RSS Blog FeedLoan Modifications...Will a Class-Action Lawsuit Put a Monkey Wrench in the Works?
Dec. 3, 2008The latest in the ongoing saga of the loan modification proposal for Bank of America's (once Countrywide) 400,000 troubled mortgages just hit the news. On Monday, Dec. 1, a private investor, William Frey, filed a lawsuit in New York State Supreme Court alleging that the proposed modification is illegal. Hoping to make it to class-action lawsuit status, Frey's case argues that most of the Countrywide loans do not belong to Countrywide or Bank of America, but rather are owned by trusts that bought them through securitization, or the secondary market.
While the lawsuit names 371 different securitizations, Frey’s fund holds certificates in only one. The problem is that the language used in the contracts, never spelled out how to handle modifications to loans for borrowers who cannot afford their mortgages. The language was very vague, until more specific language started to be used in 2007, when the 'Mortgage Meltdown" caused problems to grow exponentially.
He actually has a very good legal point. Investors who bought Mortgaged Backed Securities have contractual agreements that are being usurped by these Loan Mod proposals. The legal precidents, of course, matter because of the financial outcome, which would be the weakening of secondary markets, and even the risk of permanent damage. Without the securitization of mortgages on the secondary markets, the housing industry would shrink in damaging proportions.
The other major issue is the damage to investor confidence, and the financial effect which will be inevitably passed on to homeowners. "The public policy problem going forward is, if Congress can legislate or a judge can break the contract, then I as an investor will demand a much higher premium," says a mortgage-company risk officer. "I can't model and price something that is 'oh gee, we're going to change the rules.' It's a big problem." So all of the increased risk gets passed on to future homeowners.
Not to mention the losses that will be incurred, bondholders will lose $8.4 billion by reducing borrower payments. Adding insult to injury, the speculation is that BofA isn't paying for the modifications out of its own pocket, but "out of the bondholders' money.
And here is a nasty little statistic: The RE-Default rate on loan modifications is 50%, meaning that half of the loan modifications done end up defaulting a second time. This staggering statistic throws a questionable light on the enormous costs to both taxpayers and investors, at the gain of what?
We'll keep following this lawsuit which promises to be a precident setting event.
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UPDATES:
The Subprime Shakeout - Feb 10, 2009
Bill Frey Receives an Invitation from Congress - May 17, 2009
Frey's Letter to Congress - Nov. 12, 2008
View more entries tagged with: Loan Modification, Class Action Lawsuit, Countrywide, Bank Of AmericaRE: Loan Modifications...Will a Class-Action Lawsuit Put a Monkey Wrench in the Works?
Posted by Anonymous Dec. 16, 2008But the little known fact is that as early as 2001 the Bush Administration put together a proposal to tighten oversight of Fannie Mae, but were stonewalled by the Dems on the oversight committee. Fannie was their playground, and all their cronies, like Raines, benefited with HUGE $bil. salaries and bonuses, and now they seem to have a convenient memory loss. The bush administration continued to warn about the possibility of disaster, unheeded. In 2008 alone, they made 17 proposals, all ignored until the summer, when the *** hit the fan. THE BLAME FALLS ON CONGRESS, they are the ones that gave oversight, not the administration.
Its a shame that we aren't going to know the truth until the next generation of historians can weed through the politically charged rhetoric... like my own:)
RE: Loan Modifications...Will a Class-Action Lawsuit Put a Monkey Wrench in the Works?
Posted by Deborah J. Boyd Dec. 11, 2008So we have Mr. Frey and friends upset because they invested in securities that should have probably been labled junk bond status but ended up as AAA. He said, and I agree, that the bond holders should not pick up the tab. He seems to feel that BofA and the merged acquisition of Countrywide should pay.
I disagree. The people who should pay the difference in the modification and the original mortgage are the issuers of the bogus ratings which points directly to the Republican party and the Bush Administration for all the garbage about financial institutions being self-regulated.
To the International World, the USA makes it look as if Capitalism is now a failure. The only way out that I see is for homeowners that need modifications to agree to give an equity share of the home to the investors that is at least 2/3 of the difference and have the Federal Government absorb the rest and guarantee the first payment to the securities upon the sale of the house. We need to restore the confidence of the consumer in buying real estate and stop the unfair negative effect of the huge population of foreclosurers on the people who maintained their homes properly and played by the rules and understood what they were signing up for.