Fitch: Bank of America's Fannie Mae Settlement a Positive
CHICAGO -- January 7, 2013
Fitch Ratings believes Bank of America's (BAC) recently announced settlement
with Fannie Mae (FNM) is overall positive for the company. The settlement
amount is below Fitch's expectations under various stress scenarios. Fitch
believes this settlement substantially addresses BAC's exposure to mortgage
repurchase obligations from FNM and addresses much of the uncertainty related
to this exposure.
Fitch believes BAC's total consideration to FNM is very manageable within the
context of BAC's capital and earnings generation, and will also allow
management to begin to move from dealing with legacy issues to focusing more
on growing the franchise.
Fitch notes that terms of the settlement are in two parts, which include a
$3.6 billion cash payment to FNM to be made in January 2013 as well as the
repurchase of $6.75 billion in residential mortgage loans sold to FNM, which
BAC has valued at less than the purchase price.
Given existing representation and warranty reserves, this proposed settlement
will increase representation and warranty provision expense by $2.5 billion in
fourth-quarter 2012, which Fitch believes to be well covered by the company's
This proposed settlement resolves outstanding claims of $11.2 billion alleged
representation and warranty breaches on residential mortgage loans sold to FNM
from Jan. 1, 2000 through Dec. 31, 2008, as well as potential future claims on
2000 to 2008 originations.
Given that this period includes some of the most problematic mortgage vintages
that BAC has had to resolve over the last few years, Fitch believes that a
large portion of the uncertainty regarding BAC's potential future liabilities,
which under an extreme stress scenario Fitch noted could be as high as $20
billion, has been reduced.
That said, since that BAC does still have some remaining litigation risks to
other parties, Fitch would still expect some additional costs going forward.
However, Fitch believes BAC's improved capital, liquidity, and slowly
improving earnings, should provide a buffer to absorb these incremental costs
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Justin Fuller, CFA, +1-312-368-2057
70 W. Madison
Chicago, IL 60602
Bill Warlick, +1-312-368-3141
Brian Bertsch, +1-212-908-0549
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