Bloomberg News

Countrywide Mortgage Investors May Get 9% of Forecasted Losses

June 30, 2011

June 30 (Bloomberg) -- Bank of America Corp.’s proposed payments of $8.5 billion to investors in Countrywide Financial Corp. mortgage bonds would equal about 9 percent of expected losses on the underlying loans, according to Credit Suisse Group AG and Nomura Securities International Inc. analysts.

The deal represents “a potential game changer” for investor attempts to get compensation for mortgages that never matched their promised quality, and would affect bonds with $91.5 billion of projected lifetime losses, Credit Suisse analysts including Chandrajit Bhattacharya said in a report. Nomura forecasted losses of $92 billion to $100 billion for the securities, which had $424 billion in initial balances.

Subprime-mortgage bonds jumped after Bank of America’s proposed settlement was announced yesterday. The debt had plunged since May as the Federal Reserve auctioned home-loan bonds once owned by American International Group Inc., helping to spur losses across broader credit markets earlier this month.

The mortgage accord was hammered out between Charlotte, North Carolina-based Bank of America; 22 investors including Blackrock Inc. and Pacific Investment Management Co.; and Bank of New York Mellon Corp., the trustee for the securities. The trustee will seek to apply the terms to mortgage debt not held by the bondholder consortium, thereby affecting a broader group of investors.

Bank of New York asked a New York state court yesterday to sanction the agreement, which would be followed by an assessment of losses on individual loan pools. A firm hired by the trustee will then help to determine amounts paid on specific bonds.

“We expect that it will take at least five to seven months before settlement payments can be made,” Nomura analysts including Paul Nikodem wrote in a report yesterday.

Swap Index

A Markit ABX credit-default swap index tied to subprime- mortgage bonds rated AAA when issued in 2006 jumped to 49.5 yesterday, compared with the 15-month-low of 46.4 reached June 24, according to London-based administrator Markit Group Ltd.

The index, which signals the levels investors may pay for subprime bonds in cents on the dollar, had fallen from a two- and-a-half year high of 62.7 in February. The index had more than doubled from a record low 28.7 in June 2009.

The settlement over debt sold by Countrywide, which Bank of America bought in 2008, would compensate investors at about 8 percent of the $106 billion in loans that have either already defaulted or are now “severely delinquent.” An additional $115 billion of mortgages remain outstanding, according to a presentation by the bank.

Lobby for Payouts

The final amount owed may be “meaningfully” higher as some investors lobby for greater payouts, according to Chris Gamaitoni, a Compass Point Research and Trading LLC analyst.

Breaches of sellers’ so-called representations and warranties average about 65 percent to 70 percent on the various defaulted-loan pools reviewed by Urbandale, Iowa-based Barrent Group, according to Richard Barrent, its president.

Sellers have agreed to buy back 40 percent to 50 percent of that amount and most of the rest has become “impasse loans,” which remain in dispute, he said. The securitized loans studied by his firm on behalf of bondholders and insurers often represent an “adverse selection” with especially large losses, he added.

National Economic Research Associates, a New York-based consulting firm, will be hired to determine probable loan losses for pools that are part of the Countrywide agreement. Individual deals are set to receive a share of the $8.5 billion equal to the transactions’ portion of total forecasted losses.

Realized Losses

The money will be treated as so-called subsequent recoveries in determining how it will to be shared among the various tranches of individual deals, according to RBS Securities Inc. analysts Paul Jablansky and Ying Wang wrote in a report yesterday.

That treatment means “the settlement would increase the amount of interest payable to securities that have taken realized losses at the expense of more senior securities that have not yet taken such losses,” the Stamford, Connecticut- based analysts said.

The deal would be “positive” for classes of Countrywide mortgage-bond deals currently receiving payments, according to the New York-based Credit Suisse analysts. It will particularly help “senior mezz” pieces of option adjustable-rate-mortgage bonds and “penultimate” AAA tranches of subprime debt, they said.

The New York-based Nomura analysts predict that the payments will have the “greatest yield impact” on so-called second- and third-pay senior subprime classes and current-pay Alt-A tranches.

“The settlement will affect other deal tranches through potentially higher interest payments and/or lower total writedowns,” they said. “In addition, any potential write-up of previously written down subordinate tranches could have a meaningful impact on mezzanine” credit-default swap positions.

--Editors: Pierre Paulden, Alan Goldstein

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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