Reporting on the implications of the bond insurer Syncora's $375million settlement with Bank of America has been a Rashomon
experience: Everyone I talked to had something different to say
about what drove Tuesday's settlement and what it means for
MBIA, which has been litigating its own mortgage-backed
securities breach-of-contract claims in parallel with Syncora.
So if you were expecting a clear-cut answer on whether the
Syncora settlement is good or bad for MBIA, you're going to be
disappointed. Syncora and MBIA were both litigating put-back
claims against Countrywide and BofA before New York state
Supreme Court Justice Eileen Bransten, who has delivered
important simultaneous rulings for the bond insurers. But the
similarities between Syncora and MBIA end in Bransten's
courtroom. When it comes to negotiations with BofA, they're in
very different postures.
The good news for MBIA: Bank of America's settlement with
Syncora shows that the bank remains willing and able to resolve
claims that the mortgages underlying Countrywide-sponsored
securities breached representations and warranties. In 2010 and
2011 Bank of America reached reps-and-warranties deals with the
bond insurer Assured Guaranty; with the government-sponsored
entities Fannie Mae and Freddie Mac; and with 22 institutional
investors who backed a global $8.5 billion settlement of MBS
investors' put-back claims. Since then, the bank has been stuck
in litigation with objectors to the proposed $8.5 billion global
deal and in sniper fire with Fannie Mae. The Syncora settlement
puts BofA back on the settlement track.
The settlement also shows that momentum from the litigation
helps the monolines. My understanding is that Syncora and Bank
of America have been in settlement talks for a long time,
negotiating behind the curtain while the litigation plays out on
a public stage. Specific events in the monoline cases against
the banks -- even developments as significant as Bransten's
loss-causation ruling or the battle over Bank of America's
successor liability for Countrywide's wrongdoing -- don't have a
direct impact on negotiations. That said, when U.S. District
Judge Paul Crotty of Manhattan delivered a very insurer-friendly ruling on loss causation last month in Syncora's case against
JPMorgan, BofA took note. That's also a positive for MBIA.
On the downside, MBIA has been much more aggressive than
Syncora in its expectations of recovery from Bank of America and
may need a bigger cents-on-the-dollar recovery than Syncora got
from the bank. Let's be clear: No one except negotiators for
Syncora and BofA really knows the exact value of Syncora's
present and future put-back claims or the exact value of
everything BofA paid to resolve them. Here's what we do know,
however. Syncora's last amended complaint against Countrywide,
filed in 2010, alleged that the insurer had paid out $145
million to policyholders in five Countrywide home equity-backed
securitizations and had received another $257 million in claims
from those five deals. That's a total of $402 million, which
makes Syncora's $375 million in cash recovery from Bank of
America look great. But if you look at Syncora's news release on the settlement, you'll see that the deal resolves both present
and future claims on 14 Countrywide MBS deals, not just the five
at issue in the litigation.
So what's the total value of Syncora's claims? In a
conference call with analysts Wednesday morning, Bank of America
said the Syncora settlement resolved about 20 percent of its $3
billion or so in reported put-back claims by bond insurers, or
about $600 million in claims. That would suggest a Syncora
recovery of about 60 cents on the dollar -- but BofA cautioned
analysts on the call that Syncora's unsubmitted and future reps
and warranties claims weren't all reflected in BofA's
accounting. Indeed, a Barclays analysis of the Syncora
settlement estimated that Syncora's lifetime losses on all of
the 14 mortgage-backed securitizations the deal addresses are as
much as $1.4 billion, which would mean that Syncora's cash award
of $375 million represents only 27 cents on the dollar.
But there's yet another wrinkle. Syncora, which is a
successor to XL Capital Assurance, bought back a lot of its
obligations in a 2009 remediation campaign. According to a
corporate press release, the insurer "achieved 68.4 remediation
points," which apparently means it bought back more than
two-thirds of its policy obligations. The Barclays analysis does
not seem to discount its estimate of Syncora's lifetime losses
to account for the remediation, which means its
cents-on-the-dollar analysis is probably low. (See what I mean?
Pinning down Syncora's recovery percentage is like trying to
catch a butterfly without a net.)
Syncora had booked receivables of only about $200 million on
its put-back claims, so its accounting didn't rely on a
settlement with Bank of America. MBIA, on the other hand, booked
$3.2 billion in put-back receivables in its May 10 filing with
the Securities and Exchange Commission. Not all of that is in
claims against Countrywide, and the receivables number reflects
a discount from the total dollar value of MBIA's asserted
claims. Nevertheless, MBIA has very high expectations of
recovery from Bank of America.
Even with New York's Department of Financial Services, which
regulates both the bank and the insurer, pushing hard for a
settlement, it's hard to know whether BofA and MBIA can find
that middle ground.
(Reporting by Alison Frankel)
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