Fitch: JPM Settlement Sets High Bar for Future FHFA Deals
Fitch Ratings said that JP Morgan Chase’s (JPM) $4 billion settlement with the Federal Housing Finance Agency (FHFA) sets a relatively high bar for other banks seeking to reach similar agreements.
Settlements by the larger institutions named in the complaint may pave the way for more deals. However, Fitch said it also believes that other banks involved in the FHFA litigation may need to increase the size of their litigation reserves to reflect the comparative amounts of recent settlements.
JPM’s settlement represents close to 12% of the approximately $33 billion original face value of the private-label, mortgage-backed securities (PLS) cited in the FHFA complaint. These include securities issued by JPM, Bear Stearns and Washington Mutual. The relative size of the settlement is only slightly lower than UBS’s $885 million payment earlier this year, which represented roughly 14% of the original face value.
Fitch added that these amounts are substantial, particularly given the level of to-date losses on the underlying PLS. This reflects the more aggressive stance taken by the federal government in resolving litigation against the banks involving pre-crisis matters.
Fitch believes that Bank of America (BofA) has the largest potential exposure out of the 17 banks cited in FHFA’s lawsuits. Including securities issued by Countrywide and Merrill Lynch, the bank has approximately $57 billion in original face value of PLS cited by FHFA. It is challenging to estimate the exposure for any individual institution, and BofA’s other mortgage-related negotiations and settlements may also influence the outcome of this litigation. However, using the JPM and UBS settlements as a proxy, Fitch estimates BofA’s figure could range between $5 billion and $8 billion, should the bank decide to settle. Fitch said it does not believe a settlement of this size would affect BofA’s current ratings.
Most institutions do not provide detailed information on the size of litigation reserves, making it difficult to project future reserve increases. JPM has recently disclosed $23 billion of litigation reserves as of Sept. 30, 2013, including a $9.3 billion provision added in third-quarter 2013. Proceeds from the settlements are paid directly to Fannie Mae and Freddie Mac, which pay out most of their net income to the Treasury in the form of a dividend, Fitch said.