A hedge fund has filed a most interesting suit against the Countrywide Financial Corporation, the giant mortgage lender, demanding that Countrywide compensate holders of some securities backed by mortgages if the lender changes the terms of the loans. According to the lawsuit, the fund, Greenwich Financial Services, and other investors stood to lose money if Countrywide, now part of Bank of America, modified loans under a settlement that it reached with 11 state Attorneys General in October. This came as the government was pushing banks to help struggling homeowners. It’s good to see some folks fighting back.
In recent months, some investors who own mortgage securities have begun voicing concern about how loans are modified, but few have filed suit. The Greenwich Financial case, filed in state court in New York, highlights the complexity associated with modifying loans that have been bundled into securities. It also signals that more aggressive government and private efforts to help borrowers could face stiff resistance from investors. The lawsuit claims that under contracts governing 374 Countrywide mortgage trusts, the company must purchase at face value any mortgage that it modifies.
According to William Frey, president of Greenwich Financial, an estimated $150 billion in mortgages could be covered by the requirement. His position is that Countrywide doesn’t have the right to modify the terms. Though his firm is the only named Plaintiff in the case, many other investors are said to be supporting this lawsuit. They would benefit if the court granted the case class action status. Under the settlement with the states, Countrywide agreed to modify up to 400,000 loans and to provide $8.4 billion in relief to borrowers to settle predatory lending accusations. It’s contended in the suit:
Countrywide plans not to absorb the $8.4 billion itself, even though it was Countrywide’s own conduct of which the Attorneys General complained in the proceedings, but rather to pass most or all of that reduction on to the trusts that purchased mortgage loans from Countrywide.
I must confess that this lawsuit really takes a turn that I never anticipated. In effect, as I understand it, the litigation pits a rather elite group against the actual victims of a predatory lender. While I concede that both groups are victims, my feelings go out more to the homeowners. In any event, it will be interesting to see how this lawsuit works out.
Source: New York Times
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