Attorney Comment(s) ?

[Irish Gal]

In a nutshell, what does this mean for homeowners w/ Countrywide loans under CA (or other state's) AG? Or is this just a slugfest between investors and servicers?

Thanks!



August 20, 2009

Countrywide Loses Ruling in Loan Suit

By GRETCHEN MORGENSON

A federal judge in Manhattan has rejected an argument by Countrywide Financial seeking certain protections from investor lawsuits under new legislation intended to encourage modifications of home loans.

Countrywide, the big mortgage company, had argued that the legislation automatically voided its pledges to buy back loans from investors if those loans were modified for troubled borrowers.

The ruling is a win for holders of mortgage-backed securities who sued Countrywide in December after the company, now a unit of Bank of America, agreed to modify thousands of loans in a settlement with state attorneys general. The opinion, by Judge Richard J. Holwell of Federal District Court in New York, was made public on Tuesday.

The case against Countrywide is being closely watched by pension funds, insurance companies and other investors in mortgage securities who contend that loan servicing companies that agree to change the terms of mortgages are breaching contractual obligations to owners of those loans.

Investors who own mortgage securities receive interest and principal payments from borrowers over the life of the loans. When servicing companies modify those loans, investor payments are typically reduced.

“I view this as an opening salvo and a demonstration that investors do have contractual rights, even when it is politically unpopular,” said William A. Frey, one of the investors who brought the lawsuit. “This is ultimately going to be one of many legal battles over who should pay the hundreds of billions of dollars in losses on mortgages.”

Bank of America, which took over servicing of the investors’ loans when it bought Countrywide in 2008, is defending the case. It argued that the matter belonged in federal court and that any contractual obligations to repurchase modified loans were trumped by the Helping Families Save Their Homes Act of 2009. Under that law, servicing companies that agree to modify loans receive some protection from liability arising from the loan changes.

Judge Holwell ruled that the immunity granted under the legislation did not prevent Countrywide’s investors from trying to enforce their rights under the mortgage securities contracts. The investors must prove that Countrywide’s pooling and servicing agreement covering their loans does indeed require it to repurchase mortgages the bank modifies, the judge said, ruling that the case belongs in state court.

Shirley Norton, a spokeswoman for Bank of America, said it was reviewing the order and considering its options. “The court did not rule that the safe harbor is inapplicable,” Ms. Norton said, merely that it did not fall under federal jurisdiction.

Investors’ lawyers hailed the decision.

“This is a first step in a decision by a federal judge that says even after the servicers’ safe harbor was enacted and even after all the wrangling in Congress, we are still going to allow people to enforce their contract rights when it is appropriate,” said Owen L. Cyrulnik, counsel at Grais & Ellsworth in New York, which is representing investors in the suit against Countrywide.

The lawsuit was filed in December after Bank of America struck a predatory lending settlement with attorneys general in 11 states. In that deal, the bank agreed to modify thousands of mortgages written by Countrywide, providing $8.4 billion in loan aid to an estimated 400,000 Countrywide borrowers.

Under the terms of the settlement, Countrywide said it would cut principal balances on some loans and reduce interest rates on others. Rates could decline to 2.5 percent, depending upon a borrower’s ability to pay, and remain at that level for five years.

But it turned out that Bank of America owned only a small portion of the mortgages it had agreed to modify. Investors who owned the largest share of the loans had not agreed to the settlement and would bear the brunt of the reduced payments.

Two investment funds holding Countrywide mortgages sued Bank of America, contending that the regulatory deal ran afoul of promises Countrywide had made when it issued the mortgage securities.

The funds, Greenwich Financial Services Distressed Mortgage Fund and QED L.L.C., are owned by Mr. Frey, who contended that the mortgage securities contained pledges by Countrywide to repurchase from investors any loans it agreed to modify. On later mortgage securities, Countrywide changed the agreements, eliminating the language about buying back modified loans.

According to the lawsuit, which is asking for a declaration from the court to make Countrywide live up to its contracts, some 374 mortgage pools issued by Countrywide contain language pledging to buy back modified loans from investors.

The case highlights the potential for conflicts of interest in the loan servicing business. Loan servicers have a duty to investors not to do anything that jeopardizes the income stream to holders of the securities.

But servicers are often units of large banks that also make home loans. Investors in mortgage securities are increasingly concerned that the companies may put their own interests ahead of those of their servicing customers when they modify loans.

