What does Syncora’s $375 million BofA deal mean for MBIA?

July 19, 2012

Reporting on the implications of the bond insurer Syncora’s $375 million 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 an additional $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.

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