Fitch sees yesterday's announcement concerning 200,000 residential mortgages owned or serviced by Bank of America (BAC) as neutral to negative for some RMBS bondholders and potentially beneficial for the bank. The announcement provided another view into the settlement reached between the largest lenders and several U.S. state attorneys general late last year, although important details have yet to be released.
The agreement, which is expected to affect the Countrywide legacy portfolio, is likely to provide for an average principle reduction amount in excess of $100,000 for each borrower 60 days overdue. The agreement does not include mortgages owned or backed by the Federal Housing Authority (FHA) or the U.S. Department of Veterans Affairs (VA).
In our view, the most likely loans to qualify for this principal reduction are those originated during 2005-2007. The principal amounts ultimately reduced and the impact on those trusts will vary based on the loan origination year, current loan-to-value ratio, and delinquency rate. Those originated during peak house price years will likely see the largest reduction, as the plan calls for a balance cut to bring the loan amount down to the property's current value.
While Fitch has taken into account higher market value declines for the peak vintage collateral in its current ratings, the potential for increased defaults among currently paying borrowers that are marginally underwater could increase total losses to the trusts, particularly if the principal reductions are not effective in reducing defaults.
We believe the agreement could be potentially beneficial for BAC. Because the bank has already reserved for penalties, any reversals could help BAC's income going forward. While the agreement will help the bank reduce the amount of penalties it owes over time, the aggregate best case benefit is moderate from a financial perspective.
Fitch will continue to monitor the details of the settlement and their impact on the large lending institutions and RMBS bondholders.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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