Protesters Converge on Front Lawn of Greenwich CEO’s Home

Posted on February 14, 2009 by Isaac Gradman

In another unexpected twist in the fight over the cost of loan modifications, the Stamford Times and the Greenwich Time have reported that protesters converged outside the home of Greenwich Financial Services CEO William Frey on February 8 to protest Frey’s lawsuit against Countrywide and Bank of America. The protest, part of three-day homeowners’ workshop sponsored by the Neighborhood Assistance Corporation of America (NACA), involved anywhere from 350 to 400 people wearing bright yellow hats and T-shirts with pictures of sharks and the words “Stop Loan Sharks” emblazoned on the front (see picture at right).

In one of the most bizarre facets of this story, the protesters, according to the Stamford Times article, placed furniture on Frey’s front lawn to “symbolize the dislocation felt by people who have had their homes foreclosed upon and been evicted, their belongings tossed outside by state marshals.” The article went on to describe how, according to NACA CEO Bruce Marks, this protest was part of an aggressive and confrontational “Predators Tour” aimed at several top executives of companies that refuse to allow NACA to renegotiate the terms of the loans on behalf of its members. According to the Greenwich Time article, the nonprofit’s accountability campaign targets company executives who they believe contributed to the subprime mortgage crisis to encourage them to support the refinancing of these loans.

While I can understand the anger felt by many homeowners at the greed displayed by banking executives such as Merrill Lynch CEO John Thain and others who profited handsomely during the housing bubble, it seems to me that NACA’s protests aimed at Frey are entirely misguided. For those familiar with Greenwich Financial’s lawsuit against Countrywide (discussed in prior postings here), it should be clear that while Frey is intervening in Countrywide’s settlement with dozens of Attorneys General, it’s not because he opposes loan modifications in principle. Instead, Frey seeks to have the costs of these modifications borne by the party primarily responsible for issuing deceptive or unreasonable loans.

The Attorneys General brought charges of predatory and unreasonable lending practices against Countrywide that the company clearly felt were substantial enough to settle for upwards of $8 billion. However, recent evidence has emerged that these costs are not actually coming out of Countrywide’s pockets, but instead being passed down to the ultimate bondholders, who did not directly engage in predatory lending.

Of course, it’s true that investors exhibited a voracious appetite for subprime mortgage-backed securities during the boom, but most of the pooling and servicing agreements for such bonds contained exhaustive representations and warranties by the lenders that the loans were not originated in a predatory or unprincipled manner. For Frey to attempt to hold Countrywide to its representations and force the company to bear the costs of its practices seems perfectly reasonable, even if fundamentally self-interested.

Most would agree that loan modification and foreclosure avoidance will be integral to any comprehensive financial stimulus. But, in the rush to secure loan modifications, it appears that the consequences and costs were not carefully thought through, resulting in the liability being fixed on parties other than those primarily responsible for these problems. Instead, shouldn’t NACA and other homeowner advocacy groups be focusing their anger and political pressure on lenders who ignored any semblance of quality control measures or reasonable lending practices to push greater and greater volumes of loans through the door? What about protesting outside the homes of the Attorneys General who boasted of achieving comprehensive homeowner relief while letting those responsible almost entirely off the hook? It seems these parties are much more deserving of finding couches and armchairs strewn across their front lawns than is William Frey.

Even more radical, it seems, is the idea that instead of pointing fingers at large companies for their problems, troubled homeowners should start by taking a good hard look in the mirror and deciding whether they were being realistic when they took out such hefty loans. If they were being honest, many would have to admit that they expected to be able to refinance into perpetuity to afford mortgage payments beyond their means. While there was certainly a significant volume of predatory lending occurring during the last ten years, I believe, as I’ve discussed in the past, that we all have to hold ourselves accountable to some degree for the borrow-and-spend culture that led to this inevitable credit crunch.

Posted in Attorneys General, causes of the crisis, costs of the crisis, Countrywide, Greenwich Financial Services, John Thain, loan modifications, NACA, pooling agreements, responsibility, William Frey | 3 Comments

Greenwich CEO William Frey Primed to Become the Lorax For Investors Without a Voice?

