Countrywide Loan Modification Settlement Becomes Issue In Connecticut Senatorial Race

The ramifications of the Mortgage Crisis are being felt on this Election Day 2010, as the issues of foreclosures, loan modifications and MBS-related losses to pensionholders’ portfolios are being brought to the forefront in some key political battles.  As a prime example, take the heated race for Chris Dodd’s open Senate seat in Connecticut, where Democratic candidate Richard Blumenthal still held a single-digit lead over Republican candidate Linda McMahon in polls leading up to today’s vote.

Embedded below is a television spot by McMahon, entitled “The Biggest Lie,” which attacks Blumenthal’s participation in the settlement between Attorneys General from 44 states and Countrywide over the lender’s alleged predatory lending practices.  The ad suggests that while Blumenthal has stated that taxpayers would not pay a dime for the settlement, taxpayers would end up footing the entire bill for the loan modifications Countrywide agreed to perform.  The ad quotes an article by Alex Ulam called “The Bank of America Mortgage Settlement Fiasco” in the left-leaning publication, The Nation.

To be fair, taxpayers will not be footing the entire bill for the Countrywide settlement, as Countrywide/BofA still owns some of the loans at issue (the article in The Nation reports that the number is a paltry 12%), and The Nation article itself states that, “as it turned out later, much of the settlement’s cost would be covered by taxpayers…” (emphasis mine).  Thus, McMahon’s ad is not entirely forthright, either.  Furthermore, it’s unclear that Blumenthal fully understood the way the settlement would play out (see prior post), and The Nation suggests that Blumenthal “seems to have missed it entirely,” so calling his statement a “lie” smacks of political rhetoric.  But, the point is still a good one – the Countrywide settlement shifted the majority of losses to taxpayers and largely let Countrywide and BofA off the hook for its irresponsible lending practices.

I had a chance to meet with Alex Ulam, the author of “The Bank of America Mortgage Settlement Fiasco,” a number of times in San Francisco when he was first beginning his research for this story and was relatively new to the issues surrounding securitizations and loan servicing, such as servicer conflicts of interest and loan repurchase liability.  He came to me for some background on the Countrywide settlement (note that BofA spokesman Terry Francisco is quoted in the article as calling it an “agreement,” not a “settlement”) and an explanation of who would bear the costs of the agreed-upon modifications.  By the time Ulam’s article was published some months later, he evinced a firm grasp of the issues, and wrote a thorough and scathing piece for The Nation regarding the shortcomings of the resolution between the Attorneys General and the country’s largest subprime lender.
To be certain, this issue has been discussed previously in The Supbrime Shakeout (articles here, here and here) and in this article in the Daily Journal and California Lawyer Magazine.  However, Ulam’s article was one of the first in a nationwide publication to understand and explain to its readers that by agreeing to modify loans that it no longer owned, Countrywide was shifting the losses associated with its troubled loans to the pension funds, hedge funds, insurance funds and other investors who had purchased MBS backed by these loans.  And the article has made its impact, prompting McMahon to raise the issue as an attack on Blumenthal, and garnering a good deal of local media coverage in Connecticut, such as this article in the Greenwich Times/Stamford Advocate.
It remains to be seen whether the allocation of losses relating to the Mortgage Crisis will be a major factor in this year’s elections, but it is clear that these issues are beginning to seep into the mainstream consciousness.  I would imagine that politicians all over the country are watching the Connecticut senatorial election closely to see whether voters care enough about these issues to make them pay at the polls for their role in the crisis or their failure to effectively clean it up.

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