Fitch Ratings thinks that the decision Monday by the U.S. Appeals Court in Manhattan to send back the proposed $8.5 billion Countrywide Financial Corp. (CFC) RMBS settlement back to state court might facilitate its approval. Bank of America Corp. (BAC) bought CFC in an all-stock deal in 2008.
The case was removed last year from the New York state court and brought to federal court after geting many objections from investors that were not part of the settlement group.
According to independent attorney Isaac Gradman of The Subrpime Shakeout, the Second Circuit reversed the ruling of District Court Judge William Pauley in the $8.5 billion settlement over mortgage putbacks. This means, Gradman said, that the case will be sent back to state court to be tried as an Article 77 proceeding instead of a class action. By doing this, he said, the Court of Appeals held that the “securities exception” to the Class Action Fairness Act (CAFA) was applicable since the case was just about the rights and duties created by or pursuant to a security.
Fitch said that given that the case is now back to NY state court, approval will probably happen sooner, perhaps in mid this year.
"We believe early approval would benefit [BAC] as it would crystalize the bank's ultimate losses on a large portion of private label RMBS." the rating agency analysts said. They added that if the case stayed in federal court, the process would have probably been drawn out and delayed with any approval probably getting pushed back to 2013 at the earliest.
Although Fitch views the court venue reversal as favorable for BAC, the settlement has not yet received final approval.
BAC reserved $8.5 billion for the settlement in 2Q11. The settlement amount has underpinned the rating agency's base case assumption on the projected rep and warranty losses from private-label RMB. "We believe if this settlement is not approved, losses could escalate beyond our base case," analysts stated.
Even though they believe that the court approval of the proposed settlement is a key issue for BAC, analysts also said it will have ramifications for the banking industry.
This settlement, they said, is 2% of the original principal balance of private-label RMBS covered totaling $425 billion.
If approved, it would cover roughly half of private-label RMBS related to BAC and legacy entities, notably Countrywide, Fitch analysts said. "We believe an approval would provide a potential framework for other settlements," analysts stated.
They cited BAC's statement in its recent 10K annual filing that if the settlement is not approved, then private-label rep and warranty losses can significantly go over the existing reserve. Once the transaction is finalized, it cannot be challenged by individual investors.