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Countrywide Loses Ruling In Loan Suit

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A federal judge in Manhattan has rejected an argument by Countrywide Financial seeking certain protections from investor lawsuits under new legislation intended to encourage modifications of home loans.

Countrywide, the big mortgage company, had argued that the legislation automatically voided its pledges to buy back loans from investors if those loans were modified for troubled borrowers.

The ruling is a win for holders of mortgage-backed securities who sued Countrywide in December after the company, now a unit of Bank of America, agreed to modify thousands of loans in a settlement with state attorneys general. The opinion, by Judge Richard J. Holwell of Federal District Court in New York, was made public on Tuesday.

The case against Countrywide is being closely watched by pension funds, insurance companies and other investors in mortgage securities who contend that loan servicing companies that agree to change the terms of mortgages are breaching contractual obligations to owners of those loans.

Investors who own mortgage securities receive interest and principal payments from borrowers over the life of the loans. When servicing companies modify those loans, investor payments are typically reduced.

“I view this as an opening salvo and a demonstration that investors do have contractual rights, even when it is politically unpopular,†said William A. Frey, one of the investors who brought the lawsuit. “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.â€

Bank of America, which took over servicing of the investors’ loans when it bought Countrywide in 2008, is defending the case. It argued that the matter belonged in federal court and that any contractual obligations to repurchase modified loans were trumped by the Helping Families Save Their Homes Act of 2009. Under that law, servicing companies that agree to modify loans receive some protection from liability arising from the loan changes.

Judge Holwell ruled that the immunity granted under the legislation did not prevent Countrywide’s investors from trying to enforce their rights under the mortgage securities contracts. The investors must prove that Countrywide’s pooling and servicing agreement covering their loans does indeed require it to repurchase mortgages the bank modifies, the judge said, ruling that the case belongs in state court.

Shirley Norton, a spokeswoman for Bank of America, said it was reviewing the order and considering its options. “The court did not rule that the safe harbor is inapplicable,†Ms. Norton said, merely that it did not fall under federal jurisdiction.

The BoA certainly won't want this crap back on it's books.

However this will drag on for years and the lawyers will get very rich.

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