Fund investors sue Countrywide over loan modifications

02 December 2008

Countrywide Financial Corp., the home lender acquired by Bank of America Corp., was sued by Greenwich Financial Services Fund over claims an agreement to reduce payments on mortgages by $8.4 billion would hurt investors (See: Bank of America agrees to purchase Countrywide Financial Corp).

The hedge fund claims investors will be harmed by Bank of America's settlement, reached on behalf of Countrywide, with 15 state attorneys general. The value of trusts that bought 400,000 mortgages will decline under the deal, the fund said.

In the proposed class action, or group lawsuit, the Greenwich, Connecticut-based fund demands a declaration that ''Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts,'' said David Grais, a lawyer for the fund. Grais said Countrywide could owe the trusts $80 billion.

Countrywide, ensnared by the sub-prime mortgage crisis, was the largest US mortgage lender before Bank of America bought it for $2.5 billion on 1 July. Under an agreement announced in October with 15 state attorneys general, Countrywide will modify mortgages for about 400,000 homeowners to settle allegations of predatory lending. (See: FBI probes Countrywide's financial practices)

''Countrywide plans not to absorb the $8.4 billion reduction in mortgage payments itself, even though it was Countrywide's own conduct of which the attorneys general complained,'' the fund said in the complaint filed yesterday in New York State Supreme Court in Manhattan. Under the settlement, the mortgage lender would ''pass most or all of that reduction on to the trusts that purchased mortgage loans from Countrywide,'' the fund said in the complaint.

Bank of America said it was "disappointed in this attack on a program intended to keep at risk families in their homes" and help stabilize the housing market.