From the Wall Street Journal:
Bank of America Corp.’s decision to embark on an $8.4 billion home-loan-modification program to settle charges brought by state attorneys general against Countrywide Financial Corp. was hailed as a milestone when the deal was announced this fall. But apparently nobody talked to one group that will shoulder much of the settlement’s costs: investors who hold securities backed by Countrywide mortgages.
ow, some of those investors are crying foul, adding to the confusion over what is becoming a central issue in efforts to resolve the wave of foreclosures that is at the root of the global financial crisis.
J.P. Morgan Chase & Co. and Citigroup Inc. recently announced foreclosure-prevention programs that aim to reduce interest rates, extend repayment schedules and, in the case of Citigroup, reduce loan amounts, to help borrowers keep their homes. But the programs have focused primarily on loans wholly owned by those companies because they feel they have more authority to rework those mortgages.
More than $2 trillion in mortgage loans were packaged into mortgage-backed securities and sold to investors by Wall Street, according to Inside Mortgage Finance. But opinions vary regarding the degree to which these mortgages can be modified.
Under terms of contracts with investors, mortgage companies generally have the authority to rework loans when it is likely to benefit investors. But just how much authority the mortgage companies have is open to debate.
Modifications also can benefit some bondholders at the expense of others. Reducing a borrower’s loan balance, for instance, may hurt holders of the riskiest piece of a mortgage securitization more than investors who bought securities that had higher credit ratings.
Last week, a group of about two dozen investors met in New York with attorneys at Grais & Ellsworth LLP, who believe they may have grounds to sue. Attorney David Grais told them that Bank of America was conflicted when it agreed to the settlement because Countrywide was both the originator of the mortgages and the servicer of the securities. “This is penalty shifting,” Mr. Grais said.