SAN FRANCISCO, Oct 13 (Reuters Legal) - Investors cannot force Countrywide Financial Corp. to buy back mortgages that the lender agreed to modify, a New York court ruled.
The decision by New York State Supreme Court Justice Barbara Kapnick, made public on Wednesday, dismissed a lawsuit brought by two investment funds. The funds had sued Bank of America Corp.’s Countrywide unit over a deal with some 11 state attorneys general in 2008 to modify $8.4 billion of loans made to roughly 400,000 borrowers.
Investors who own mortgage securities typically receive interest and principal payments. If servicers modify the underlying loans to reduce borrower obligations, investors would receive lower payments.
But Kapnick ruled that the two plaintiff investment funds had not complied with requirements necessary to sue -- including a provision mandating that they gather the support of 25 percent of investors.
Bank of America spokeswoman Shirley Norton said they are pleased the court recognized the 25 percent rule.
“These preconditions protect investors collectively against ill-conceived litigation forays that could prove damaging to investors -- such as the Greenwich plaintiffs’ bid, which would effectively halt all modifications of distressed mortgages,” Norton said.
William Frey, president and CEO of Greenwich Financial Services, said the company’s legal team will decide whether to appeal.
In some instances, U.S. mortgage bond investors have been able to band together to reach the 25 percent threshold.
Kapnick’s ruling makes the need to bolster those efforts “all the more obvious,” Frey said.
David Grais, a partner at Grais & Ellsworth in New York, represents the investment funds. He is also lead counsel for the Federal Home Loan Banks of San Francisco and Seattle in separate litigation against 11 securities dealers to rescind the purchase of $24 billion in mortgage-backed securities. In March, American Banker called Grais the “new nemesis” of the mortgage-backed securities industry.
Judge Kapnick ruled last week in the case against Countrywide, but the court documents were only made public on Wednesday.
The case is Greenwich Financial Services v. Countrywide Financial, Supreme Court of the State of New York, County of New York, No. 650474/08.
Reporting by Dan Levine; Additional reporting by Terry Baynes of Reuters Legal