Federal Mortgage Deal Slight Positive for US Banks
Location: New York
Author: Brian
Bertsch
Date: Monday, February 13, 2012
Fitch Ratings believes the federal and state settlement over alleged
deficiencies in residential mortgage loan origination and foreclosure
practices is a slight positive for participating banks as it caps
litigation risk pertaining to these activities.
The U.S. Department of Justice, U.S. Department of Housing and Urban
Development, and state attorneys general agreed to terms with the five
largest U.S. mortgage servicers. Settlement terms could be extended to
other large financial firms, and we anticipate that additional lenders
will sign on. The settlement comes after more than a year of
negotiations between the various parties.
Although the $25 billion headline figure appears large, the upfront
costs, in the form of penalties, are more modest at around $5 billion.
The bulk of the settlement will be felt in the form of increased loan
modifications, including principal reductions. It will also require
changes to residential loan servicing standards, which will likely
increase servicing costs for participating lenders. We also think any
such heightened servicing standards could also be extended to
nonparticipating banks over time.
Banks largely incurred their proportionate liability in 4Q11 in
anticipation of this settlement. This includes the immediate cash
outlays, reserves for increased loan modifications, and effects of
higher servicing costs. As such, we believe the financial impact has
already been felt and that this agreement, in and of itself, is not a
ratings factor considering each banks' portion of the agreement and in
the context of their financial standing.
Although the settlement does not release banks from litigation related
to potential securities laws violations (chiefly related mortgage-backed
securitizations), it crystallizes potential liabilities pertaining to
faulty origination and servicing practices, reducing the likelihood of
extended, and likely more costly, litigation on this front. Under
settlement terms, mortgage servicers in states that have opted into the
deal are immune from any future state servicing and originating claims,
although the federal and state governments retain the ability to press
criminal charges and borrowers may still bring civil suits.
Fitch also believes that this settlement potentially paves the way for
broader use of principal reductions on first lien mortgages, if this
proves to be successful tool in addressing borrowers unable to keep up
on their mortgages. If principal reductions become more prevalent than
what is required under the settlement, it would have negative
implications for bank home equity loans. Fitch has and will continue to
assess the implications of housing related issues on bank balance
sheets.
Additional information is available on
www.fitchratings.com
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