"modifying the terms of mortgages that have been packaged into bonds and sold to investors is not as easily done as people think"

ChumpChanger with a point about renegotiating mortgages, specifically applied to Countrywide:

"I've pointed out before, in stories and in this blog, that modifying the terms of mortgages that have been packaged into bonds and sold to investors is not as easily done as people think. Specifically, I'd pointed out that the terms of the mortgage bonds that Countrywide issued required it to buy back any mortgages for which it modified terms. That "buy back your own dogshit" rule is the reason that Countrywide spent a good year making sure it didn't do that."

This was one reason that many people believed that the government needed to get involved and use legislation to help facilitate the renegotiation of mortgages.

"Well, now that Bank of America has bought Countrywide, they've gone ahead and started modifying loan terms--at this point far less an expression of generosity from the bank than of sanity, since the alternative to modifying loans is to foreclose and get stuck with yet more houses the bank can't sell. But guess what? The bondholders have sued , and are demanding Bank of America now buy back $8.4 billion of loans. This may seem crazy to you--the bondholders are not likely to be better served by foreclosure (though there could be exception, the terms are complicated and not all bond holders have the same interests). But the plain language of the terms is clear, so I'm genuinely wondering if the people who keep track of ... oh, you know, potential 11 figure liabilities ... for Bank of America's Ken Lewis told him this before he decided to plunk down a bunch of stock to buy The Most Evil Company In History."

Let's look at the story from the NY Times:

"NEW YORK (Reuters) - A group of bond investors sued Bank of America -owned Countrywide Financial on Monday demanding that Countrywide buy every mortgage loan for which it agrees to reduce payments under a predatory lending settlement deal.Countrywide and its Bank of America parent would be liable to pay hundreds of trusts a total of about $80 billion for loans it modifies, said lawyers for the plaintiffs who filed the complaint in New York State Supreme Court."

Yes, that looks like what happened.

"Countrywide, ensnared by the subprime mortgage crisis, was the largest U.S. mortgage lender before Bank of America bought it for $2.5 billion on July 1. Under an agreement announced in October with 15 state attorneys general, Countrywide will modify mortgages for about 400,000 homeowners to settle allegations of predatory lending."

I agree that this was Predatory Lending, which adds credence to my view that fraud, etc., is the second main cause of this crisis.

"Bank of America said it was "disappointed in this attack on a program intended to keep at risk families in their homes" and help stabilize the housing market."Countrywide believes that plaintiffs' lawsuit represents an unlawful effort to assert rights of the trusts," the bank said in a statement. "Accordingly, Countrywide intends to pursue plaintiffs for any and all remedies available to it, including the recovery of its costs incurred in having to defend this improper action."

I had originally believed that these bondholder types were waiting to see if they could force government intervention, which would increase their yield, so to speak.

"The complaint said Countrywide does not plan to bear the $8.4 billion cost of the loan modification but to shift that cost to 374 trusts into which its loans were securitized, harming bond investors.

The lawsuit relates to two series of securitizations known as CWL and CWALT. Countrywide has denied it is required to repurchase all loans in the these two securitizations that it modifies, the complaint said."

Can anybody read a contract nowadays?

"It said the plaintiffs do not oppose the settlement between the attorneys general and Countrywide but seek a declaration from the court that the lender "is required to purchase any loan on which it agrees to reduce the payments."The complaint also said that if the trusts "are forced to absorb the reduction in payments occasioned by Countrywide's settlement of the allegations against it, then the value of the securities that those trusts sold to investors will decline."

I don't know how far this will go, but it looks like the bondholders simply want a better deal out of this agreement for themselves, which is why the B of A attorneys are threatening to push the costs of litigation back onto the bondholders. In other words, the B of A thinks that this is a nuisance suit intended to hold things up and gum up the proceedings enough to make it worthwhile for the B of A to up the ante.

"The October deal calls for Countrywide to modify at least 50,000 mortgage loans from Monday, the day the mortgage modification program began, to March 31 next year, lawyers for the bond investors said. They estimated that the average unpaid principal balance of the loans is approximately $200,000."

Since none of us know what's on those contracts, and, at least speaking for some of us, we're not attorneys, I don't know that we can figure out where this is going one way or the other. However, from my point of view, this was not unexpected. The Bondholders had previously decided that government intervention was the best deal for them, and I thought this was probably correct. Now, it seems that they've decided to either force the B of A to offer them some money, or possibly have the government intervene to settle this dispute, on terms that would better suit them.

ChumpChanger believes that the bondholders do have a case, so we'll have to wait and see where this goes.

Plan B Is We're Screwed

ChumpChanger gets the picture:

"The consensus wisdom emerging about the Big 3 automakers is "Let 'em fail." There are some awfully good arguments for this. Yes, what's happening with the automakers is their own fault, the consequence of decades of bad decisions. Yes, to extend the bailout beyond the financial industry invites every ailing business in the country to run to the bailout trough. Yes, the shock therapy of bankruptcy may be the only way to make the US auto industry viable in the long run.

But what other choice is there? This is not a rhetorical question. I really don't know. It's easy to say that we should let them fail. But if John Dingell stares down at you (and I've sat in the audience when Dingell's stared down from his elevated perch--trust me, you can go many years without seeing a stare as blood curdling as his) and asks what your plan is for all the autoworkers who are going to be displaced, what's your answer? It seems to me that at the moment we have none. And anyone who says we should just let the industry go bankrupt and let it sort and downsize itself out had better have some answer to this.

PS: If you want to get some historical perspective on the dialogue here, check out A Step Toward Feudalism: The Chrysler Bailout, a paper from back in 1980 that the Cato Institute has put online (points to them for not just throwing out the sillier stuff when they were digitizing the archive). We bailed out Chrysler and the nation survived -- though it did mean years of listening to Lee Iacocca's turnaround story. "

Well, you and Cato both have a point, because that's how the world works. On the one hand, we aren't the USSR, on the other hand, government intervention leads to more government intervention. In the case of Chrysler, the terms should have at least been more onerous, including a vow of silence from Iacocca, even though I don't believe in vows for myself.

So, in this case, you're right again. There's no Plan B for any of this, because everyone's been working under a system of implicit and explicit government guarantees, based partly on the past government interventions. We're in a huge bind because of this, and are having to intervene to attempt to lessen an outright panic against risk.

On the other hand, Cato is right. We need to get out of this government guaranteed system, or at least radically alter it, because those guarantees made this outcome more likely.

So, you're both correct again, because that's the way the world works.

Who Was Counting On A Bailout?

Via Chump Changer, the following:

"Read the story carefully and note which bankers seem to love the plan most: JP Morgan's Jamie Dimon and Bank of America's Ken Lewis. The guy who seem to have been counting on a bailout since long before the government suspected it would be giving it to them. "

It's good to put names to the list of people who were counting on a bailout. I, of course, belief that this belief was widespread, and that the government knew that it was implicitly committed to a bailout.

Still, I take the post as a little positive proof of this.