BofA’s Countrywide loses court ruling on mortgages

Modifications Not Authorized By Investor May be Invalid

Countrywide Decision: Investor is owner of loan

Posted on August 20, 2009 by livinglies

BofA’s Countrywide loses court ruling on mortgages — Modifications Not Authorized By Investor May be Invalid

There is lots of significance about this decision. First it shows that if the investor is going to sue it is going to be against the intermediary pretender lenders and not the borrower — because they don’t want to expose themselves to liability for predatory loan tactics, usury, securities violations, TILA, RESPA and HOEPA violations. Second it shows that as we have said all along here, the servicers don’t have the right or authority to actually negotiate and execute a loan modification.  And third it shows that the investor who bought bonds that were mortgage backed securities are the OWNERS OF THE LOAN.

This decision is essentially fatal to ALL foreclosure actions based upon securitized loans. It identifies the investors as the owners of the loan and negates the alleged authority of intermediary pretender lenders to do ANYTHING in the way of enforcement, modification, collection through legal means etc. because they simply have no standing (because the alleged debt is not owed to anyone other than the investor). The foundation is crumbling. These decisions are coming out one after the other because of a simple fact — the tacit deal between Wall Street and loan servicers and loan data administrators (MERS) may exist, but it has no legal effect without the investor and the borrower signing on to these new terms with extra conditions and co-obligors.

August 20, 2009, 7:42 am NEW YORK (Reuters) – A federal judge has ruled that Bank of America Corp (NYSE:BAC – News) cannot have a lawsuit by investors seeking to force it to buy back mortgages heard in federal court, saying he lacks jurisdiction to decide the case. Tuesday’s ruling by Judge Richard Holwell of the U.S. District Court in Manhattan means the case will move to state court. Holwell did not decide the merits of the case. “Congress passed two statutes within a year of each other to address the mortgage crisis,” the judge wrote. “In neither of these statutes did Congress federalize the case.”

The ruling is a win for investors, to the extent that Holwell rejected a claim by the bank’s Countrywide Financial Corp unit that new federal laws to encourage loan modifications to help struggling borrowers stay in their homes govern this case. Countrywide had argued that the laws negated obligations it might have had to buy back modified loans. In 2008, Countrywide agreed with some 11 state attorneys general to modify $8.4 billion of loans made to roughly 400,000 borrowers. Investors who own mortgage securities typically receive interest and principal payments. If servicers modified the underlying loans to reduce borrower obligations, investors would be harmed because they would receive lower payments.

Holwell did rule that investors bear the burden of showing that pooling and servicing agreements for their loans, taken “as a whole,” require Countrywide to buy back the loans. Bank of America could not immediately be reached for comment. A published report said a spokeswoman agreed that the court did not rule on the merits of the plaintiffs’ claims. The current case was brought by two investment funds holding Countrywide mortgages, Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC. These investors complained they would be harmed if Countrywide shifted the burdens of loan modifications to 374 trusts into which loans had been repackaged and securitized.

These investors would rather Countrywide repurchase modified loans for the full unpaid amounts. Countrywide had been the largest U.S. mortgage lender before Bank of America acquired it last July for $2.5 billion. The case is Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC v. Countrywide Financial Corp, U.S. District Court, Southern District of New York (Manhattan), No. 08-11343. rule that investors bear the burden of showing that pooling and servicing agreements for their loans, taken “as a whole,” require Countrywide to buy back the loans. Bank of America could not immediately be reached for comment. A published report said a spokeswoman agreed that the court did not rule on the merits of the plaintiffs’ claims. The current case was brought by two investment funds holding Countrywide mortgages, Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC. These investors complained they would be harmed if Countrywide shifted the burdens of loan modifications to 374 trusts into which loans had been repackaged and securitized. These investors would rather Countrywide repurchase modified loans for the full unpaid amounts. Countrywide had been the largest U.S. mortgage lender before Bank of America acquired it last July for $2.5 billion. The case is Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC v. Countrywide Financial Corp, U.S. District Court, Southern District of New York (Manhattan), No. 08-11343

From Mortgage Law Network
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Short Sales and Bank of America

By Wendell Sherk, Missouri Attorney on Jul 6, 2009 in Foreclosure Process

Bank of America has made a splash recently by updating its short sale agreements. The bank is now, intentionally or not, making it simpler for folks to decide to allow a foreclosure or file bankruptcy instead.

Bank of America has reportedly changed its short sale agreements to provide that the homeowner will remain liable for any unpaid balance owed on the mortgage after the sale.  It has claimed this is simply to protect their investors and insurers.

