MINNEAPOLIS, MN, May 13, 2009 /24-7PressRelease/ -- Senate passes "Servicer Safe Harbor" legislation that may save Countrywide Home Loans from losing $80 Billion; Consequences could have devastating effect on Real Estate Industry
By Wayne Robison, www.ForeclosureU.com Senior Writer
On May 8 the Senate passed a bill called "Helping Families Save Their Homes Act (S. 896)". If passed by congress and signed by the president, it could likely have wide reaching implications on the real estate industry. None of which appear positive. Under a very realistic scenario, passage of the bill would freeze mortgage markets indefinitely.
The Servicer Safe Harbor piece of the S. 896 bill will allow mortgage servicers to override contractual obligations that currently restricts them from modifying mortgages. Such restrictions are made in the "pooling and servicing agreements" that servicers have with the actual owners of the mortgages (investors of mortgage backed securities). Furthermore the bill will allow bankruptcy judges to reduce principle balances on mortgages through what is being called "mortgage cramdown".
Case in Point
At the heart of real estate are loans. At the heart of loans are investors. At the heart of investors is profit. At the heart of investor profit is confidence in the validity and enforceability of agreements and contracts.
A lawsuit that was recently filed in New York's Supreme Court is at the heart of all the above.
A private Hedge Fund (investor) called Greenwich Financial Services has filed suit against Countrywide (now Bank of America) in short, accusing Countrywide of illegally modifying the terms of roughly 400,000 loans valued at 80 billion dollars. Loans that are owned by Greenwich Financial in the form of mortgage backed securities. The remedy Greenwich seeks is to be paid in full (the unpaid balances) for each and every loan Countrywide modified, roughly 80 billion dollars.
Greenwich's claim is simple, that Countrywide modified these loans without the consent or approval of Greenwich and disregarded the contract terms (otherwise known as a "pooling and servicing agreement") under which the mortgage securities were purchased.
According to Greenwich, the pooling and servicing agreement, in part states: "The Master Servicer (Greenwich) may agree to a modification of any mortgage loan if ... Countrywide purchases the modified mortgage loan from the trust fund immediately following the modification".
In other words, per the contract terms, Countrywide was free to modify as many loans as they wanted, so long as they paid Greenwich "in full" for those loans.
Although this may appear to be a simple issue of contract law, it will likely morph into a Fifth Amendment, Bill of Rights issue. That is, "protecting against abuse of government authority in a legal procedure".
If successful, Greenwich will likely be compensated by the United States Government considering Countrywide has just arguably failed the government "stress test" and will need 34 billion dollars in additional capital by July 2009. A Greenwich victory will be a reaffirmation for the rule of law and send a clear message that our legal system and courts will not be over run by the political winds of the times.
In fact, once Congress got wind of the lawsuit, Greenwich President William Frey received a letter of rebuke from the chairman of the House Financial Services Committee, Mr. Barney Frank.20In no uncertain terms the Congressman Frank expressed "outrage" about Greenwich's lawsuit and "strongly urged" Mr. Frey to reverse his course.
(It should be noted that Greenwich believes that loan modifications are not in their best interest. They state that empirical data demonstrates a "net loss" when loan modifications are implemented. Simply put, they believe that reworking property owner loan terms, increases losses).
If a ruling comes down in favor of Countrywide it will perpetuate the inverse of the above. The credit markets that are frozen and said to be responsible for this prolonged recession will worsen. If those who invest in mortgage backed securities have doubt about the instruments utilized to purchase them, confidence will be severely damaged. The result will be an obliteration of investor capital, as it relates to mortgage securities, which translates into the potential annihilation of new mortgages. Furthermore, other servicers like Countrywide will be emboldened to initiate similar loan modification protocols, creating further deterioration of mortgage markets.
Farer reaching effects of a Countrywide victory will certainly in sue as the integrity and security of United States contract law will take a severe hit in the minds of investors worldwide. Undoubtedly the impact of such a decision will adversely affect the United States preeminent global standing as the most secure place for domestic and global investors money.
The rule of law, regardless of how painful it may be, is in the best interest of the real estate market, the economy and the country as a whole.
In all probability, this case needn't be tried if this bill is signed into law. You may want to share this with others and voice your opinion to your Congressperson.
To read the full complaint by Greenwich click here: http://www.scribd.com/mobile/documents/8614287/download
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