By agreeing to rewrite up to 400,000 mortgages originated by Countrywide Financial Corp., Bank of America Corp. has set out to prove that mass modifications can be done with securitized loans.
The dispersed nature of modern mortgages — in which a loan is often held by one party and serviced by another — has complicated prior attempts to modify loans on a large scale, such as the Hope Now coalition. The Federal Deposit Insurance Corp., as the receiver for IndyMac Bank, has said it aims to modify 60,000 of the failed thrift's loans, including ones that it securitized.
Many servicers have claimed they do not have delegated authority from investors to make principal reductions on loans, an issue cited repeatedly by House Financial Services Committee Chairman Barney Frank, who said last month that he is considering overhauling the servicing system to speed up loan modifications.
A full 88% of the loans covered by B of A's settlement with the attorneys general of 11 states have been pooled into mortgage-backed securities. The Charlotte company said Tuesday that the investors in those securities had allowed it to modify the loans.
"We have the authority," said Dan Frahm, a spokesman for B of A. "We will operate in the financial interest of the investor, just as we do for our owned portfolio."
There are other loans not covered by the settlement whose investors have not authorized modifications, Mr. Frahm said, but he suggested they would come around.
"We strongly believe they will support this," he said.
Debbie Hagen, the chief of the consumer protection division in the office of Illinois Attorney General Lisa Madigan, one of the parties to the settlement, said B of A "obtained investor authorization for all of the borrowers" covered under the consent order, which has not yet been filed.
Benjamin Diehl, a deputy attorney general in the consumer law section of the office of California Attorney General Edmund G. Brown Jr., said Monday that getting investors who own mortgage-backed securities to sign off on principal writedowns has been "complicated."
B of A indicated to Mr. Brown's office that "the vast majority of their investors were on board and were willing to go forward with the program based on representations they've made to us," Mr. Diehl said.
"There are a few [investors] that haven't" agreed, "so they're continuing to talk to them," he said.
Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp., said any agreement to modify loans has to be compared to what the Treasury Department is offering under its Troubled Asset Relief Program.
"The agreement is good in that the states have done as much as they possibly can for these borrowers," he said. "But there's a question beyond what B of A directly owns or can influence."
Because investors are hoping to transfer a number of loans or securities to the Tarp, there could be "less appetite for mods until those loans are in the hands of Treasury," he said, which is estimated to take at least three to six months with the transition to a new administration.
B of A put an $8.4 billion cost estimate on the modification program and said the costs for modifying the loans it owns had already been estimated as part of its acquisition of Countrywide.
The program is targeting borrowers who are facing foreclosure or likely to become seriously delinquent as adjustable rates reset and monthly payments increase dramatically.
The agreement, announced Sunday, stemmed from civil lawsuits alleging predatory lending by Countrywide. The attorneys general were led by Mr. Brown and Ms. Madigan.
Joe Price, B of A's chief financial officer, said in a press release that "over time," his company will reduce principal and interest both "on loans Countrywide owns and on loans Countrywide services on behalf of investors."
Attempting to prevent foreclosure would be "in the best interests of both our customers and the investors whose loans and securities we service," Mr. Price said.
Mr. Brown's office included a telling hedge in its press release announcing the settlement. "Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers," the release said.
