Residential Warranty Corporation

Moody's Text: BofA $8.5 Bln Settlement Is Credit Positive

WASHINGTON (MNI) - The following is a statement by Moody's Wednesday on Bank of America's announcement that it has reached a settlement with investors in residential mortgage-backed securities issued by Countrywide:

Moody's Investors Service today commented on the announcement by Bank of America Corporation (BAC) that it had reached a settlement with a consortium of investors and The Bank of New York Mellon, as trustee, with regard to representation and warranty and servicing claims on nearly all private label first-lien mortgage-backed securitizations issued by Countrywide Financial Corporation or other Countrywide affiliates. The rating agency said that the settlement is positive for creditors since it reduces Bank of America's potential exposure to higher losses under a stress scenario.

BAC reported it will take a charge of $8.5 billion for the settlement, and will also take additional provisions of $5.5 billion in the current quarter against other representation and warranty exposures. While the settlement and additional provisions will negatively affect BAC's earnings and capital ratios in the current quarter, the bank's capital ratios will remain above the level of a year ago.

"The costs incurred are at the high end of the range that Moody's had previously estimated Bank of America might be required to pay to resolve these matters," said David Fanger, Moody's Senior Vice President. "However, following today's settlement and the announced addition to reserves, Moody's believes that BAC's remaining representation and warranty exposures are no longer a negative credit concern."

On June 2, Moody's placed on review for downgrade the long-term deposit, senior and subordinated debt ratings of BAC (A2 senior) and affiliates. The ongoing review is focused on whether the unusually high levels of systemic support incorporated into those ratings should be reduced to pre-crisis levels in light of the evolving post-crisis regulatory environment. As a part of the review, the rating agency is also considering whether there has been sufficient improvement in BAC's financial strength to warrant raising its unsupported rating (currently Baa2 for Bank of America, N.A.). Today's announcement provides additional evidence of such improvement.

The rating agency will consider the implications of today's announcement as part of the ongoing review. Moody's added that the positive credit implications of today's announcement must be weighed against the bank's still sizable exposure to residential mortgages in its own loan book, for which credit costs could spike if the US economy were to contract again. During the review the rating agency will also consider BAC's exposure to continued litigation costs related to faulty foreclosure practices. Other considerations will include the potential effectiveness of changes in risk management at BAC, given the poor performance during the credit crisis and BAC's still sizable capital market activities, which Moody's views as both opaque and potentially volatile.

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