Federal Judge Tosses Countrywide’s Bid for Safe Harbor from Mortgage Investors
August 24th, 2009 Categories: Mortgage and Loans, Real Estate News, Real Estate Trends
From DSNews last week:
A legal battle between now-defunct Countrywide Financial and some of its mortgage investors took a new turn Wednesday, when a federal judge in New York rejected the lender’s argument that recently passed “safe harbor” legislation protected it from investors’ lawsuits.
Federal District Court Judge Richard J. Holwell did not directly rule on the merits of the case made by Countrywide, which was absorbed by Bank of America after staggering losses and allegations of predatory lending at the onset of the mortgage crisis. But Holwell said the lender and its investors would have to take their fight to the state courts.
“I view this as an opening salvo and a demonstration that investors do have contractual rights, even when it is politically unpopular,” William A. Frey, one of the investors suing Countrywide, told the New York Times Wednesday.
Other investors in mortgage securities, from hedge funders to pension managers, are monitoring the case, which could help decide whether or not the investors would have to eat losses resulting from a lender’s or servicer’s modifications of troubled loans in their pools. “This is ultimately going to be one of many legal battles over who should pay the hundreds of billions of dollars in losses on mortgages.”
Faced with charges of malicious lending practices, Countrywide last December entered into an agreement with 11 states to modify thousands of its mortgages, to the tune of $8.4 billion in aid to borrowers.
But Countrywide only owned 12 percent of those loans, said Owen L. Cyrulnik, an attorney representing investors who held the majority of the mortgages.
Those investors filed a class action against Countrywide, alleging that it reneged on its pooling-and-servicing agreements, which they say obligated the lender to buy back any troubled loans they modified.
But Countrywide responded in court that Congress’ Helping Families Save Their Homes Act of 2009 provided automatic protection from investors’ claims – known as safe harbor – for lenders and servicers of the mortgages.
Holwell ruled that Countrywide’s investors had a right to cry foul and attempt to assert their rights in state courts. But he also said the burden would be on investors to prove that Countrywide’s pooling-and-servicing agreements would require it to buy back the modified loans from investors.
The case could have a significant impact on the U.S. economic recovery. If Countrywide wins, future reductions of loan principals or interest rates for distressed borrowers could come at the cost of investors, which might deter future investments and lending. If the investors win, Countrywide – and other lenders – could find themselves holding millions more in toxic loan assets, further destabilizing the banking industry.
Cyrulnik, however, said an eventual win for investors would be good for the free market, because it would affirm the basic responsibilities each party holds in any transaction.
“Servicer safe harbor does not trump state contract law,” he said.
