Countrywide settlement may favor Wall Street over Main Street

Legal News Line Nov. 11, 2008, 11:35am

Jerry Brown (D)

Oakland, Calif. (Legal Newsline) - Just a month ago, when the terms of the largest settlement in home mortgage history were announced, many hailed the settlement as the first significant step to providing needed relief to homeowners buried in rising interest rates and declining property value.

But some of those who started the foreclosure freeze movement a year ago in California are now taking issue with the deal, claiming the Bank of America settlement will protect Wall Street investors more than it will Main Street customers.

Robert Gnaizda, general counsel of The Greenlining Institute, said Bank of America has soothed mortgage investors by minimizing the potential losses from the settlement. The deal, as it now stands, Gnaizda said, will not help a high number of homeowners avoid foreclosure.

State Attorney General Jerry Brown reached an $8.68 billion settlement with Bank of America over alleged predatory lending practices of Countrywide Financial Corp. At the time, Brown said the settlement was the largest of its kind.

Bank of America, which purchased Countrywide on July 1, agreed to start a loan counseling program on Dec. 1, as part of terms in a settlement.

But Gnaizda sent a letter to Los Angeles Superior Court Judge Richard Wolfe - the judge who will approve the settlement between California and Bank of America -- in late October, offering what he called "a Main St. community perspective" of the proposed settlement.

"The greatest defect in the settlement ...," Gnaizda wrote, "is that the terms can only be accomplished if the investor intermediaries who hold the complex mortgage instruments (such as hedge fund and international sovereign wealth funds) concur with the terms."

The Greenlining Institute -- an advocacy group based in Oakland, Calif. -- has lobbied state attorneys general and Bank of America officials for specific terms that will help homeowners avoid foreclosure.

Gnaizda sourced a letter from a New York law firm that represents many mortgage investors saying they would only agree to a small percentage of revised loans.

"They are quoted saying in their letter," Gnaizda wrote to the judge about the law firm, "'Countrywide is only performing the modifications to satisfy the terms of its settlement, and that the affected loans should not be repurchased from the trust. Wearing one hat, Countrywide originated predatory loans and sold them to securitization trust. Wearing another it now plans to modify loans to so as to extinguish the liability of Countrywide as predatory lender.'"

Gnaizda said these investors are increasing pressure on Bank of America not to modify loans on a large scale.

"Many investors are saying they don't agree to loan modification unless you demonstrate fraud," Gnaizda told Legal Newsline. "But the company is not admitting to a pattern of fraud. Bank of America will not want to sully its reputation, nor its acquisition of Countrywide. They can't make loan modifications without investor approval, and the investors won't agree."

Gnaizda told Judge Wolfe this is the "fatal flaw" of the settlement.

"Had the attorney general negotiated, consistent with his settlement, to secure and admission of fraud, then the 400,000 estimated loans covered by the settlement could be readily modified," he wrote.

A recent New York Times article and another in The American Banker reported that hedge fund investors believe their portfolio of loans cannot legally be modified without their consent.

Gnaizda said he believes the end result of the settlement as it now stands is that Bank of America will likely pay far less than the reported $8.68 billion amount touted by Attorney General Jerry Brown when he announced the settlement.

"It in fact might be as little as $1 billion," Gnaizda wrote.

Brown said the settlement includes loan modification terms.

"This loan-modification program provides real relief for borrowers at risk of losing their homes," the attorney general said at the time the deal was announced.

Gnaizda urged Judge Wolfe to refuse to accept the terms of the settlement until new terms that fully protect borrowers are added to it.

The remaining lawsuits against Countrywide were consolidated in San Diego Federal Court. Those lawsuits, which include the suit brought by San Diego City Attorney Mike Aguirre, have yet to be settled. Aguirre lost a bid for re-election on Nov. 4, further complicating the future of these lawsuits.

More News