Countrywide loses in Law Suit by Investors

Countrywide Financial lost in its petition for relief from investor lawsuits against the Megabank. Countrywide Financial was seeking relief from investor lawsuits under the new legislation Helping Families Save Their Homes Act of 2009. The legislation provides that mortgage servicers that agree to modify mortgage loans received protection from liability arising from the loan changes.

Bank of America is actually defending the case against Countrywide as it took over Countrywide’s serving in 2008 when it bought the Megabank. Bank of America argued that the legislation automatically voided its duty to purchase loans back from investors if those loans should be modified for borrowers in trouble. It also argued that the matter should be argued in Federal Court.

The ruling from the court by United States Federal Court Judge Richard J. Holwell is a win for investors of mortgage back securities the lawsuit against Countrywide back in December. The suit came after the Megabank, now a subordinate to Bank of America, agreed to modify thousands of mortgage loans under a settlement with State Attorney Generals. The settlement Countrywide came to with Attorney Generals in eleven states was to modify thousands of loans affecting an estimated four hundred thousand borrowers and provided for eight point four billion dollars in loan aid for those borrowers. The suit was brought against the Megabank for its predatory lending practices. 

Countrywide in that suit agreed to cut principal and interest on the balances of those loans it sold under predatory lending. Countrywide estimated that it would reduce interest rates on those loans by approximately two and a half percent depending on the borrower’s ability to pay and the remain at the level for five years. Bank of America however only owned a small portion of the mortgages it had agreed to modify. Investors actually owned the lion’s share of the mortgages that Countrywide and Bank of America agreed to modify. The investors would now become the bearer of brunt from the reduced payments and they did not agree to the settlements arranged by the Megabank.

Pension Funds, Insurance Companies and other investors that invest in mortgage backed securities contend that loan serving companies like Countrywide that agreed to modify the terms of mortgage loans are breaching contractual obligations to the actual owners of those loans, the investors.

Investors who in deal in mortgage back securities receive payments from the principal and interest on the life of the loan in those mortgage pools. Mortgage servicers that modify those loans actually reduce what investors would receive in payments.

Greenwich Financial Services Distressed Mortgage Fund and QED L.L.C both investment funds holding Countrywide mortgages sued Bank of America challenging that the regulatory deal was faulty in nature as Countrywide had contractual obligations to investors when it issued the mortgage securities on those loans. They challenge that Countrywide when it made the settlement knew about the contractual obligations to investors when it made the settlement with the Attorney Generals.  They contend that Countrywide had an obligation to repurchase any loans that were modified from investors that were in the pool.

The lawsuit is asking the court to hold Countrywide accountable for the modified loans and thus live up to its contractual obligation to repurchase the modified loans. The lawsuit states that there are three hundred and seventy four mortgage pools that were issued by Countrywide that contain the contractual buy back language from investors in regards to loans that have been modified. Countrywide on later mortgage securities changed the language in agreements to eliminate the buy- back of modified loans; however the pools in question still contain the buy-back language.

Judge Howell in his ruling stated that while the legislation did grant immunity it did not prevent Countrywide investors from trying to enforce their contractual rights under mortgage securities contracts. He further stated that investors must prove that the Megabanks pooling and servicing agreement covering the loans in question does require the Megabank to repurchase the modified loans. Howell also ruled that the case belongs in the State Courts and not in a Federal Court of Law.

Lawyers for the investor involved in the case are content with the decision. They believe this is the just one step in many that shows after all is agreed with in Congress and servicers were given safe harbor that investor still have contractual rights and should be allowed to pursue them. One of the investors believes this is a good demonstration that investors do have contractual rights. He stated sometimes those contractual right are not popular but that is the way the contact agreements read. He believes this is the first of many legal battles over who is fiscally responsible for the billions of dollars in losses on mortgages.

A spokesperson for Bank of America stated that they are reviewing the court order and are considering its options. She stated that the court did not rule safe harbor was not applicable it merely stated it did not fall under federal jurisdiction.

The case against Countrywide simply highlights the conflicts of interest a loan servicing businesses that also originate the loans. Loan servicers by contractual duty must not do anything that may jeopardize the income streams of the holders of mortgage securities. Investors are concerned that the servicing companies have put their own interest ahead of those it contractually is obligated to serve when modifying mortgage loans.