Countrywide Sued by Fund Over $8.4 Billion Loan Deal

Date: Tuesday, December 2, 2008
Author: Patricia Hurtado, Bloomberg

Countrywide Financial Corp., the home lender acquired by Bank of America Corp., was sued by Greenwich Financial Services Fund over claims an agreement to reduce payments on mortgages by $8.4 billion would hurt investors.

The hedge fund claims investors will be harmed by Bank of America’s settlement, reached on behalf of Countrywide, with 15 state attorneys general. The value of trusts that bought 400,000 mortgages will decline under the deal, the fund said.

In the proposed class action, or group lawsuit, the Greenwich, Connecticut-based fund demands a declaration that “Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts,” David Grais, a lawyer for the fund said today in an e-mailed statement. Grais said Countrywide could owe the trusts $80 billion.

“Countrywide plans not to absorb the $8.4 billion reduction in mortgage payments itself, even though it was Countrywide’s own conduct of which the attorneys general complained,” the fund said in the complaint filed today in New York State Supreme Court in Manhattan. Under the settlement, the mortgage lender would “pass most or all of that reduction on to the trusts that purchased mortgage loans from Countrywide,” the fund said in the complaint.

‘At-Risk Families’

“We are in the process of reviewing the complaint and therefore, we cannot comment on specific claims,” Shirley Norton, a Bank of America spokeswoman, said in an e-mailed statement. “We are, however, disappointed in this attack on a program intended to keep as many as 400,000 at-risk families in their homes and, together with similar programs across the industry, stabilize the nation’s housing market.”

Bank of America reached the settlement in October with 15 state attorneys general. The bank didn’t admit or deny any wrongdoing under the accords.

“We are confident that together with the attorneys general we have built a program that benefits both consumers and investors, whose interests we carefully considered in developing our program,” Norton said in today’s statement. “This program proactively addresses a potential for far greater investor losses than would be realized if not for us undertaking modifications, and therefore benefits the investors whose loans and securities we service.”

Ultimate Foreclosure

Bank of America said in the statement that loan modifications have been “occurring for decades without objections or challenges, so we are especially troubled at the timing of this complaint. No one benefits if we allow these homeowners to advance toward ultimate foreclosure. We are confident any attempt to stop this program will be legally unsupportable.”

Grais said in his e-mail that the hedge fund is seeking a declaration that “Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts.”

Countrywide must change at least 50,000 mortgage loans between today, when its modification program starts, and March 31, he said. The lender has said it may modify as many as 400,000 loans, Grais said.

“We believe that the average unpaid principal balance of these loans is approximately $200,000. If so, and if the court grants the declaration we seek in this complaint, then Countrywide (and its parent Bank of America) would be liable to pay the trusts approximately $80 billion for the loans it modifies,” he said.

The case is Greenwich Financial Services Distressed Mortgage Fund 3 v. Countrywide Financial Corp., New York State Supreme Court (Manhattan).

To contact the reporter on this story: Patricia Hurtado in Manhattan at pathurtado@bloomberg.net