Fitch Ratings says that the US$25 billion settlement reached Thursday between U.S. authorities and five big banks over deficiencies in mortgage servicing and foreclosure practices, is a slight positive for the banks’ credit ratings, as it caps their litigation risk.
Yesterday, the U.S. Department of Justice, U.S. Department of Housing and Urban Development, state attorneys general, and the U.S. Federal Reserve Board agreed to terms with the five largest U.S. mortgage servicers concerning alleged deficiencies in residential mortgage loan origination and foreclosure practices. Fitch notes that the settlement comes after more than a year of negotiations between the various parties.
“Although the US$25 billion headline figure appears large, the upfront costs, in the form of penalties, are more modest at around US$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,” the rating agency says.
It also suggests that the settlement’s terms could be extended to other large financial firms, and it anticipates that additional lenders will sign on.
Fitch says that the banks have already incurred most of their liabilities in this case in the fourth quarter of 2011, in anticipation of this settlement. “This includes the immediate cash outlays, reserves for increased loan modifications, and effects of higher servicing costs,” it says. “As such, we believe the financial impact has already been felt.”
Additionally, Fitch notes that while the settlement does not release the banks from litigation related to potential securities laws violations, it does crystallize their potential liabilities pertaining to faulty origination and servicing practices, reducing the likelihood of more costly litigation on this front.
Fitch also says it 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,” it says.