Jan 7 - Fitch Ratings believes Bank of America's (BAC) recently
announced settlement with Fannie Mae (FNM) is overall positive for the
company. The settlement amount is below Fitch's expectations under various
stress scenarios. Fitch believes this settlement substantially addresses BAC's
exposure to mortgage repurchase obligations from FNM and addresses much of the
uncertainty related to this exposure.
Fitch believes BAC's total consideration to FNM is very manageable within the
context of BAC's capital and earnings generation, and will also allow management
to begin to move from dealing with legacy issues to focusing more on growing the
Fitch notes that terms of the settlement are in two parts, which include a $3.6
billion cash payment to FNM to be made in January 2013 as well as the repurchase
of $6.75 billion in residential mortgage loans sold to FNM, which BAC has valued
at less than the purchase price.
Given existing representation and warranty reserves, this proposed settlement
will increase representation and warranty provision expense by $2.5 billion in
fourth-quarter 2012, which Fitch believes to be well covered by the company's
This proposed settlement resolves outstanding claims of $11.2 billion alleged
representation and warranty breaches on residential mortgage loans sold to FNM
from Jan. 1, 2000 through Dec. 31, 2008, as well as potential future claims on
2000 to 2008 originations.
Given that this period includes some of the most problematic mortgage vintages
that BAC has had to resolve over the last few years, Fitch believes that a large
portion of the uncertainty regarding BAC's potential future liabilities, which
under an extreme stress scenario Fitch noted could be as high as $20 billion,
has been reduced.
That said, since that BAC does still have some remaining litigation risks to
other parties, Fitch would still expect some additional costs going forward.
However, Fitch believes BAC's improved capital, liquidity, and slowly improving
earnings, should provide a buffer to absorb these incremental costs going
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.