Barclays said in a report on Friday that JP Morgan's payout on breeches of RMBS representation and warranties is 37% smaller than the Countrywide payout on similar claims, which is likely to raise some issues with some investors.
On Friday JP Morgan reached a tentative settlement with 21 institutional investors, represented by the law firm Gibbs and Bruns, to pay $4.5 billion to settle the claims on 330 RMBS trusts issued by Bear Stearns and JP Morgan between 2005 and 2007.
The payout is 6.6% of total realized and expected collateral losses on the 330 deals and represents 6.0% of the collateral balance outstanding on these deals, according to Barclays. By comparison, the countrywide settlement offered bond investors a payout ratio of 10.8% of losses.
The Countrywide settlement serves as “a ready benchmark for objectors,” said Barclays. “Investors such as AIG, which is holding out on the Countrywide settlement, and is not in the group of investors who have accepted this settlement, could likely object.”
Another complication is that the settlement is subject to trustee and court approval to become final. “There are more than six trustees that oversee these deals, so each trustee may follow a different process for evaluation and arrive at a different conclusion,” said Barclays. “It is unclear how the settlement will work if some trustees opt out while others choose to accept it.
The trustees of the trusts have until Jan. 15, 2014 to accept the offer, with the option to request a further extension of sixty days to evaluate the terms of the agreement.
Although the settlement does not cover any of the Washington Mutual RMBS claims, Barclays believes it could serve as a benchmark if JP Morgan is found to have liability for the WaMu deals.
“If it is determined that JP Morgan is liable for Washington Mutual's rep and warranty claims, then WaMu bonds could receive a settlement with terms similar to those for the JP Morgan and Bear shelves,” said analysts. “On the other hand, if the Washington Mutual estate is held liable, recoveries to RMBS holders could be much smaller. “