OREANDA-NEWS. The long-awaited, recently distributed payments from the $8.5 billion Countrywide/Bank of America settlement, while a windfall for bondholders, are unlikely to lead to significant rating actions for U. S. RMBS, according to Fitch Ratings.

Nearly five years after the settlement was reached, bondholders from most of the 530 trusts included in the settlement received payments on the June 2016 distribution date. Fitch has outstanding ratings on only 203 of the 530 transactions included in the settlement. Of the roughly 3,000 classes included in the settlement that Fitch actively rates, 74% have incurred principal writedowns to date, and are currently rated 'Dsf'. The settlement payouts improved the principal recoveries for many defaulted classes. Nonetheless, Fitch does not expect to upgrade such classes above 'Dsf' because the lost interest to date related to the writedown is not expected to be recovered.

In July 2015, Fitch identified 48 U. S. RMBS classes as potential upgrade candidates following the settlement payouts, and placed the classes on Rating Watch Positive. Fitch will conduct a full analysis during the third quarter of this year on all affected Fitch-rated classes (including those not placed on Rating Watch Positive) for potential rating implications and recovery estimate revisions.

BACKGROUND AND TIMING

On June 28, 2011, Bank of America Corporation (BAC) and Countrywide Home Loans, Inc (CHL) reached a settlement with Bank of New York Mellon (BNY) as trustee, representing 22 institutional investors, regarding alleged breaches of representations and warranties and violations of servicing obligations. Per the settlement, BAC - which purchased CHL in 2008 - was to make a payment of $8.5 billion to BNY, as trustee for 530 Countrywide RMBS trusts. The settlement also called for BAC to implement a number of servicing improvements.

The settlement payout was contingent on both court and tax (IRS and state) approval. After more than four years, both court and tax approvals were received in October 2015. A third-party expert (NERA) determined each trust's allocable share of the settlement based on projected lifetime net losses, and the entire settlement payment was paid to the trustee in February 2016. After the trustee sought judicial guidance concerning the order in which to distribute funds to bondholders (whether to pay down or write up first), payments were distributed to bondholders of 512 of the 530 trusts in June 2016. The remaining 18 trusts face further legal hurdles before receiving payments.