Feb 9 () - Fitch Ratings believes the federal and state settlement
over alleged deficiencies in residential mortgage loan origination and
foreclosure practices is a slight positive for participating banks as it caps
litigation risk pertaining to these activities.
The U.S. Department of Justice, U.S. Department of Housing and Urban
Development, and state attorneys general agreed to terms with the five largest
U.S. mortgage servicers. Settlement terms could be extended to other large
financial firms, and we anticipate that additional lenders will sign on. The
settlement comes after more than a year of negotiations between the various
Although the $25 billion headline figure appears large, the upfront costs, in
the form of penalties, are more modest at around $5 billion. The bulk of the
settlement will be felt in the form of increased loan modifications, including
principal reductions. It will also require changes to residential loan servicing
standards, which will likely increase servicing costs for participating lenders.
We also think any such heightened servicing standards could also be extended to
nonparticipating banks over time.
Banks largely incurred their proportionate liability in 4Q11 in anticipation of
this settlement. This includes the immediate cash outlays, reserves for
increased loan modifications, and effects of higher servicing costs. As such, we
believe the financial impact has already been felt and that this agreement, in
and of itself, is not a ratings factor considering each banks' portion of the
agreement and in the context of their financial standing.
Although the settlement does not release banks from litigation related to
potential securities laws violations (chiefly related mortgage-backed
securitizations), it crystallizes potential liabilities pertaining to faulty
origination and servicing practices, reducing the likelihood of extended, and
likely more costly, litigation on this front. Under settlement terms, mortgage
servicers in states that have opted into the deal are immune from any future
state servicing and originating claims, although the federal and state
governments retain the ability to press criminal charges and borrowers may still
bring civil suits.
Fitch also believes that this settlement potentially paves the way for broader
use of principal reductions on first lien mortgages, if this proves to be
successful tool in addressing borrowers unable to keep up on their mortgages. If
principal reductions become more prevalent than what is required under the
settlement, it would have negative implications for bank home equity loans.
Fitch has and will continue to assess the implications of housing related issues
on bank balance sheets.
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The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.