Posted on February 11, 2009 by Isaac Gradman

One of the most interesting stories we’ve been following in the world of mortgage crisis litigation has been the lawsuit filed by Greenwich Financial Services CEO William Frey against Countrywide Financial Corp., Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP (all now part of BofA). As discussed in several prior postings, Frey has sued Countrywide on behalf of investors in subprime mortgage-backed securities for violating its securitization agreements when it agreed to large-scale loan modifications as part of its $8 billion settlement with Attorney Generals from dozens of states.

In going back and reading news coverage on this story, I came upon a story in the Wall Street Journal from December 1, 2008 that I had missed. The article, entitled “Mortgage-Bond Holders Get Voice: Greenwich Financial’s William Frey Challenges Loan Servicers Like Bank of America“, contains several quotes from Frey that reveal broad aspirations beyond this first lawsuit against Countrywide (thanks to msfraud.org for posting this article). According to the article:

Mr. Frey says he may negotiate with mortgage servicers on behalf of bond investors or file lawsuits against other mortgage-servicing companies. “This is an opening salvo,” he says.

The story instantly recalled images from my childhood of Dr. Seuss’ timeless masterpiece, “The Lorax.” For those who are not familiar with eponymous hero of the Dr. Seuss story, the Lorax was a diminutive but wise character who spoke for the trees because the trees had no voices to speak for themselves (you can find the text of the story here, but like most Dr. Seuss stories, the illustrations are indispensable). The story has been hailed as an “environmentalist classic,” but it could just as easily be considered an allegory about the consequences of unchecked greed and unsustainable growth, two familiar culprits of our current financial calamity. Amidst this modern tale of disaster, it would appear that Frey views himself as the Lorax, speaking for mortgage bondholders who had no voice in the Countrywide settlement. And the WSJ article reveals Countrywide may be just the beginning, as Frey intends to represent additional bondholders in disputes with mortgage servicers.
In Dr. Seuss’ tale, the Once-ler family of loggers ignores the warnings of the Lorax, who lacks any power to affect their actions, and the Once-lers continue cutting down trees until they have all disappeared. Whether the result will be the same for Frey and mortgage bondholders depends in large part on whether they have any power under the terms of their Pooling and Servicing Agreements with Countrywide to require repurchases of modified loans. But this raises an interesting question: how did Frey gain the authority to become the spokesperson for mortgage bondholders in the first place? Surprisingly, the WSJ story suggests that Frey may not have even had standing to contest Countrywide’s settlement until he began acquiring affected securities:

Mr. Frey didn’t initially hold any of the Countrywide bonds that are the subject of the settlement. But in the past month he set up a distressed-bond fund that, he says, contains “substantial holdings” in Countrywide bonds. These bonds were transferred into the fund by one investor who wanted to challenge the company’s actions while staying out of the spotlight. “This is a vehicle designed to put me in charge of resolving these pools,” Mr. Frey says. Mr. Frey and his attorney, David Grais, decline to name the investor or provide information about the size of the fund or whether Mr. Frey himself had invested any money in it.

So, let me get this straight: Frey is actually the spokesperson for a wealthy investor, who in turn has transferred bonds that were the subject of the Countrywide settlement to Frey so that he could have standing to represent a larger class of aggrieved bondholders. Hmmm… not only is it clear that Frey is no Lorax, but this mysterious investor behind the Greenwich lawsuit may not be driven by a higher moral calling, either. After all, if Greenwich is able to prevail and force Countrywide to repurchase the subject loans at face value, this clandestine investor would receive a financial benefit compared to the current depressed value of the bonds (or perhaps this investor actively purchased these bonds hoping that he’d realize a profit as a result of a successful outcome to the Greenwich litigation). Thus, it appears the mantra repeated by the Once-lers to justify exploiting the environment and by mortgage originators and banks to justify massive expansion of their lending programs, may be the same mantra underlying Greenwich’s challenge to the Countrywide settlement: “business is business, and business must grow.”

