Residential Mortgage-Backed Securities to Benefit from BofA Settlement

According to a report from Fitch Ratings, the recent settlement that Bank of America has reached with investors over mortgage repurchase and settlement claims is likely to “positively affect the ratings of approximately 10 percent of Fitch-rated U.S. residential mortgage-backed securities (RMBS) in the affected Countrywide trusts”[1]. Last Wednesday BofA agreed to pay $8.5 billion to institutional investors to settle repurchase claims related to Countywide bonds and also promised to implement servicing changes that include paying additional fees to investors if servicing timelines are not met, implementing cure processes for mortgage and title documentation and transferring high-risk loans owned by trusts to subservicers. Fitch believes that the settlement will likely set a precedent and framework for how other legacy RMBS issuers may settle “portions of their representation and warranty-related litigation.”

Investors have alleged that in addition to being sold faulty loans, they have been paying excessive servicing fees because BofA continued to service bad loans rather than foreclose. As a result of the settlement and the agreement to transfer high-risk loans to subservicers, the rate of foreclosure in the country – at least as far as BofA loans are concerned – could increase in the coming months[2]. “The sooner we can deal with that [foreclosure] overhang, the better for the economy,” said BofA spokesman Jerry Dubrowski. Although total investor-acceptance and court approval of the settlement would solve “nearly all” of BofA’s Countrywide-related woes, only about 25 percent of investors holding involved securities have agreed to the deal and the court has not yet approved the settlement. Many investors hope that the judge will declare the settlement not generous enough, calling “two cents on the dollar…an absolute joke”[3]. Chris Gamaitoni, Compass Point Research and Trading analyst, predicts that the proffered sum of $8.5 billion is nothing more than a “starting point” that will “likely increase meaningfully after the court hears arguments from other invested parties.” Gamaitoni predicts that the sum could go as high as $26.5 billion.

What do you think should be done about BofA’s Countrywide issues?

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