As the mortgage crisis has deepened, servicers have also come under immense pressure from the government to modify loans. The goal is to keep borrowers in their homes and curb the flood of foreclosures, but changes to loan terms can put servicers at odds with the investors they have a duty to serve.

[so-cal-gal]

Looks like CW/BofA could be buying back some notes from investors.

What I would predict is that CW/BofA try to weed out as many people who apply for a mod as possible, just as they are doing now. [They grant 2.5X fewer mods than the industry standard right now. Industry wide data:10%; BofA/CW:4%]

This could cause BofA to have some real heartburn: where do they get the capital to buy back all those notes if the judge says they have to honor their contracts.

[Oh, I just love typing those words, since I'm having to force CW/BofA to honor a modification contract that CW issued. ]

Seriously, it could have BofA putting the palm out to Uncle Obama.

That or, what bank is big enough to buy up BofA? [Unless BofA is too BIG to be allowed to fail.]

If another bank with more ethics were to take over CW/BofA and really clean house, it might be a good thing for those still trying to get a mod.

[Irish Gal]

Originally Posted by so-cal-gal

Looks like CW/BofA could be buying back some notes from investors.

What I would predict is that CW/BofA try to weed out as many people who apply for a mod as possible, just as they are doing now. [They grant 2.5X fewer mods than the industry standard right now. Industry wide data:10%; BofA/CW:4%]

This could cause BofA to have some real heartburn: where do they get the capital to buy back all those notes if the judge says they have to honor their contracts.

[Oh, I just love typing those words, since I'm having to force CW/BofA to honor a modification contract that CW issued. ]

Seriously, it could have BofA putting the palm out to Uncle Obama.

That or, what bank is big enough to buy up BofA? [Unless BofA is too BIG to be allowed to fail.]

If another bank with more ethics were to take over CW/BofA and really clean house, it might be a good thing for those still trying to get a mod.

Thanks for the comment. I always enjoy your critiques of these jerks! Uncle Obama needs to grow a pair. Sick of his pampering those Wall St. burglars. But, I suspect you're right. Somehow the taxpayer's will dig them out of that rut, too. By the way, I've read that the gov't is trying to oust Ken Lewis and that some woman has been hired at BofA (politically placed by those trying to shove Kenny out), forgot her name, and she has a "squeaky clean" reputation as a Wall St. hag. She's been "properly placed" to calm the investors down and "instill confidence." Yea, right. Who knows. Maybe some ethics will end up at BofA, after all. I remember seeing Kenny on 60 mins last yr or so and he was aaaalllll smug as to how conservatively he managed BofA and kept it sssssoooooooooo $$$$$$ healthy cuz "he's a North Carolina boy and not a New Yawk Wall Streeter" !!!! Seriously, that was his schtick reasoning a yr or so ago ) He turned out to be scum too, just like his New Yawk cohorts! Now, look at him. I think he's toast, at some point. He's hangin on by his whiskers. Many people want him gone.

[so-cal-gal]

Thank you for the eval.

I do need to make one comment about the situation with CW/BofA with regard to offering mods to any borrowers.

The first count in the CW CA AG's suit was over them not abiding by CA Civil Business & Professional Code 17500 which is TRUTH IN ADVERTISING. They advertised those loans as being 'good' loans for the borrowers. Since that was NOT a truthful statement in their advertising, Jerry Brown hammered them.

Okay, now after agreeing to the STIPULATED SETTLEMENT AGREEMENT, CW advertised the availability of the mods.

A NH court case has an apparent settlement offer based on those FALSE ADVERTISEMENTS. It seems that BofA attorneys ended up telling the NH court on the record that the CW ads were 'PUFFERY' and admitting that the mods were never intended to be readily available to qualified borrowers. The case that brought the suit NEVER even received a mod offer. They were strung along for SOOO long that they lost their home to foreclosure.

Now all it would take is the AGs getting disgusted enough to take this issue BACK to court, citing that they are absolutely in contempt of court, failing to follow court orders and in breach of the agreement.

That could put BofA/CW between a rock and a hard place.

They have a need to NOT offer the mods but at the same time they gotta offer them, causing them to need to buy back more of the loans per the judgment for the note-holders. That diminishes their capital, so they will want to limit the number of mods offered but they don't want to get hauled into court in every state where they made loans over the truth in advertising situation where they claimed they WOULD offer the mods.

Is Ken up to a tight-rope act?