A US district judge this week decided not to take action on a lawsuit filed against Countrywide Financial by investors in mortgage-backed securities. The suit claims Countrywide’s decision to modify mortgage loans up to $8.4bn violates contracts held by investors in the securitizations where some of those loans live. The investors involved in the suit are asking that Countrywide purchase any loan it intends to modify out of the respective securitization and absorb the losses taken on modifications. Countrywide, whose operations were acquired by Bank of America (BAC) raised concerns under the Truth-in-Lending Act (TILA) and tried to have the case heard in federal court rather than the state court where the case was filed. The judge recently issued a decision to not take action on the case, instead referring it back to New York State Supreme Court. “Although defendants deny it, by arguing that [the Truth-in-Lending Act] requires a different interpretation of the contract, defendants are raising a federal defense,” Howell’s decision reads, according to industry reports. “A federal defense has never been sufficient for federal question jurisdiction.” The judge’s decision, not a ruling on the case, should cast no doubt on a servicer’s legal authority to modify mortgage loans, according to the Center for Responsible Lending (CRL). “Loan modifications are essential to turning around the current financial crisis, and the number of modifications continues to be dwarfed by the number of foreclosures,” the CRL said in a media statement late Thursday. “We hope that servicers, who are already using ‘investor refusal’ as a scapegoat for denying modifications, will not use the purely procedural decision in this case as a further excuse to refuse to modify loans.” Write to Diana Golobay. Disclaimer: The author held no investments when this story was published.

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