In its own way, this is a good thing.  In states that allow a mortgage lender to retain a personal claim against a former homeowner to the extent a mortgage is not paid after a sale or foreclosure (called a “deficiency balance”), the disclosure by B of A that the debt will still be subject to collection may provide more information to consumers than other lenders are doing now.  It may help homeowners be better informed.

Of course, in most situations where B of A forecloses on a first mortgage, they have not in the past typically pursued collection of this deficiency, even if they were legally entitled to do so.  Thus, the change in policy could foretell a change in B of A’s deficiency collection strategy — which in itself will lead to a Pandora’s Box of litigation over how foreclosures were done and whether the lender obtained the best possible prices for their collateral.  Or it could be one of the more effective ways to discourage anyone from taking on the burden of trying to complete a short sale that almost entirely benefits B of A and its investors in the first place.

Bank of America Could Push More
Foreclosed Homes for Sale

The decision of Bank of America, one of the nation’s largest mortgage banks, to add a liability clause to its short-sale contract could push more foreclose homes for sale into the market.

BofA expanded its short-sale contract and added a clause that would make homeowners liable for the difference between the short-sale price and the mortgage loan amount.

Housing advocates were dismayed by the clause, contending that the clause will push more homeowners into bankruptcy or foreclosure, perpetuating the growth of foreclosed homes for sale.

Since BofA is among the nation’s biggest mortgage lenders and also the owner of another of the nation’s biggest lenders, Countrywide Financial, its decision to revise its short-sale agreement will affect large numbers of borrowers.

This decision could force homeowners considering the short-sale option to change their minds and just allow their houses to become foreclosed homes for sale.

In response to criticisms, BofA explained that it was just asking homeowners to sign a promissory note to protect its shareholders and investors who will suffer large losses from the gaps between short sale prices and loan amounts.

The bank also insisted that other mortgage insurance firms and investors have been requiring the promissory-note part of the short-sale agreement.

Recently, the Obama administration encouraged troubled homeowners to consider short selling to prevent their houses from becoming foreclosed homes for sale if they are not qualified under the loan refinancing and modification schemes of the Making Home Affordable program.

Officials promoted the short-sale option because it protects the credit records of defaulting homeowners, giving them another chance to make a home purchase when their financial circumstances become better.

But the liability to pay the difference, as described in the Bank of America short sale contract, is now another barrier to overcome for many homeowners.

In the state of Washington, short selling has been a favored foreclosure prevention option. Of the total single-family houses sold in Washington recently, 4,400 units were short sales, representing around 12 percent of total statewide sales.

The short-sale number could be even bigger, according to real estate analysts in the state, because some short-sales were not listed as such in some records.

The BofA decision has alarmed mortgage professionals in Washington who have been working out short sales. They said about one-third of sales they are currently working out are short sales.

Lastly, spokespersons for BofA and other mortgage banks argue that the short-sale clause could encourage many homeowners to exert more effort to get loan refinancing or loan modification to prevent their houses from becoming foreclosed homes for sale.

SEC Charges Former Countrywide Executives
With Fraud

Former CEO Angelo Mozilo Additionally Charged With Insider Trading

FOR IMMEDIATE RELEASE
2009-129

Washington, D.C., June 4, 2009 — The Securities and Exchange Commission today charged former Countrywide Financial CEO Angelo Mozilo and two other former executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

The SEC alleges that Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.

The SEC's enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company's ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so.

"This is the tale of two companies," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as 'toxic,' and said another's performance was so uncertain that Countrywide was 'flying blind.'"

Rosalind Tyson, Director of the SEC's Los Angeles Regional Office, added, "Angelo Mozilo had access to detailed and alarming information about Countrywide's operations. He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table."

According to the SEC's complaint, filed in federal district court in Los Angeles, Countrywide's annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide "manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities." Its annual reports for 2005 and 2006 falsely stated that the company ensured its "access to the secondary mortgage market by consistently producing quality mortgages." The annual report for 2006 also falsely claimed that Countrywide had "prudently underwritten" its Pay-Option ARM loans.

The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.

According to the SEC's complaint, Countrywide developed what was internally referred to as a "supermarket" strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, Countrywide's underwriting guidelines were as wide as they had ever been, and Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.

The SEC's complaint alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public.

The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide's increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.

The SEC's complaint alleges that each of the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint further alleges that Mozilo and Sieracki violated Rule 13a-14 under the Exchange Act. The SEC's complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.

# # #

For more information, contact:

Rosalind R. Tyson
Regional Director, SEC's Los Angeles Regional Office
(323) -965-3893

Michele Wein Layne
Associate Regional Director-Enforcement, SEC's Los Angeles Regional Office
(323) 965-3850

John McCoy
Regional Trial Counsel, SEC's Los Angeles Regional Office
(323) 965-3890