Moody's Investors Service said in a report that the Bank of America settlement with the GSEs does not address the uncertainty around claims by monoline insurers and private label investors.
The agreements with Freddie Mac and Fannie Mae resolved a substantial number of repurchase claims involving residential mortgage loans sold to the GSEs by Countrywide and reduces the uncertainty around the potential cost to BofA from GSE repurchase claims.
However, it does not shed any light on what the potential costs will be from the claims arising from private label buyers and monolines. The rating agency said that the settlement also does not eliminate additional claims that might come from the Countrywide mortgages sold to Fannie Mae.
"We expect the cost to resolve those claims will be less than the total cost incurred for GSE claims, and as such is manageable for BofA," wrote Moody's in the report. "However, there is a risk that the costs may be substantially higher if unfavorable legal decisions are reached, although we believe it will likely take several years for the litigation to be resolved."
The analysts estimated the reserve addition, less the settlements and an additional $1 billion in losses on GSE repurchases that BofA disclosed it had taken during the fourth quarter will leave BofA with a repurchase reserve of $3.6 billion at yearend.
"While a small portion of the reserve is for exposures with certain monoline insurers, the bulk of it is for GSE (i.e., Fannie) claims," Moody's analysts said. "Together with the $6.3 billion of losses already incurred (including the latest settlements), this implies that BofA expects its total GSE mortgage repurchase expense (including mortgages originated by BofA itself or companies that BofA acquired) will ultimately be somewhat less than $9.9 billion. "
According to Moody's, BofA might be aiming low as they expect repurchase expenses associated with GSE claims to be slightly higher at around $12 billion. The figure could go still higher without any material credit implications to BofA.
As for claims from monoline and private label buyers, Moody's said it expects the repurchase expense will be "significantly less than our $12 billion cost estimate for BofA’s GSE repurchases." This is because private investors face higher procedural hurdles than the GSEs in submitting repurchase requests, and the loans were usually sold with weaker representations and warranties than those sold to the GSEs.