Monday, December 1, 2008

Investors Sue Countrywide

Investors in securitzed mortgages sue Bank of America’s Countrywide unit for $8.4 billion
Insurers, banks and others claim lender’s mortgage-modification agreement with 15 states will shortchange debt-holders

Bank of America’s Countrywide unit was sued for $8.4 billion by owners of mortgage-backed bonds who allege that the bank plans to pass on to them the costs of a regulatory settlement over misleading sales practices.

The suit was filed in New York state supreme court by Greenwich Financial Services Distressed Mortgage Fund 3 in Greenwich, Conn., which resolves distressed mortgages.

The fund represents dozens of insurance companies, banks, endowments and sovereign wealth funds that own securitized mortgages sold by Countrywide Financial, fund owner William Frey said in an interview.

The complaint seeks class-action status on behalf of thousands of holders of subprime and other mortgages that are to be reduced as part of Countrywide’s settlement with the attorneys general of at least 15 states, including California, Texas and Florida.

It alleges that Countrywide plans to pass on most or all of the mortgage reductions to the trusts that bought the securitized loans from the bank. The trusts in turn sold the securities to investors to pay Countrywide.

Bank of America, which acquired Countrywide on July 1, will likely absorb any costs involved in settling the suit—if the case is indeed settled—because Countrywide has so little money left, said Christopher Whalen, managing director of consultancy Institutional Risk Analytics.

“I wish [Bank of America chief executive] Kenneth Lewis would come clean on the true costs of remediating and absorbing Countrywide,” Mr. Whalen said in an interview. “The disclosures so far have been very meager.”

Countrywide is required to purchase all loans that it modifies under the settlement, the suit contends. The lender has said that these mortgages “are not subject to repurchase,” according to the complaint.

The $8.4 billion settlement in October, which may become the largest predatory lending agreement ever, resolved allegations that Countrywide misrepresented loan terms, loan payment increases and borrowers’ ability to afford loans.

Countrywide has said the loan modification program, which could help as many as 400,000 borrowers keep their homes, would be ready to start today.

Bank of America spokeswoman Shirley Norton said today the company hasn’t yet received a copy of the bondholders’ complaint.

Still, she added, Bank of America is “disappointed in this attempt to halt a program intended to keep as many as 400,000 at-risk families in their homes.”

“We are confident any attempt to stop this program will be legally unsupportable,” her e-mail said.

It’s not clear that bondholder are looking to short-circuit the mortgage modification program. In fact, the suit states that “plaintiffs make no complaint about the settlement between the attorneys general and Countrywide.”

Countrywide, once the largest provider of subprime mortgages in the U.S., faces a host of lawsuits related to its sales practices and sale to Bank of America. The lender was headed by Angelo Mozilo—now under investigation by the Securities and Exchange Commission—before it was acquired by B of A in July.

That $2.5 billion takeover vaulted Bank of America to the top of the U.S. mortgage lending industry. Countrywide made almost one of every five U.S. home loans last year, and reported almost $4 billion in loan losses during the second quarter.

In October, Countrywide settled a suit by Bank of New York Mellon, the world’s largest custodian of financial assets, over $2 billion in notes. The lender agreed to offer $980 per $1,000 in principal. Bond investors were concerned that Bank of America would hold on to the best assets of Countrywide while assigning debt to a new company created by the acquisition.

In addition, MBIA Insurance sued Countrywide in October, alleging that the lender fraudulently induced the bond insurer to guarantee bonds that have cost it more than $459 million.

A number of borrowers have also taken Countrywide to court. In addition, the company’s shareholders sued Countrywide in February, seeking more money from its takeover by Bank of America.

Securitization litigation

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