The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.
Investor Sues to Block Mortgage Modifications - Yahoo! News.
At first glance, you’re probably thinking what I was (well, maybe not…) but seriously, why would some mean hearted investor want to prevent Bank of America from helping 400,000 home owners stay in their homes?
Let me attempt to explain:
- Countrywide wrote the loans and sold them on the secondary market.
- When they sold them, they didn’t sell them in 1 piece, they sold sections (called tranches) to a multitude of different investors and investment companies. It’s actually possible that parts of one mortgage end up being owned by 30 different “parties.”
- The parties who bought these loans bought them as contracts that had a prepayment risk but didn’t buy them with a modification risk.
- When a loan gets modified, it changes that contract which inherently changes the value of the investment.
- The investors who are suing to stop it are saying that if you start changing the contracts, you are going to effectively ruin the secondary mortgage market because suddenly the value of the loans that are sold becomes an unknown.
- If the secondary mortgage market dies, then the housing market dies. It’s just that simple, without mortgage money, the party is over.
Are the investors saying that the loans shouldn’t be modified? No they aren’t. What they are saying is, “I didn’t buy this investment with the thinking that it could be modified going forward.” So if you, Mr. B of A, want to change the terms, that’s fine, buy it back and change the terms.
The investors are, it seems to me, hoping for one of two results:
- That Bank of America will buy the loans back (with our help of course).
- That they take their chances with foreclosures. Given the report that the National Association of Realtors issued earlier on Mortgage Modification Defaul Rates of 50%, that’s not a compelling case for loan modifications.
So are the mean, evil heartless investors really that bad? Nope, they made a contract with Bank of America and they are saying that there is something bigger at stake than modifying a “few” loans.
Stay tuned, it’s going to be an interesting thing to follow…..
{ 7 } Comments
Tom,
Was there something in contract law that I missed? A contract is binding on both parties. So BOA issued a contract which they then have to abide by. Seems rather straightforward to me. I agree with the investors - especially if they don’t prevail - it would be the death of the secondary mortgage market.
Aside from all the principals’ rhetoric, what we have here is a failure to achieve a contractual meeting of the mind. The legal concept of ‘mutual agreement’ raises it’s ugly head.
What may be at stake here, is the very foundation of capitalism: Sanctity of contract.
Vance — Agree with you, but there’s a fly in your position. The contracts with servicers clearly, (clear as mud that is) state they CAN modify the loan terms. The sticking point is if both parties to the loan contract have been fairly served in the modification.
If payments/interest are reduced it’s kinda hard to argue the investor hasn’t been damaged. Foreclosure worse, you say?
Isn’t that for the investor to decide?
The sticking point is if both parties to the loan contract have been fairly served in the modification.
And did “we” create such a convoluted financial system so that it’s virtually impossible to figure out exactly who ones the individual loans?
That was my point too - it seems that maybe the investors have decided to take their chances?
OK, BawldGuy and Tom - it would seem that the heart of the issue is more the (possible) death of the secondary market, rather than the strict contractual obligations of both parties. Correct?
If I sign a mortgage with BOA to pay $X per month, that’s a contract with BOA - leaving out the servicing. If BOA sells that contract (ie, they sell the value of that cash flow) to someone else (read Fannie and Freddie), the buyer is “banking” on that cash flow to support that investment. There’s no relief in there for me to change my terms - I agreed to the contract. The investor who bought the contract did so with the understanding of the terms of the contract - I would pay. If I don’t pay, the investor will collect their principal and seek other investments. That’s all contract law. If that investor sees the terms of the contract changed by a third party, you’re darn right they have the right to sue! And who could blame them?
Yep, you’ve nailed it. If B of A can unilaterally rewrite contracts for the “political” good of helping people who might not make it any way, the secondary market is toast…..
I’ve been telling customers for years, that we (the bank) have the right to sell our interest in the mortgage to someone else, but the only thing it does is change the name and address of the place you make the payments. That means that the people who bought it don’t have the right to change anything. That also means that B of A has no right to change it either….
Tom
Tom — The people who bought it, certainly CAN change the terms with the direct agreement of the borrower. It’s the lender who sold it to the investor who can’t “agree” with the borrower on new terms — or at least that’s what the investors are gonna say in court.
The ’service agreement’ allows for modification, as you pointed out in the post. However, the sticking point is whether the investor agrees that modification was a ‘win/win’ - a dubious proposition at best from their viewpoint.
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