Posted in Attorneys General, BofA, causes of the crisis, Countrywide, Greenwich Financial Services, lenders, loan modifications, repurchase, William Frey | 4 Comments

Pennsylvania Joins Countrywide Settlement, But Where Is the Money Coming From?

Posted on January 31, 2009 by Isaac Gradman

Pennsylvania Attorney General Tom Corbett, whose office spent several months investigating deceptive mortgage practices alleged against Countrywide and its affiliates, has announced that Pennsylvania has joined the $8 billion settlement announced in October with Attorneys General from now over thirty states.

In exchange for extinguishing the state’s claims against Countrywide, the settlement will allegedly make over $150 million available to help keep borrowers with subprime and pay-option mortgages in their homes.
As discussed in several previous posts (collected here), the primary question engendered by this news is who will really bear the cost of these loan modifications? Though a surface-level reading of the news makes it appear that Countrywide (or BofA) will actually pay $150 million to the state of Pennsylvania to help keep borrowers in their homes, the truth is that Countrywide, which no longer owns most of these loans, will work to modify the terms of the loans to allow borrowers to keep making payments. Though the ultimate loss in revenue generated by the loans may be around $150 million, investors such as hedge fund Greenwich Financial Services have claimed that this loss is actually born by the investors who currently hold an interest in the loans (see, e.g. prior posting here), rather than by Countrywide, which is acting simply as servicer. According to a suit recently filed by Greenwich against Countrywide, this result is contrary to the terms of Countrywide’s Stipulated Judgment with the Attorneys General.
Why this fundamental issue has not been identified by the Attorneys’ General, let alone satisfactorily explained, is anyone’s guess. However, it doesn’t take a rocket scientist to realize that when BofA purchases Countrywide for $4 billion and then quickly settles claims against the entity for $8 billion, something doesn’t add up.
Posted in Attorneys General, BofA, Countrywide, Greenwich Financial Services, investors, lawsuits, loan modifications, pay option ARMs, settlements, stipulated judgments, subprime | 1 Comment

Subprime Shakeout Discussed in Volokh Conspiracy Post On Formation of Aggregator Bank

Posted on January 26, 2009 by Isaac Gradman

On January 19, 2009, Eric Posner from the Volokh Conspiracy cited to the Subprime Shakeout in his article entitled “Why should the government buy toxic assets?” The post addressed the idea of an “Aggregator Bank” that would acquire the mortgage-backed securities that banks can’t or won’t sell–the original and much-debated purpose of TARP (the original government bailout plan).

In discussing the benefits and potential drawbacks of an Aggregator Bank, the article asked:

What is gained by this exercise? Not increased certainty or the discovery of the “real” value of the MBS’s. It would have to be—if the intervention were to make sense at all—that the MBS’s are worth more aggregated in the hands of the Aggregator than they are in the hands of banks and other investors scattered around the world. How could this be the case?

To see how, consider some of the litigation that has erupted as a consequence of the subprime crisis. This excellent blog, by Isaac Gradman, provides some examples. Debtors and attorneys general are suing loan originators like Countrywide for predatory lending practices, and winning settlements. Under the terms of these settlements, the mortgage loans are modified, with principal and interest reduced. The problem is that Countrywide is now the loan servicer for these loans, so if it agrees to lower payments, as it has, the holders of MBS’s, not Countrywide, incur the loss. Can it do this? A definite maybe! Everything depends on the terms of the contracts between the loan servicer and the MBS holders.

Posner is correct that in the particular case of Countrywide, which settled with the Attorneys General of over a dozen states for upwards of $8 billion in what was widely-hailed as the largest predatory lending settlement in U.S. history (see prior post here), the question of who bears the cost of loan modifications comes down to the terms of the contracts between Countrywide and the investors. The settlement itself does not appear to provide for Countrywide to bear the cost of modifications, but does require some consultation with investors. If the contracts likewise do not provide for Countrywide to bear these costs, the great victory claimed by the Attorneys General for engineering this settlement would be rendered ethereal, as investors would bear the entire cost of the poor underwriting and predatory lending practices that led to the suits against Countrywide in the first place. Indeed, how could this be called the largest predatory lending settlement in U.S. history and a “model for other lenders” if the alleged predatory lender was able to shift the cost burden of its modifications onto investors?

