Widely overlooked in all the press on BofA’s woes is its CEO, Brian Moynihan’s, suggestion that he could put Countrywide into bankruptcy. Just a reminder: a bankrupt firm’s creditors aren’t guaranteed much of anything but a place in line. So, for Fannie and Freddie, any such move will exacerbate losses – piling lots of new ones atop those already anticipated from Countrywide’s’ dud book of GSE-backed and PLS-owned loans. In addition, the impact of a bankrupt servicer of the size of Countrywide could spread contagion risk in the secondary market, perhaps the reason Fannie is reportedly toying with taking on or arranging the transfer of some sizable amounts of BofA servicing.
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