Investor Sues CFC over Mods

Washington-Servicers have been looking over their shoulders all year, expecting investors to sue if they go too far in modifying securitized mortgages - and it has finally happened.

An investment fund manager filed a class-action lawsuit on Dec. 1 to challenge a major loan modification program involving 400,000 Countrywide mortgages.

William Frey, president of Greenwich Financial Services in Connecticut, says he wants to make sure the mortgage-backed securities investors aren't stuck with the losses and to enforce the servicing contracts.

He contends that Countrywide must purchase the loans out of the securitized trust at par if they are slated for modification. There is "no contractual ability" for Countrywide to modify the loans and keep them in the trusts, he said in an interview.

The plaintiffs, Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC, filed the class-action lawsuit in a New York State Court.

The complaint points out that Bank of America's settlement with state attorneys general could lead to the modification of $80 billion in Countrywide loans, which would reduce payments to investors by $8.4 billion and reduce the value of the MBS certificates by billions of dollars.

Under the pooling and servicing agreements, "any mortgage that is modified must be purchased from the trust," the lawsuit says. And the investors are entitled to receive "not less than 100% of the unpaid principal balance of, and any accrued interest on, that loan immediately before modification."

Bank of America issued a statement saying loan modifications benefit both homeowners and investors. "We are confident any attempt to stop this program will be legally unsupportable," BoA said.

Mortgage banking attorney Larry Platt doesn't expect the plaintiffs will be successful for procedural and substantive reasons.

However, "it does illustrate the risk that investors are prepared to sue," he said.

Democrats in Congress and banking regulators have been urging servicers to adopt streamlined loan modification programs to deal with the foreclosure crisis.

But "investors are watching," Mr. Platt said. And servicers know they are at "risk of lawsuits by disgruntled investors," he added.

The partner at K&L Gates in Washington noted the PSA requires a certain percent of the investors to file a direct claim. Mr. Frey "doesn't have them," Mr. Platt said. "So he is trying to use a class-action lawsuit to get around the provisions of the contract."

The K&L Gates partner also said he does not believe the plaintiffs' interpretation of the contract is correct or that restrictive.

Bank of America, Charlotte, N.C., completed its purchase of Countrywide Finance Corp., Calabasas, Calif., in July after several state attorneys general had filed civil suits alleging Countrywide engaged in predatory lending.

On Oct. 6, Bank of America entered into a settlement with 10 state AGs and agreed to adopt a systematic loan modification program for Countrywide's subprime and payment-option mortgages.

"Countrywide believes the plaintiffs' lawsuit represents an unlawful effort to assert rights of the trusts. Accordingly, Countrywide intends to pursue plaintiffs for any and all remedies available to it, including recovery of its costs in having to defend this improper action," according to the BoA statement.

The Greenwich Financial Services president says he is not trying to stop the loan modifications. He just wants to ensure that the investors' rights are not ignored.

"The only way to modify the loans according to the contract is to purchase it," Mr. Frey said. The New York law firm Grais & Ellsworth LLP filed the class-action lawsuit on behalf of investors in 373 Countrywide MBS totaling $150 billion.

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