Under Countrywide Stipulated Judgment, Investors Must Be Consulted

Posted on December 9, 2008 by Isaac Gradman

After reviewing the Complaint filed by hedge fund Greenwich Financial Services against Countrywide and BofA and listening to the comments made last week by Greenwich CEO William Frey and his attorney regarding the case, I decided to take a closer look at the Countrywide settlement with the attorneys general of several states to see how it treated the investors holding the Countrywide-originated loans at issue. Frey has alleged that Countrywide’s settlement does not adequately take investor interests into account, while actually imposing the costs of the loan modifications required by the settlement on investors.

Upon closer examination of Countrywide’s Stipulated Judgment and Injunction with California Attorney General Edmund Brown (posted below), I was surprised to find that Countrywide is instructed several times to consult with or consider investor interests in the loan modification process, albeit in fuzzy language that may be easy to skirt.

For example, pursuant to Section 6.2.1(a), Countrywide is required to make “an individualized evaluation of the Borrowers’ economic circumstances… to determine if alternatives to foreclosure are available, and consistent with the directions of the investors, if applicable.” (emphasis mine)

In Section 6.2.1(b), Countrywide is required to “maintain the current practice of offering Delinquent Borrowers who desire to remain in their homes and who can afford to make reasonable mortgage payments loan modification or other workout solutions, subject to applicable investor guidelines and approvals.” (emphasis mine)

Finally, in what will likely be one of the key provisions at issue in the Greenwich action, Countrywide represents in Section 6.3.7(e) that it currently has, or reasonably expects to obtain, “discretion to pursue the foreclosure avoidance measures outlined in Section 6 of this Stipulated Judgment and Injunction for a substantial majority of Qualifying Mortgages. If [Countrywide does] not have discretion to pursue these foreclosure avoidance measures, best efforts will be used to obtain appropriate investor authorization.”

These provisions immediately raise several questions regarding which investors must approve these modifications. Would a majority of interested investors being in favor of the modifications constitute investor approval or authorization? Or could one disgruntled investor like Greenwich Financial have the ability to block all modifications involving loans in which it invested?

Moreover, the fuzzy language surrounding these provisions leaves their enforceability up in the air. What constitute “applicable investor guidelines and approvals”? Must these be found in the language of the respective Pooling and Servicing Agreements (PSAs)? “Appropriate investor authorization” certainly sounds like it stems from such agreements. Moreover, the term “best efforts” is highly subjective and unlikely to permit one investor to block an $8.68 billion settlement. Ultimately, the outcome of the suit by Frey and Greenwich Financial will probably turn on whether this Stipulation accurately and appropriately incorporates the language in the PSAs regarding the requirements for investor approval.

Countrywide Judgment http://documents.scribd.com/ScribdViewer.swf?document_id=8757860&access_key=key-1e9711dm3qwyfgwd0ejg&page=1&version=1&viewMode=

Posted in Attorneys General, BofA, Countrywide, Greenwich Financial Services, hedge funds, investors, Jerry Brown, lawsuits, litigation, loan modifications, settlements, stipulated judgments, William Frey | Leave a comment

William Frey and David Grais Appear on Fox News to Defend Greenwich Suit Against Countrywide

Posted on December 6, 2008 by Isaac Gradman

Greenwich Financial Services CEO William Frey and his attorney, David Grais, of Grais & Ellsworth LLP appeared on Fox News on Tuesday to answer questions about their lawsuit against Countrywide (see other postings on this story). In the segment, linked below, Frey maintains that Countrywide’s settlement with the attorneys general of several states requires a large portion of the cost to be borne by investors, rather than by Countrywide itself. Interestingly, Grais argues that “we are all in favor of modifications,” but also asserts that, “this is Countrywide’s problem and Countrywide ought to bear the cost of helping the borrowers, who they never should have made these loans to in the first place.”

You can view the full segment here.

Posted in costs of the crisis, Countrywide, Fox News, Greenwich Financial Services, investors, lawsuits, loan modifications, predatory lending, settlements, television coverage of the crisis, William Frey | Leave a comment

Details of Greenwich v. Countrywide Emerge

Posted on December 5, 2008 by Isaac Gradman

An article published on Monday in Business Week (available here) sheds some additional light on the lawsuit filed by Hedge Fund Greenwich Financial Services against Countrywide challenging its agreement to conduct large-scale loan modifications (previously discussed here, here, and here).

