“The loan modification buy back clause is on a secret Countrywide loan pool in which $122 billion worth of mortgages sold to investors from early 2004 to April of this year. The problem with the clause is that they are policing themselves and no one is watching!”
Putting cherry red lip stick and doing major cosmetic surgery on a mortgage pig and selling it has thoroughbred horse was something Angelo Mozilo his Countrywide cronies were very good at. In fact they were so confident in their pig dressing skills, that they agreed to buy back these pigs if they needed new lipstick or if the new owner realized that they had a pig and not a horse.
Bank of America became the largest U.S. mortgage servicer when it acquired Countrywide early this year and now this acquisition is haunting Ken Lewis and shareholders big time. In fact, this purchase may drown the B of A brand for good and make it go down like the titanic.
For example, on Monday, two investment firms announced a lawsuit exercising a unique buy back clause regarding loan modifications. These buy back assurances are usually found in only prime mortgage pooling and servicing agreements (PSA’s) such as Fannie Mae and Freddie Mac type loans.
The Countrywide mortgages in question haves a specific clause in the prospectus of the pooling and servicing agreement that guarantees that they will buy back loans that are modified. The mortgage servicing agreement covers approximately $122 billion in loans that were packaged and sold to investors from early 2004 to April of this year.
This is very unusual for a buy back clause to be placed in a pooling and servicing agreement that covers a batch of high risk, non-Fannie Mae and Freddie Mac subprime mortgages. In fact it is quite stupid given the default rate on these loans and the fact that most all will either be foreclosed on or modified.
A typical buy back clause in your average Countrywide pooling and servicing agreement protects against fraud and or omission in which a Trustee or the Co-Trustee is required to notify the Master Servicer in writing about defective loans. If Countrywide Home Loans cannot or does not cure such omission or defect within 90 days of its receipt of notice from the Trustee or the Co-Trustee, Countrywide Home Loans is required to repurchase the related Mortgage Loan from the Trust Fund at a price (the “PURCHASE PRICE”) equal to 100% of the Stated Principal
Rather than repurchase the Mortgage Loan as provided above, Countrywide Home Loans may remove such Mortgage Loan (a “DELETED MORTGAGE LOAN”) from the Trust Fund and substitute in its place another Mortgage Loan of like kind (a “REPLACEMENT MORTGAGE LOAN”); however, such substitution is only permitted within two years after the Closing Date.
However, this loan modification buy back clause like the one in this batch of $122 billion is almost never found in a batch of subprime or alt-a loans and is usually reserved for prime mortgages issued by agencies like Fannie Mae and Freddie Mac.
This make me very nervous and leery of what they are really doing with these particular mortgages behind closed doors. Especially given the fact that this is a top secret closed door industry and Countrywide and Bank of America are policing themselves.
Countrywide were shell masters at shifting and selling risk into the secondary market and then retaining the master servicing rights to rake in fees with almost zero risk or liability. Until now…
Let me have Countrywide’s Vice President, David Sambol explain this in his own words:
But the primary servicing is in the senior position, so you don’t really — you are paid to service the loans, and so there is no real credit exposure to those assets other than a slight credit exposure in the sense of increased expenses to support the increased delinquencies that we might have.
The agreements said that Countrywide Home Loans would buy back home mortgages in the pools if their terms were changed to help borrowers remain current. AKA Loan modifications.
OK, for those of you that don’t understand the above, this means really bad news for Countrywide borrowers, investors and our economy.
The birth of the Countrywide mortgage servicing shell game:
Countrywide Home Loans established Countrywide Servicing in February 2000 to service mortgage loans originated by Countrywide Home Loans that would otherwise have been serviced by Countrywide Home Loans. In January and February, 2001, Countrywide Home Loans transferred to Countrywide Servicing all of its rights and obligations relating to mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, respectively.
In October 2001, Countrywide Home Loans transferred to Countrywide Servicing all of its rights and obligations relating to the bulk of its non-agency loan servicing portfolio (other than the servicing of home equity lines of credit), including with respect to those mortgage loans (other than home equity lines of credit)
Are these investors being mislead by a major Countrywide conflict of interests or just a servicing shell game?
The terms in mortgage servicing agreements leaves the decision to modify a loan is left to the company that services it. The major issues and problems for investors is that this $122 billion pool is managed and decisions are left to Countrywide Home Loans Serving unit to make.
Hence, we have got a major problem here folks!
It is obvious that Countrywide placed this clause in the agreement to make the mortgage pool that more attractive to potential investors and thus increase the inherit value of what was really a dressed up mortgage pig. Hence, they could sell the pool faster and for more money because it was that much more valuable to investors.
So, the question of the day is, “If Countrywide and Bank of America have a loan modification buy back clause on $122 billion in mortgages and they are firms that are actually servicing these said mortgages, how in the hell will we ever know if they are truly helping the homeowners who are holding the end product (homes) in this mortgage pool?”
The truth is that Countrywide and B of A really does not have very much incentive to help the struggling borrowers in this pool and the sad fact is that these borrowers don’t even know they have been chosen as sacrificial foreclosure lambs. Hell, if they help these lambs with their pork filled loans, then they would have to buy back these pigs by the boat load.
I am sure many have already suffered their foreclosure fates.
At the time of this writing, it is unclear how many mortgages are involved in this pool. But for example, if Bank of America had to buy back just 7% of these toxic loans, it would cost them $7.4 billion. Triple the acquisition cost of the failed Countrywide.
Until very recently these PSA’s never spelled out how to handle loan modifications for struggling borrowers who cannot afford their mortgages. Back in 2005, that wasn’t a problem. It is now, of course.
In a Countrywide Financial Q2 2007 Earnings Call Transcript Jim Fowler of JPM Securities asked Countrywide executives this.
“I’m wondering if since these loans haven’t cured up until foreclosure, what is it that is being modified so that the foreclosure doesn’t — isn’t just pushed into the future, I guess is a clumsy way to say it? What is it that you’re doing? What tack is generally being taken that you think will change the prospects at the borrower level that your collection and curing attempts from 30-day to 90-day hasn’t been as successful?
Thanks for the answer.”
Kevin Bartlett
Most of the modifications do represent the first two categories I think you mentioned. They represent a deferment of past-due interest or capitalization of the past-due amounts. To a far lesser extent — in fact, it is not very material at all — the percent that represent interest rate reductions.
The criteria that we use when we decide to modify is an assessment of the borrower’s condition and our conclusion that we believe that, in effecting the modification, the borrower would in fact thereafter have the wherewithal to pay as agreed on the modified loan.
We make that assessment by getting our hands around the reasons for the default, what is happening with the borrower’s income, and we only will affect the modification if we believe we are not just delaying a law.
Angelo Mozilo
Next caller.
Moe Bedard
Next lawsuit…
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