Fitch Ratings expects the Bank of America Corp. (BAC) settlement of mortgage repurchase and servicing claims will positively affect the ratings of roughly 10% of Fitch-rated U.S. RMBS bonds in the affected legacy Countrywide trusts.  

Fitch believes that payouts from the settlement in the short term and improved servicing practices in the longer term are probably going to further improve recovery prospects for a larger part of the bonds. This will lead to more pronounced upgrades of Fitch’s Recovery Ratings on those tranches.

"Virtually all credit ratings on Countrywide-issued Alt-A and subprime bonds are already at or near default levels so BofA’s settlement is unlikely to lead to significant upgrades," according to 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."

According to Fitch, the settlement will also likely establish the framework for how other legacy RMBS issuers will eventually 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," said Group Managing Director Kevin Duignan.

The settlement includes changes to servicing practices and an $8.5 billion payment to Bank of New York Mellon, as trustee, for 530 legacy Countrywide RMBS trusts, Fitch said.

According to the rating agency’s analysis, the settlement represents about 5% of the outstanding balance of the affected deals. Meanwhile, payouts will be allocated according to each trust’s expected share of total lifetime losses, as determined by a third party.

Fitch thinks that the amounts ultimately allocated to the trusts will not be enough to have an across the board positive effect on ratings but for roughly 10% 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 experience the biggest payouts, the potential upgrades span the spectrum of both the prime and nonprime products, Bailey said.

The agreement also includes several changes to BAC’s mortgage servicing practices, such as: an agreement to transfer some high-risk loans to subservicers at BAC’s expense;an added payment of fees to the trusts if certain standards, such as default-servicing timelines, do not meet defined benchmarks; and implementation of a cure process for mortgage and title documentation, with an agreement by BAC to indemnify the trusts for any losses caused by their inability to liquidate a mortgage as a first-lien mortgage.

Fitch believes that some of these servicing improvements could increase recovery prospects.

The rating agency downgraded on June 10 the primary residential mortgage servicer ratings of nine banks, which included BAC, to reflect the growing burden of managing troubled loans in an environment of heightened litigation risk and regulatory scrutiny.

While the settlement was not considered, Fitch’s June 10 servicer rating actions already took into account a continued increase in servicing costs due to the ongoing changes to servicing practices.

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