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post #1 of 2 (permalink) Old 10-27-2008, 11:20 AM Thread Starter
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Here Come The Suits

Minyanville - Market Commentary, Investing Ideas, Global Finance, The Economy
Banks Beware: Here Come the Lawsuits

Despite the Armageddon-esque financial turmoil of recent weeks, one thing about America hasn’t changed: If you really want someone to do something, sue them.

The lined up in droves: Cities, counties and states sued the pants off Countrywide for its shady lending practices. California, Illinois and Florida all alleged the lender fleeced American homeowners, jamming them into loans they had no hopes of repaying.

Now, Bank of America (BAC), who purchased the troubled California-based lender earlier this year, is stuck cleaning up the mess. Earlier this month, the bank agreed to pay more than $8 billion to settle lawsuits filed against Countrywide. Friday, the Los Angeles Times ran through the details of its plan to help as many as 395,000 troubled borrowers:


Only owner-occupiers (not investors) with subprime or option ARMs qualify for assistance

Interest rates may be reset as low as 2.5%

Prepayment penalties and late fees will be waived

Upside-down borrowers may have principal reduced

Borrowers who lost their homes (or don’t qualify for assistance) will receive an average of $2,000.

Notably, Bank of America managed to get most investors who bought Countrywide’s mortgage-backed securities to agree to the plan. Holders of these assets have previously balked at such sweeping plans, since modifications usually lower a loan’s cash flow and decrease the value of securities behind it.

Efforts to get lenders to work aggressively with borrowers to avoid foreclosure have been largely ineffective. To be sure, there has been progress, but it’s fallen mightily short of promises the Bush Administration made last year when it announced its pilot program, HOPE NOW.

The aggressive plan, which Congressman Barney Frank, capitalism’s new public enemy number-one, called “the first truly comprehensive plan we’ve seen from the private sector,” could set the stage for a deluge of lawsuits.

The precedent has now been set: The way to stop foreclosures is to start suing banks.

I remember sitting in a meeting in early 2006, when a German bank that had lent our mortgage finance firm a few hundred million dollars asked why we didn’t get into the lucrative option-ARM market. The response: “We don’t want to touch those things. They’re a class action lawsuit waiting to happen.”

Indeed.

Other than Countrywide, the biggest writers of option ARMs during the boom were Washington Mutual, Bear Stearns and Wachovia. Not a single one remains independent.

The proud new owners of these banks, JPMorgan (JPM) (WaMu and Bear) and Wells Fargo (WFC) (via Wachovia) would do well to beef up their legal departments.
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post #2 of 2 (permalink) Old 10-27-2008, 02:40 PM
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Q: How long does it take to verify "owner" occupancy for half a million homes ?
A: Forever.

It's still a slap in the face of everyone who obtained a normal loan.
Where do I sign up ?
And check out this gem.
Certain complications, including second mortgages and car debts, that in the past might have prevented a first mortgage from being modified, will be disregarded,
Quote:
-------------------------------------------------------------------------------------
Countrywide plan may cut mortgage rates for 395,000 borrowers - Los Angeles Times

Countrywide plan may cut mortgage rates for 395,000 borrowers
Interest rates on some subprime and 'option ARM' loans will temporarily go as low as 2.5%.
By E. Scott Reckard
October 24, 2008
... the number of families in California losing their homes rose to a record high of almost 80,000 in the last three months.

The Countrywide plan, which is aimed at borrowers with subprime mortgages or pay-option adjustable-rate home loans, known as option ARMs, would temporarily cut interest rates on some loans to as low as 2.5%. Some borrowers who owe more than their homes are worth could even see their loan balances reduced, giving them equity once again in their properties.

The idea is to modify a loan's terms just enough to create a new monthly payment, including principal, interest, taxes and property insurance, equal to 34% of a borrower's verified monthly income.

Charlotte, N.C.-based Bank of America, which bought Calabasas-based Countrywide in July, estimates that the effort could cut borrowers' payments by as much as $8.4 billion.

Bank of America officials say they have obtained permission for the modifications from the vast majority of the big banks, investment funds and institutions to which Countrywide sold most of its loans while continuing to service them. Such investors have blocked many earlier efforts to modify loans, Countrywide and other loan servicers said.
...
The lender also agreed to pay an average of $2,000 to borrowers who have lost their homes -- or who will lose them because they don't qualify for the program.
...
The ultimate goal is to modify 395,000 loans, including 125,000 in California, according to Countrywide, which became the No. 1 U.S. home lender by aggressively promoting subprime and exotic loans in addition to traditional mortgages.
...
A key difference is that the FDIC isn't offering to reduce amounts owed by IndyMac customers.
...
A big chore will be determining borrowers' incomes because many loans were made with little or no verification of earnings, said Bank of America executive Steve Bailey, who is overseeing the program.

Not every borrower will qualify. One reason, Bailey said, is that the loan owner's expected earnings on a modified loan must exceed what it would expect to recover in foreclosure.
...
On the other hand, borrowers whose income is determined to be high enough for them to make their payments, even after their rates go up as dictated by the loan's original terms, won't be offered help.

Certain complications, including second mortgages and car debts, that in the past might have prevented a first mortgage from being modified, will be disregarded, Bailey said. If the first mortgage can be modified to make the payment equal 34% of a borrower's income, the plan is to do so and let the borrower work out how to handle the other debts.

The first option to be considered for troubled borrowers with subprime loans and option ARMs would be replacement loans backed by the Federal Housing Administration under Hope for Homeowners, a $300-billion program that became available this month.

The federal program in effect requires a lender to cut the principal to 87% of the home's current value so that the borrower can receive a smaller long-term, fixed-rate loan. Because Hope for Homeowners is new, it's unclear how many Countrywide borrowers might get such FHA loans, lawyers in the California attorney general's office say. Jeff Lazerson, a Laguna Niguel mortgage broker, said lenders appeared to be unreceptive to the fledgling program because of the required write-down of principal.
...

Similar modifications would be available for borrowers with option ARMs, on which payments eventually soar if a borrower runs up the loan balance by consistently choosing the lowest of several payment options. Such borrowers also could see their loan amounts reduced to 95% of the current value of their homes. The option to let the loan balance rise would disappear.

Reckard is a Times staff writer.

scott.reckard@latimes.com
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