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Fitch: Private-label RMBS litigaton poses risk to bank ratings

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Increased litigation associated with private-label residential mortgage-backed securities may hurt bank ratings, if court rulings side with investors more often than banks, according to Fitch Ratings. Analysts don't expect losses banks incur from loan repurchase agreements with Fannie Mae and Freddie Mac to hurt ratings or an institution's "capital adequacy" as much as the growing litigation risk related to private-label RMBS. Fitch does expect losses from the GSE repurchases to continue to weigh on bank earnings over the near term. Analysts said some recent settlements banks have made with the GSEs "have helped establish some certainty around a portion of the potential exposure at the largest banks." Fitch said these settlements prompted analysts to now expect total losses for loan putbacks at the low end of its August estimate of $17 billion to $42 billion at the nations' four largest banks. "Repurchase claims on problematic mortgage loans continue to pose a risk to the largest banks, which were the most active originators and issuers of agency and private-label RMBS," analysts said. Private-label transactions tend to perform worse than agency RMBS, increasing risk for repurchase claims, Fitch said. But investors in these deals "generally have weaker representations and warranties and face significant hurdles in gathering necessary information and pursuing claims." Write to Jason Philyaw.

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