Bank of America went ahead and bought the failing Countrywide earlier this year because it wanted to widen its market share in mortgages and the price was so attractive. It also knew that Countrywide had a lot of bad paper in its books otherwise it wouldn't be having so much trouble. But it figured it could with time sort it all out.
Then Countrywide was charged by 15 states for predatory lending practices and earlier this fall Bank of America, on behalf of its subsidiary, reached a settlement on the charges. Accordingly, it would modify up to 400,000 Countrywide home loans by cutting back on the principal balance, dropping interest rates and doing refinances, thus hoping to help borrowers stay in their homes. This action was quickly considered a solid boost for the battered real estate market and deservedly attracted a lot of media attention.
But the well-intentioned plan is now facing a serious challenge. B of A only has around 12% of the 400,000 home loans in its own portfolio with which it can do whatever it wants. The rest were packaged every which way and sold on the secondary market. In about 75% of these it has a so called "delegated authority" provision that was written in investor contracts supposedly allowing it quite a bit of freedom to modify. How exactly that works is now in dispute.
The investors in mortgage-backed securities issued by Countrywide believe that Bank of America is trying to settle the predatory lending charges on their backs. On the other hand, B of A feels its program will benefit both the investors and the homeowners. Go figure who is right. The investors are now talking with a law firm about this and it's a good bet that legal action is forth-coming. Unless, that is, the proposed workout terms are adjusted more towards their position.
It's possible that B of A's Countrywide acquisition gives it another headache it wasn't counting on that can drag on for a while and cost money. Perhaps lots of it. In a worst case scenario the borrowers involved here who really need the help might end up getting no assistance at all from this particular initiative.