OREANDA-NEWS. Fitch Ratings has maintained 48 U.S. RMBS classes on Rating Watch Positive in anticipation of potential future upgrades related to the pending distribution of the payout from the $8.5 billion Countrywide/Bank of America settlement. 

KEY RATING DRIVERS

The Rating Watch Positive reflects the potential for increased credit enhancement (CE) resulting from a pro rata share of payment, following the distribution of the $8.5 billion Countrywide/Bank of America settlement. The trustee for the 530 trusts involved in the settlement, Bank of New York Mellon (BoNY), has received the $8.5 billion and each trust's allocated share has been determined by a third-party expert. However, on Feb. 5, 2016, BoNY filed a Verified Petition for Judicial Instruction, seeking guidance on the order in which it should distribute principal to bondholders and write up balances. The order in which the two actions are taken could have implications for overcollateralization (OC) triggers, and related cash leakage to subordinate classes. The court motion is expected to further delay the settlement payouts to bondholders as the Court, trustee and investors attempt to determine the appropriate method of distribution.

Fitch will continue to monitor the progress of the settlement. After a method of distribution is determined, Fitch will conduct a full analysis of all affected Fitch-rated classes - including those not placed on Rating Watch Positive - for potential rating implications and recovery estimate revisions.

BACKGROUND

On June 28, 2011, Bank of America and Countrywide reached a settlement with Bank of New York Mellon, as trustee, representing 22 institutional investors, regarding alleged breaches of representations and warranties and violations of servicing obligations. Per the settlement, Bank of America - which purchased Countrywide Financial in 2008 - made a payment of $8.5 billion to Bank of New York Mellon, as trustee for 530 Countrywide RMBS trusts. The settlement also called for Bank of America to implement a number of servicing improvements. The associated payout was contingent upon both court and IRS approval, which were received in April and October of 2015, respectively.

RATING SENSITIVITIES

Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

In addition to increasing mortgage pool losses at each rating category to reflect increasingly stressful economic scenarios, Fitch analyzes various loss-timing, prepayment, loan modification, servicer advancing, and interest rate scenarios as part of the cash flow analysis. Each class is analyzed with 43 different combinations of loss, prepayment and interest rate projections.

Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.