Trying to Decipher what the Syncora deal means for MBIA

Yesterday Syncora and Bank of America announced an agreement to settle outstanding litigation with respect to the residential mortgage backed securities (RMBS) originated by Countrywide and insured by Syncora.  The essence of the agreement was as follows:

In return for releases of all claims the Company has against Countrywide and Bank of America Corporation arising from its provision of insurance in relation to five second lien transactions that were the subject of litigation and all of the Company’s claims in relation to nine other first and second lien transactions, the Company received a cash payment of $375 Million.

Obviously the settlement has importance to MBIA.  MBIA is also in the middle of litigation with Countrywide to settle RMBS insured by MBIA.

The outstanding question is what Syncora expected to get versus what they ended up getting.  Now what they got is easy.  Its $375 million.  What they expected is a bit trickier.

Alison Frankel, with the help of Barclays, took a stab at this in an article today.  She wrote the following:

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 was the following caveat:

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.

I’ve looked through Syncora’s filing and the press releases and I think the Barclays analysts have it right.  Here’s my reasoning:

On slide 13 of the Q4 2008 Syncora Guarantee Inc. Insured Portfolio Summary it states that Countrywide was the largest exposure with $2.607 billion.

If I look back at the press releases associated with Syncora’s RMBS remediation campaign, Syncora was actually very forth coming and specified the total Aggregate Principle Balance being committed on a security by security basis.  That can be accessed here.

I parsed through these securities and filtered the Countrywide originations. Countrywide accounts for all of the Countrywide Home Equity Loan Trust and all of the Harborview Mortgage securities (for confirmation that Harborview was indeed a Countrywide entity, take a look at any of the SEC filings for Harborview, for example this one).   If you add up the aggregate principle balance of the Countrywide Home Equity and the Harborview Mortgage securities, it comes out to $1.258 billion.

Now the press release I got this data from was released before the tender was complete, but only by a couple of days.  If you add up the total committed principle specified in the press release you get $3.537 billion, whereas in Syncora’s final press release on the restructuring the amount was $3.8 billion.  So its close.

Subtracting the commuted exposure ($1.349 billion) from the total Countrywide exposure ($2.607 billion) you get $1.349 billion.  This is pretty much bang-on what Barclays had estimated.

Muddying Factors

What is less clear to me, and what I really have no way of determining, is whether the $350 million recovery should be compared against the $1.349 billion in securities, or against a much smaller amount.

As Frankel points out earlier in her article, the litigation that Syncora had against Bank of America was for 5 second lien transactions.

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

The complication is that in the press release Syncora talks about an additional 9 securitizations that aren’t a part of the litigation, but that are also part of the settlement with Bank of America.

…all of the Company’s claims in relation to nine other first and second lien transactions

Presumably the 5 plus the 9 securitizations add together to be $1.349 billion in total exposure.  And if all 14 securitizations are fraudulent, and Syncora could have expected to recover on all of them, then Syncora’s overall recovery is not that great.

But I’m not sure that is the right way to look at this.  There are a couple of considerations that paint a bit rosier picture of the settlement, and provide a bit more hope for MBIA.

First, having become rather familiar with MBIA and their history of litigation, its clear that MBIA was continually adding claims as they found them.  That Syncora did not do this, and instead limited the litigation to 5 of the 14 claims, suggests to me that perhaps the other 9 claims weren’t fraudulent.  If this is the case, that Syncora was able to release future claims on these additional 9 securitizations is actually a bit of icing on the cake.

A second point is that Syncora did not appear to be expecting anywhere near $1.35 billion in recoveries.  Going back to the lawsuit, Sycora was looking for a total recovery of $405 million.  In addition, taking a look at the last Annual Statement Syncora said it had put back $1.6 billion in total RMBS and that it expected to recover $212 million on these amounts (Page 14.35):

As of December 31, 2011 and December 31, 2010, the amount of mortgage loans that the Company is seeking sponsors to repurchase aggregated approximately $1.6 billion and $1.3 billion…As of December 31, 2011 and December 31, 2010, the Company estimated that it would realize a net benefit from such recoveries aggregating $212.1 million and $168.5 million, respectively.

These amounts included loans not only from Countrywide but from EMC and Greenpoint.  I imagine that these recoveries are in addition to the $405 million Syncora was looking for from the Countrywide litigation.  I also imagine that the 9 un-litigated securitizations would be included in this amount, which suggests that Syncora was not looking to recover very much from these 9.

A third and related point is that while the RMBS are experiencing default, it is unlikely that the entire RMBS is in default.  Claims will be lower than the total outstanding principle balance.  Taking a look at the notes to Syncora’s last quarterly statement, the company said that for the first lien securities:

A loss severity was applied to the first lien defaults ranging from 56.1% to 82.9% based upon actual loss severity observances and collateral characteristics to determine the expected loss on the collateral in those transactions.

For the second liens and HELOCs they did not break out the default so neatly into a percentage but still it could be said that th number will be somewhat below 100%.

Can you project to MBIA?

To sum it up, I don’t think that there was anything wrong with the Barclays analysis noted by Alison Frankel.  But I also think there are other mitigating factors that need to be considered before trying to project what this settlement means for MBIA.  Without more details as to which of the securities are fraudulent and therefore legitimate put-backs, and what the loss severity on each securitization is expected to be, its difficult to put a number to what the recovery is.  In the absence of such detail, I am inclined to take Syncora at its word, and assume that they expected recoveries of around $400-$600 million.  If this is the case, then the resolution was well within the range of what would be a nice payday for MBIA if they can settle on similar terms.