Bank of America encounters problem with loan modifications

Loan modification problems at Bank of America

The Problem:

More than $2 trillion in mortgage loans were packaged into mortgage-backed securities, and were sold to investors by Wall Street.

In particular, Bank of America Corp recently embarked on an $8.4 billion home-loan-modification program to settle claims brought against Countrywide Financial Corp. Under the settlement, Bank of America, which acquired Countrywide in July, agreed to modify the mortgages of as many as 400,000 borrowers- by refinancing loans, lowering interest rates and reducing principal amounts. Bank of America says- its contracts with investors provided it with "delegated authority" to modify many of the loans. It owns about 12% of the loans at issue in the settlement and can modify them easily. The 75%, with "delegated authority" provided in its contracts with investors, were settled this fall, with attorney generals from 15 states. Many of these loans, covered by this settlement, were packaged into mortgage-backed securities.

Now, some of those investors are crying foul. They said that many of these loan modifications violated representations and warranties made, when the mortgages were packaged into securities. As a result they said that banks should repurchase the loans, before modifying them.

Translation of the Problem:

Bank of America, Countrywide and other banks servicing these notes for their respective investors will be encountering lots of problems when modifying your loan. These problems and inefficiencies will be passed onto the homeowner upon commencing a loan modification.

However, the American Securitization Forum, an industry group, is working on standards that would make it easier to create streamlined loan modification programs for loans that were packaged into securities. But the complexities "take some time to work out," said Tom Deutsch, the group's deputy executive director. The Bank of America spokesman said, "This program's foreclosure alternatives provide a win for the investor and the borrower and are intended to assist in the effort to stabilize the country's housing market."

Written by Katherine M