Bank of America Corp.'s plan to modify 400,000 mortgages is proving to be more complicated than expected — and not only because there are third-party investors involved.
The Charlotte company's deal with the attorneys general of 15 states to settle allegations of predatory lending by its Countrywide Financial Corp. did not address what should be done when a borrower has a second mortgage.
Since the agreement was announced last month, some investors in Countrywide's asset-backed securities have contactedB of A and questioned the wisdom of modifying first-lien mortgages without making changes to second liens.
"In some instances, the second is performing, but in most, if they're not performing on the first lien, they aren't on the second, and that's exactly what we're trying to address," Scott Kurzban, Countrywide's executive vice president of mortgage investor relations, said in an interview Tuesday.
B of A is still working out details of the plan for second liens, Mr. Kurzban said. The company would not say how many of the borrowers covered by the settlement have second mortgages, or what it would do in cases where it neither owns nor services that mortgage.
Jeff Naimon, a partner at the law firm Buckley Kolar LLP, said it is difficult to get holders of the first and second liens to sign off on loan modifications, because they have conflicting interests.
"Why should a first-lien holder agree to a lower interest rate if the second lien is still getting 10% on their money?" he asked. Holders of the first lien are "offended" by the idea of writing down any principal if whoever holds the second lien "isn't taking a bigger haircut."
Many second liens are underwater as a result of home price depreciation, Mr. Naimon said. "If you're [the owner of] a second, your economic interests are to hold on as long as possible and try to not have a foreclosure, because a sale will wipe you out. In real life, as it stands now, it's very difficult to coordinate these modifications."
Even without the second mortgages, modifying 400,000 loans would be a tricky endeavor.
B of A owns 12% of them and says it has "delegated authority" for another 75% under pooling and servicing contracts with investors and does not need their approval for modifications.
In the past few weeks Countrywide's servicing group has been "reaching out" to the investors in the remaining 13% who have not given their approval to perform modifications, Mr. Kurzban said.
Grais & Ellsworth LLP has challenged B of A's right to modify any of the securitized loans unilaterally and is trying to get investors to sue the company. About 25 investors met with the law firm last week, but it says none have retained it.
Terry Wakefield, the chief executive of Wakefield Co., a Grafton, Wis., mortgage consulting company, questioned whether any servicer could modify loans not held in its own portfolio.
Pooling and servicing agreements do not allow servicers to make changes beyond preserving collateral, such as paying advances for taxes on properties in foreclosure, he said. "I am not aware, nor have I ever seen, a security structure where the issuer had unilateral rights to lower interest rates on the loans in a security."
Second liens are particularly complicated, Mr. Wakefield said, because the priority of a lien is determined solely by when it was recorded. "If you start tampering with first liens, then that first lien could very quickly become a junior lien if there is an existing second lien on the property."
For the first mortgages covered by the settlement, Mr. Kurzban said Countrywide primarily will make rate reductions to lower the borrowers' debt-to-income ratios to between 34% and 42%.
For pay-option adjustable-rate mortgages, if rate adjustments are not enough, Countrywide "will adjust principal" to as low as 95% of the home's current market value, he said.
Investors have primarily been concerned about whether the loan modifications are in their best interest, Mr. Kurzban said.
"We're comparing the loss of a loan modification to the projected loss if we go to foreclosure or liquidation," he said. Because of home price depreciation, a loan modification "will represent a better outcome than foreclosure" for most investors.