Though his name is not mentioned in the complaint, the moving force behind the lawsuit is Greenwich Financial CEO, William Frey, a self-styled “advocate for investors’ contractual rights” (see a short bio on Frey here). The complaint seeks class action status on behalf of “all persons or entities that own or hold certificates in one or more of” over 100 Countrywide securitizations.
As the Business Week article points out, Frey has been vocal in his opposition to loan modifications since March of this year and maintains that he’s on a crusade to protect the rights of all investors who purchased Triple A-rated bonds, not just those who bought bonds backed by Countrywide mortgages. Frey argues that such modifications violate contract law and thus discourage future investment in the U.S. financial system. Frey has received pressure from Washington legislators, including in the form of a letter signed by, among others, Barney Frank (D-Mass.), Maxine Waters (D.-Calif.) and Luis v. Gutierrez (D.-Ill.), to back off of his position and allow the bailout bill to go through. You can view Frey’s letter in response here.
An interesting side note raised by the article is that Ocwen Loan Servicing, the largest subprime mortgage servicing company, could become the target of additional lawsuits challenging loan modifications if workouts are found to violate securitization contracts. Though the general counsel for Ocwen is quoted as saying that servicers are bound to pursue modifications that benefit all parties, this becomes difficult when, as is often the case, the various parties’ interests conflict.
As loan modification looks to be central to any plan to stabilize the mortgage market, the outcome of these legal battles will be pivotal to the question of who bears the cost of the subprime and broader financial crises. Look for these lawsuits to heat up and multiply over the coming months.
Posted in BofA, contract rights, costs of the crisis, Countrywide, Greenwich Financial Services, lawsuits, litigation, loan modifications, Ocwen, securitization, stability, subprime, William Frey, workouts | 3 Comments

Greenwich v. Countrywide Complaint Now Available

Posted on December 3, 2008 by Isaac Gradman

Here is the Complaint brought by Grais & Ellsworth on behalf of hedge fund Greenwich Financial Services against Countrywide Financial Corp., Countrywide Home Loans, Inc. and Countrywide Home Loans Servicing LP (all now part of Bank of America) in the Supreme Court of the State of New York, County of New York (discussed earlier today here). The Complaint alleges two causes of action for declaratory relief, the first seeking a declaration that Countrywide must repurchase any loan on which it agreed to reduce mortgage payments and the second seeking a declaration that Countrywide must purchase those loans at a price not less than 100% of the unpaid principal balance (UPB).

From a legal marketing perspective, it appears that Grais & Ellsworth’s efforts to drum up a challenge to the settlement between attorneys general in 11 states and Countrywide/BofA–by publishing a “white paper” and an open letter on the subject and holding a meeting for prospective plaintiffs (see prior posting here)–were successful.

Interestingly, the provisions of the relevant Pooling and Servicing Agreements (PSAs) appear, from the limited language quoted in the Complaint, to mandate in a fairly straightforward manner that either Countrywide Home Loans (the lender) OR Countrywide Home Loans Servicing (the loan servicer) repurchase the modified loan from the Trust Fund at 100% of the UPB. The fact that the language refers to the “Modified Mortgage Loan” raises the question of whether Countrywide would be required to pay the UPB prior to modification, or the UPB after modification (which could have been reduced considerably by the terms of the workout). Stay tuned…

Greenwich v. Countrywidehttp://documents.scribd.com/ScribdViewer.swf?document_id=8614287&access_key=key-bhq0wzcyazjc837oxyt&page=1&version=1&viewMode=

Posted in Attorneys General, BofA, Complaints, Countrywide, Greenwich Financial Services, lawsuits, lenders, litigation, loan modifications, repurchase, settlements, William Frey, workouts | Leave a comment

Hedge Fund Greenwich Financial Files Lawsuit Against Countrywide (BofA) Over Loan Modifications

Posted on December 2, 2008 by Isaac Gradman

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]

Posted in Attorneys General, BofA, Complaints, Countrywide, Greenwich Financial Services, hedge funds, investors, lawsuits, loan modifications, repurchase, securitization, subprime, underwriting practices | Leave a comment