The decision by a New York State Supreme Court judge to approve the terms of a settlement between private-label mortgage securitization investors and Bank of America (BofA) is positive for the bank's credit profile, if not successfully appealed with respect to loan modifications, according to Fitch Ratings. The settlement removes a substantial source of uncertainty from BAC's remaining contingent liabilities, though future appeals are possible.
BAC is fully reserved for the $8.5 billion settlement (in addition to $100 million for legal and administration fees). Following this settlement, BofA faces remaining litigation exposure in New York and California related to Federal Housing Finance Agency (FHFA) private-label securitization (PLS) claims. However, BAC is now better positioned to fund future litigation losses.
In a prior special report, we estimated that the remaining FHFA litigation losses for BofA could total between $5 billion and $8 billion. With this settlement complete, we think the FHFA losses can be managed by the bank within the context of current expectations for earnings and capital ratios.
The judge ruled that the 2011 settlement between investors, BofA and trustee Bank of New York Mellon (BNY) should be upheld, noting that BNY acted in good faith. We believe that the approval of the settlement likely reflected, in part, the fact that litigants had dropped objections given improving PLS performance over the past two years as the housing market has begun to recover.
While the approval of the settlement is a positive for BofA, there is no impact on current ratings. Longer-term ratings momentum will be predicated on meaningful and sustained earnings improvement, capital ratios that compare more favorably with large bank peers and a continued wind-down of legacy litigation liabilities and impaired assets.