Legal News

Does B of A have ?Delegated Authority? to Modify Mortgages?

By Dan Slater

As the financial crisis deepens, some companies might choose between bailout and bankruptcy (or even government-sponsored bankruptcy). Other companies might look to investors to pick up some slack.

Today, the WSJ reports on the next chapter in Bank of America’s move to modify home loans in order to settle charges brought by state attorneys general against Countrywide Financial. But apparently, writes the Journal, nobody spoke to one group who will shoulder much of the costs of the $8.4 billion home-loan-modification program: investors who hold securities backed by Countrywide mortgages.

First, a bit of background: BofA, which acquired Countrywide in July, settled charges this fall with attorneys general from 15 states. The settlement stemmed from charges that Countrywide engaged in predatory lending practices involving borrowers who took out subprime loans and option-adjustable-rate mortgages. Under the settlement, BofA agreed to modify the mortgages of as many as 400,000 borrowers by refinancing loans, lowering interest rates and reducing principal amounts.

BofA says its contracts with investors provided it with “delegated authority” to modify many of the loans. “We believe the program benefits both customers and investors,” a BofA spokesman told the Journal. BofA didn’t seek investor approval before agreeing to the settlement “because the design of the program was based in large part on the delegated authority” in the contracts, he added.

But some investors believe they should have been contacted first. “Our view is that Countrywide Financial Corp. made this determination without consulting with a representative group of investors,” said Ralph Daloisio, managing director at Natixis SA, which owns securities backed by Countrywide loans. Other investors said BofA is moving much of the cost of the settlement to investors when it should be paying those costs itself.

Last week, according to the Journal, a group of investors met in New York with attorneys at Grais & Ellsworth. Attorney David Grais told them that BofA was conflicted when it agreed to the settlement because Countrywide was both the originator of the mortgages and the servicer of the securities. “This is penalty shifting,” Grais said.

Full post as published by Law Blog - WSJ.com on November 18, 2008 (boomark / email).