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38 FITCH FINALIZES U.S. RMBS QUALIFIED AND NON-QUALIFIED MORTGAGE CRITERIA Fitch Ratings announced it has finalized its criteria for analyzing loans securing U.S. resi- dential mortgage-backed securities (RMBS) under the new qualified mortgage (QM) and Ability-to-Repay rule (the Rule) recently adopted by the Consumer Financial Protection Bureau (CFPB). Fitch developed assumptions with respect to the probability of challenges to the Rule or a mortgages QM status, as well as the potential costs or damages. "We expect some defaulted borrowers will likely challenge the Rule, but a lack of legal precedent could make the first few cases high profile and prone to significant legal costs," said senior director Suzanne Mistretta. e announcement commented, "Fitch will make upward adjustments to its credit enhancement calculations if the originator designates the loan as higher-priced QM (HPQM) or non-QM. Loans identified by the lender and confirmed by third-party due diligence as safe harbor QM (SHQM) will not receive an adjustment." Fitch makes a few assumptions regarding how to handle new loans. First, Fitch will consider the lifetime probability of default (PD) derived from Fitch's mortgage loan loss model. Additionally, the population is narrowed further to indicate only those borrowers who are likely to default within five years of origination. Finally, a state's foreclosure process, either judicial or non-judicial, plays a factor. Mistretta noted, "Lower credit quality pools will see a larger effect on credit enhance- ment relative to higher credit quality pools primarily due to their higher probability of default and smaller loan balances." Fitch will mark a key difference between structures: those that provide for expenses to be paid from available funds and those that deduct expenses from the mortgage pool's net weighted average coupon (Net WAC). e announcement clarified, "Where expenses are absorbed by the pool's Net WAC and the note rate is capped at the Net WAC, Fitch will not adjust its loss expectation for the pool. Although expenses are borne by both senior and subordinated investors, this provi- sion does not affect the trust's ability to pay contractual amounts due." BANKS COMPLETE CONSUMER RELIEF OBLIGATIONS Joseph A. Smith Jr., monitor of the National Mortgage Settlement, filed final crediting reports with the U.S. District Court for the District of Columbia on Bank of America, Chase, Citibank, and Wells Fargo. e reports confirmed that the banks have satisfied their consumer relief and refinancing obligations under the settlement, nearly a full year ahead of schedule. In a press release, Smith commented, "My re- ports mark the end of the consumer relief portion of the settlement. Because of the way this land- mark agreement was designed, an unprecedented amount of relief has been provided to consumers quickly and efficiently." He continued, "Furthermore, I believe the rigorous testing process should justify public con- fidence that the banks have fulfilled their relief commitments and that the settlement has played a part in helping keep struggling borrowers in their homes." Remunerations were called for after the banks engaged in widespread signing of foreclosure-re- lated documents outside the presence of a notary public and without confirmation whether the facts they contained were correct—both illegal actions. e practice earned the futuristic-sounding sobriquet "robo-signing" and necessitated 49 state attorneys general and the federal government to correct actions against wronged homeowners, eventually settling with the banks for an initial estimated figure of $25 billion. Oklahoma was the lone holdout. Smith notes that among the banks, 37 percent of total credit relief was in the form of first lien principal forgiveness, while second lien principal forgiveness made up 15 percent. Refinancing made up 17 percent of total credited relief, and other relief (including short sales and deeds in lieu of foreclosure) accounted for 31 percent of relief. Shaun Donovan, secretary of Housing and Urban Development (HUD), commented on a conference call with the media that more than 600,000 consumers received on average more than $79,000 in relief. Seven out of every 10 dol- lars of credit for consumer relief, such as refinanc- ings and principal reductions, came in a form that kept borrowers in their homes, Donovan said on the call. Donovan added, "is settlement delivered on what we promised." e tone of the call between Donovan and Iowa attorney general Tom Miller was mostly laudatory toward the banks, praising them for quick action as well as payments that exceeded initial estimates. Miller noted that $20 billion in credits and more than $50 billion in total homeowner benefits were "well in excess of what we predicted or expected." All told, $5.1 billion was required for first lien principal reductions in the initial settlement, but the final figure from the banks totaled almost $7.6 billion—nearly 50 percent more than what was required. Miller fired back at detractors of the settle- ment who cautioned that principal reductions would create a "moral hazard," encouraging bor- rowers to default on their loans to avoid payment. "Many people in the industry … were saying that if there was any principal reduction there would be all this moral hazard, other people would stop paying—that the whole market would be seriously harmed. Well, we've had substantial principal reduction, 7.6 billion dollars' worth, and none of this has happened. None of the problems, none of the concerns, none of the catastrophes that were predicted happened, as we predicted," Miller said. He noted that principal reductions were "a tool in the toolkit for dealing with homeowners in default." Miller continued, "We knew that there was no single solution, no magic bullet, to turn around the housing market. We knew there had to be pieces, and we thought that this would be one of the pieces, and clearly it has been. is is one of the reasons the housing market now has turned in the right direction." "The nearly 123,000 modifications, other consumer relief options and refinances for which we received credit under the settlement represent only a small percentage of what we have done to assist customers over the past several years. We remain committed to helping customers who face payment challenges find options wherever possible." –Michael DeVito, EVP for Servicing at Wells Fargo Home Mortgage VERBOSITY

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