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Fitch Lowers Bank of America's Default & Servicer Ratings

Charlotte, NC-In the wake of the poor earnings report and disclosures about additional government assistance at Bank of America Corp. here, Fitch Ratings, Chicago, has cut the long-term issuer default rating on the company's bank subsidiaries from AA- to A+.

Separately, Fitch also lowered servicer ratings by one notch on Bank of America and Countrywide Home Loans, which has been acquired by BoA.

Countrywide's residential primary servicer rating for prime loans was downgraded to RPS1- from a previous top rating of RPS1. For alt-A, subprime and HELOC servicing, BoA's residential servicer rating was notched down to RPS2+. The company's special servicer rating was also moved down one step to RSS2+, while the master servicer rating was affirmed at that same rating level.

Fitch said the servicing downgrades reflect the changes to the financial condition of its parent company, Bank of America.

For Bank of America itself, the residential primary servicer rating for prime loans was notched down to RPS1-. The bank's ratings for alt-A and HELOC servicing were also lowered to the same rating level.

Fitch said the rating action reflects the "potential impact on servicing operations of continued pressure" on Bank of America's financial flexibility and the increasingly challenged residential mortgage market.

The parent company's long-term IDR, as well as the IDR of newly acquired Merrill Lynch & Co., were affirmed at A+. Furthermore, the preferred stock ratings were cut from A to BBB and placed on ratings watch negative.

Credit quality issues caused BoA to report a net loss of $1.79 billion for the fourth quarter. The loss does include Countrywide's operations, but not Merrill Lynch's. Preliminary data indicate Merrill Lynch lost $15.31 billion for the fourth quarter.

Fitch said it took the ratings actions because the combined BoA/Merrill Lynch would experience ongoing operating and asset quality pressures in the current environment.

"The actions, which result in a convergence of BoA's IDR at its support floor, also reflect the fact that government support has been forthcoming and additional support will likely be provided in the future if necessary, due to BoA's prominence in the global and domestic banking system," said Fitch.

Merrill Lynch's individual rating has been cut to F, which Fitch said reflects its "view that this entity would likely not have survived absent assistance provided by the U.S. Treasury."

Nonperforming assets at BoA were $18.23 billion at the end of the fourth quarter, up from $5.95 billion one year prior. The company upped its provision for loan losses from $3.31 billion in the fourth quarter of 2007 to $8.54 billion in the most recent period.

During 2008, BoA and Countrywide modified approximately 230,000 home loans.

In the fourth quarter, BoA extended $115 billion in new credit, of which $45 billion was in mortgages, $7 billion in commercial real estate and over $5 billion in home-equity products. The company also originated $11.3 billion of mortgages for low- and moderate-income borrowers.

BoA's fourth-quarter net loss applicable to common shareholders was $2.39 billion ($0.48 per share), compared with net income of $215 million ($0.05 per share) for the same period last year. For the full year, BoA earned $4.01 billion. Its earnings available to common shareholders were $2.56 billion ($0.05 per share) compared with $14.8 billion ($3.30 per share) in 2007.

The mortgage, home equities and insurance services portion of BoA's global consumer and small business banking segment had a net loss of $2.5 billion as home-equity credit costs rose.

Higher non-interest expense was offset by increases in mortgage banking income, net interest income and insurance premiums. BoA took $20 billion in government funds.

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