Countrywide Financial Corp.'s agreement last month, which requires it to relax the terms of some 400,000 mortgages, was good news for struggling homeowners. But a New York law firm says the settlement isn't fair to the people who invested in Countrywide's mortgage-backed securities, and it's trying to drum up interest in challenging the settlement.
That has some consumer advocates and lawmakers who pushed for the loan workouts up in arms, saying their work will be unraveled and that homeowners will suffer. But some of the investors, who have already taken substantial losses due to the withering housing market, say they could lose even more if those mortgages are renegotiated.
Successful or not, the potential lawsuit is a reminder that fixing the mortgage meltdown will be as complicated as the web of investors, securitizers and second-mortgage lenders holding stakes in almost every mortgage. The law firm, Grais & Ellsworth, will hold a meeting this morning in New York for securities investors interested in taking legal action against Countrywide and its parent, Charlotte's Bank of America Corp.
Bank of America Corp. bought Countrywide, a California mortgage lender known for exotic loans, this summer. North Carolina and other states filed complaints alleging that Countrywide used unfair and deceptive tactics to give homeowners loans they couldn't afford. Last month, Bank of America settled those suits by agreeing to $8.4 billion worth of mortgage modifications, also called loan workouts, which can help struggling borrowers avoid foreclosure with measures such as reducing their interest rate or waiving late fees.
Grais & Ellsworth may challenge the settlement because it says Countrywide is violating its agreements with securities investors. According to the law firm, those agreements require Countrywide to repurchase any loans that it modifies or any loans that violate standards on predatory lending. Countrywide has not said that its loans were unlawful.
Loan workouts are becoming increasingly common, as banks try to stem their losses from subprime loans and the government announces its own initiatives, such as the HOPE for Homeowners program, to help banks absorb the costs of the mortgage modifications. Though most parties – the borrower, the bank and the community – will benefit from a loan workout, a securities investor might not, said Ira Rheingold, executive director of the National Association of Consumer Advocates.
“It shows how crazy things have become,” Rheingold said. “We've created this system where stopping a foreclosure doesn't help everybody.”
In a letter published on Grais & Ellsworth's Web site, partner Bruce Boisture wrote that Countrywide “plans to pay not a cent of its own” toward the cost of the loan workouts, but will force the securities investors to foot the bill, “even though it is Countrywide's own conduct (or misconduct)” that caused the settlement.
Bank of America spokesman Dan Frahm said the cost of the loan workouts will be fully incurred by Countrywide. “We're confident it (the settlement) has benefits for both the customers and the investors,” Frahm said.
“The program has been public for a month, and we have not had any challenges from any of the investors that are in the program,” he added.
In a news release last month, Bank of America's chief financial officer, Joe Price, said the cost of restructuring the loans was within projections that Bank of America made when it bought Countrywide. Through the settlement, the bank could eat the cost for up to $8.4 billion in bills it never collects on. Price indicated that the settlement could save money in the long term, by stemming foreclosure losses. Bank of America also said that some of the loan workouts “will be subject to compliance with servicing contracts and some will require investor approval.”
Like other lenders, Countrywide did not keep most of the loans it made on its own books, but instead packaged them into securities and sold them to trust funds and other investors. Those funds pay their investors interest and principal from the payments they receive from the homeowners. If interest rates or principal balances on those loans are reduced, less cash comes into the trust. Boisture says when that happens, the trusts will not have enough cash to pay the obligations previously promised to bondholders.
Boisture estimates that 385 trusts, representing hundreds of investors and outstanding debt originally worth $465 billion, could be eligible for a lawsuit. Asked about reaction from investors, Boisture replied: “I would characterize it as a significant level of interest in learning about the issues and considering their options.”