As anticipated and previously discussed (see last week’s post), a hedge fund has indeed sued Countrywide Financial Corporation (now a part of Bank of America) over loan modifications Countrywide agreed to make under the terms of a settlement reached with 11 state attorneys general in October. The New York Times has reported that the fund, Greenwich Financial Services, has filed suit in state court in New York claiming that it stands to lose money from modifications to loans in 374 Countrywide mortgage trusts, and that the terms of the contracts governing these securitizations require Countrywide to repurchase at face value any mortgages it modifies.
I look forward to reviewing the loan modification language contained in the Pooling and Servicing Agreements or Prospectuses for these securitizations. In my experience, loan modifications are generally permitted by standard securitization contracts under certain conditions, and repurchases are only required when a lender breaches its representations and warranties (often regarding the underwriting or characteristics of individual loans). I’d be surprised if the language explicitly required repurchase for any loan modification. (See an interesting discussion of this issue here, courtesy of the informative Baseline Scenario.) Instead, investors may be more successful arguing that the loans subject to modification were defective and should be repurchased for breaching the lenders’ representations and warranties.
Check back this week as I will try to track down and post this Complaint on The Supbrime Shakeout. [Update: the Complaint is now available here - IMG]