The mere fact that this important issue of cost was not addressed by the terms of the settlement agreement is either a horrendous oversight on the part of the Attorneys General, or reveals that the settlement was mere political window-dressing that was never intended to actually punish Countrywide, but only to make it appear that the company was being chastised. This lends even more credence to the lawsuit brought by Greenwich Financial CEO William Frey against Countrywide, discussed in previous posts gathered here.

Loan modifications are ordinarily structured such that the expected value to investors from modifying the loan (in net present value terms) is greater than the expected return from immediate foreclosure. For example, by lowering a borrower’s interest rate to something he or she can afford, but extending the term of the loan or increasing the principal balance, a borrower may be able to continue making payments that will benefit investors in the long run compared to an immediate foreclosure (which, as Posner points out, typically results in a fifty percent drop in the value of the home). However, when loan modifications are being conducted, not for the benefit of the investor, but because the loan was originated in a predatory or otherwise improper manner, the cost of such a modification should obviously be borne by the party responsible for such negligent or predatory practices. Instead, when the $8 billion plus expected loss is born under the terms of the settlement agreement by largely innocent investors, it should be no surprise when massive litigation follows. Thank you to the Volokh Conspiracy for continuing to highlight this important issue.

Posted in Aggregator Bank, Attorneys General, Countrywide, Government bailout, Greenwich Financial Services, investors, loan modifications, predatory lending, securities, settlements, TARP, Volokh Conspiracy | Leave a comment

New Class Action Targets Former AIG CEO Cassano

Posted on January 16, 2009 by Isaac Gradman

Courthouse News Service reports that a new shareholders derivative complaint has been filed in the Chancery Court in Delaware against former American International Group Financial Products (AIG-FG) CEO and president Joseph Cassano for allegedly driving AIG to ruin by losing $33 billion in the subprime credit market.

The double derivative lawsuit, filed by the law firm Chimicles & Tikellis on behalf of shareholders of AIG-FG, who themselves are suing on behalf of nominal defendant AIG-FG, seeks to recover damages and obtain disgorgement of unjust profits from Cassano for breaches of his duty of loyalty to AIG-FP. The suit quotes New York Attorney General Andrew Cuomo as saying that AIG-FP was “largely responsible for AIG’s collapse” and U.S. Rep. John Sarbanes, who said during a hearing of the House Committee on Oversight and Governance Reform that “it appears to me that [Cassano] single-handedly brought AIG to its knees.” The suit further alleges that despite Cassano’s poor management and questionable business practices, the AIG board permitted Cassano to retire with a lucrative compensation package worth upwards of $43 million.
It will be interesting to see how well such derivative shareholder class actions fare in pinning responsibility for large financial crisis-related losses on the executive of major financial institutions (see prior article on loss causation issues). Given the scope of this crisis, it is difficult to believe that any individual “single-handedly” brought a company that in 2007 insured $500 billion in debt instruments to its knees. And proving such massive loss causation in a court of law would be even harder.
While we would love to hold those at the top, who certainly made many questionable decisions and exercised poor judgment during the last several years, responsible for their actions, and while it rankles our sense of justice to see these individuals walk away with millions, it was the financial climate (fueled and supported by everyone from national governments to individual borrowers) that made such massive abuses possible. I’m not suggesting that people like Cassano, if it can be proven that they acted negligently or criminally, should not be held responsible. But, it is far too easy to blame this on a few high-powered individuals, rather than taking a hard look at the circumstances and the society that engendered and encouraged yet another financial bubble to mutate unsustainably.
Whenever too much money chases too few good investments, it creates a climate ripe for another meltdown; and until the incentives change, the villains may be different, but the results will stay the same.
Posted in AIG, causes of the crisis, class actions, derivative lawsuits, incentives, litigation, loss causation, public perceptions, shareholder lawsuits, subprime | Leave a comment