A Resistance To Change

Dec 1st, 2008 @ 8:18 PM by Alden Smith

It was bound to happen. Sooner or later, an investor would question the validity of the mortgage bailouts for people who are in default on their mortgage. Now we see an investor, William Frey, filing 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. Allegedly, the lawsuit, which is a class action, states that Countrywide and Bank of America have no legal standing in which to modify these loans to make them affordable. The lawsuit further alleges that these mortgages are owned by trusts that bought them through securitization.

Frey states that the modification of these loans will short bondholders $8.4 billion by reducing borrower payments. He claims that this will run the risk of permanently damaging the secondary market for housing finance.

In an interview, Frey had this to say: “I am an advocate for investors’ contractual rights. Investors’ voices have been muted in this debate because they speak of an inconvenient truth: Current solutions sacrifice the long-term viability of this nation’s housing finance system for short-term political gain. No matter how noble the intent, it is not in the interest of the United States now, or in the future, to tell its citizens and the world at large that U.S. contract rights may be bent with the political winds.”

Sherry Norton, a BOA spokeswoman, had this response: “We have not yet received a filing and, therefore, we cannot comment on specific claims. We are, however, disappointed in this attempt to halt 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. 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.”

Frey feels that it is up to taxpayers to pony up another $500 billion to buy all of the troubled loans from mortgage-backed securities pools. Each side has its own argument. Investors feel that BOA is taking advantage of the current situation because they will pay for modifications out of bondholder money. It does not sit well with investors.

However you shake it out, money will be lost to someone. Tonight the evening news reported that it is now official – we are in recession – deeper than we were in 1932. Everyone is frantic about their financial situation. It will be interesting to see how this will play out. The investors have a valid point. Try telling that to the people who are facing foreclosure.

Posted in Mortgage Refinancing, Mortgages
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