Fitch Positive on BofA (BAC) Mortgage Settlement with Fannie Mae (FMNA)
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Price: $38.33 +1.59%
Overall Analyst Rating:
NEUTRAL (= Flat)
Dividend Yield: 2.8%
Revenue Growth %: -1.9%
Overall Analyst Rating:
NEUTRAL (= Flat)
Dividend Yield: 2.8%
Revenue Growth %: -1.9%
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Fitch Ratings believes Bank of America's (NYSE: BAC) recently announced settlement with Fannie Mae (OTCBB: FNMA) 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 earnings generation.
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 going forward.
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 earnings generation.
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 going forward.
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