I didn’t catch it at first, but an item late in that Business Week cover story on the mortgage mess was very revealing. For context, keep in mind that Bank of America is claiming no problems with either their foreclosure operations or their securitization processes. While they’ve set aside $4.4 billion for buy-backs of sour mortgages from investors, they claim that the problems are entirely manageable and not systemic. At the same time, they’re running these games:

Bank of America, the nation’s largest lender, has resorted to tough tactics in resisting repurchases of bad loans. Facing pressure from Freddie Mac, one of the two government-controlled mortgage financing companies, to buy back money-losing home loans with problems like inflated appraisals, overstated borrower income, or inadequate documentation, Bank of America issued a blunt threat, according to two people with direct knowledge of the incident. If Freddie Mac did not back off its demands for the buybacks, Bank of America officials said, the bank would take more of the new, more profitable mortgages it is originating these days to rival Fannie Mae, these people said. Freddie and Fannie, known as GSEs (government-sponsored entities), need a steady supply of healthy new loans to climb out of their financial hole.

The claimed threat from Bank of America, which was not put into writing, according to one of these people, was taken seriously enough that it has been discussed at several Freddie Mac board meetings, including one in mid-October. Some officials have urged the Federal Housing Finance Agency—the government conservator that has controlled Fannie and Freddie since they were bailed out in 2008—to confront Bank of America and prevent it from trying to play one against the other, which may be infuriating but is not illegal. “If the tactic worked, I’d be shocked and appalled,” said Thomas Lawler, a former portfolio manager at Fannie Mae and now an economic consultant. “The GSEs are supposed to be run now to minimize losses to the taxpayers. Freddie ought to ignore the threat.” FHFA Acting Director Edward J. DeMarco declined to comment, as did officials of Freddie Mac. Bank of America also declined to comment.

Emphasis mine. The bigger problem with this from BofA’s perspective is that DeMarco is already working to put back mortgages from both Fannie and Freddie onto the bank. Clearly, the BofA strategy is to divide and conquer. If they’re threatening Freddie Mac to move their new mortgages to Fannie Mae, they’re probably threatening Fannie Mae to move their new mortgages to Freddie Mac. Maybe they hope nobody at the GSEs talks to each other.

But if this works, it amounts to a kind of blackmail by the biggest bank around against the GSEs. Fannie and Freddie have taken on the role of “the lender of last resort,” according to Ira Rheingold of the National Association of Consumer Advocates. The mortgage lending industry clearly polluted the market with bad loans, and Fannie and Freddie have an argument to get some of those bad loans off their books, though not all of them. But their loss mitigation strategy is a double-edged sword. In addition to trying to shed the worst of the loans, Fannie and Freddie have such a hole to dig from that they need a constant stream of performing new loans to stay above water. In addition, their role as lender of last resort means they hold a great deal of responsibility for the broader housing market, and by association the economy. So BofA can come in and say that they’ll sell to one and not the other and cause real problems inside the GSEs. Pretty devious.

I wonder if consolidation would be a possible remedy here.