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.