Fitch: BofA’s Settlement With Investors to Help RMBS Recoveries

""Fitch Ratings"":http://www.fitchratings.com expects that Bank of America's recently announced settlement of mortgage repurchase and servicing claims will positively affect the ratings of approximately 10 percent of Fitch-rated U.S. residential mortgage-backed securities (RMBS) in the affected Countrywide trusts.
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In addition, the ratings agency says payouts from the settlement in the short term and improved servicing practices over the longer term are likely to further improve recovery prospects for a larger portion of bonds and will lead to more pronounced upgrades of Fitch's Recovery Ratings (RRs) on those tranches.

Bank of America ""said Wednesday"":http://dsnews.comarticles/bofa-reaches-settlement-with-investors-over-legacy-countrywide-deals-2011-06-29 that it has agreed to pay $8.5 billion settle repurchase claims from private institutional investors related to Countrywide-issued bonds.

The settlement proposal involves 530 trusts and $424 billion in securities. BofA has also agreed to implement certain servicing changes, including transferring high-risk loans owned by the trusts to subservicers, paying additional fees to investors if benchmarked default-servicing timelines are not met, and implementation of a cure process for mortgage and title documentation.

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Bank of America's settlement offer still requires court approval.

""Virtually all credit ratings on Countrywide-issued Alt-A and aubprime bonds are already at or near default levels so BofA's settlement is unlikely to lead to significant upgrades,"" said Grant Bailey, head of Fitch's RMBS surveillance group. ""On the other hand, current and future recovery prospects for these bonds certainly improve due to expected settlement payouts and mandated servicing improvements.""

Fitch says the announced settlement also likely establishes the framework for how other legacy RMBS issuers will ultimately settle portions of their representation and warranty related litigation.

""If other RMBS issuers follow BofA's settlement framework, their bonds are also likely to see only modest credit rating upgrades, while bondholders should experience greater near and long term recovery levels,"" noted Kevin Duignan, group managing director at Fitch.

According to Fitch's analysis, BofA's settlement represents approximately 5 percent of the outstanding balance of the affected transactions. Payouts will be allocated according to each trust's expected share of total lifetime losses, as determined by a third party, the ratings agency explained.

Fitch believes that the amounts ultimately allocated to the trusts will be insufficient to have an across the board positive impact on ratings but for approximately 10 percent of the Fitch-rated bonds, upgrades of a category or more are possible.

""While the worst performing of BofA's subprime, option ARM, and Alt-A deals will see the largest payouts, the potential upgrades span the spectrum of both the prime and non-prime products,"" according to Bailey.