What Will The Courts Have To Say About Loan Modifications?

Here is a tale of what lies ahead for the mortgage and banking industries. The issue of litigation over the modification of loans and certainly more issues is going to clog the courts for some time. Substantial damages could accrue to the lenders and the issue may well come to rival the asbestos litigation chronicles as a gold mine for the bar.

A little quick history. When Countrywide was in its death throes, a number of attorneys general around the country smelled blood and attacked. Their claim was generally that Countrywide was engaged in “predatory lending” and they would therefore seek billions in damages. Wounded beast that it was, Countrywide fought back hardly at all and of course fell into the arms of Bank of America.

Once under its wing, BofA moved swiftly to settle with the circling carrion. Too many other fish were frying and Countrywide which had seemed like such a big deal at the time was now small potatoes when compared to every other wave crashing onto the shores in landlocked Charlotte. So with little more than a couple of blinks the bank agreed to modify 400,000 mortgages at a cost of as much as $8.4 billion. The attorneys general all agreed that this was good and would work well during the next election cycle.

Left out in the cold were the people who actually owned these mortgages that BofA agreed to modify since Countrywide/BofA didn’t really own them. In fact they had securitized them and sold them to investors. Oh, by the way, they gave the buyers of these securities a little security blanket. They told them that if they ever modified a loan they would buy them back at par from the investors. At the time they only anticipated modifying them if someone decided to refinance not if modification were required to preserve the asset,┬ábut they didn’t qualify the buy-back provision.

So one of those investors, Greenwich Financial filed a class action lawsuit asking that BofA honor the terms of the contract that Countrywide signed. Since then all hell has broken lose. Various members of Congress and the administration have issued not so veiled threats wrapping themselves in the duty of these investors to in effect take one for the team. To their credit the investors seem so far unintimidated and prepared to seek satisfaction in the courts.

And that’s where we stand. The validity and sanctity of contracts is something that is pretty clearly going to be adjudicated. It’s a very tangled web that gets woven as we try to extricate ourselves from this mess. Let’s hope in doing so we don’t throw overboard the legal framework that made this whole economy work for such a long time.

You can leave a response, or trackback from your own site.

Leave a Reply