It looks like Tanta at CR is on this story as well
, but after my earlier post
on loan modifications today, I felt compelled to highlight some pretty bad journalism from Gretchen Morgenson over at the New York Times.
The story ("Assurances on Buybacks May Cost a Lender
") essentially makes the wholly erroneous claim that Countrywide is subject to billions upon billions of loan buybacks when doing loan modifications in loss mitigation because of its Pooling and Servicing Agreements, and further suggests that Countrywide has an incentive to kick borrowers out of their home rather than modifying a borrower's note.
It's just the sort of thing that can hang on Countrywide's stock price, but there's one big problem here: none of it is correct.
But before we get to that, here's the gist of Morgenson's report:
Countrywide, with its stock depressed, had been seen as a prospect for a takeover. But any obligation the company has to buy back loans may complicate discussions with potential investors or buyers.
The repurchase obligations are discussed in Countrywide's prospectuses and pooling and servicing agreements that cover about $122 billion worth of mortgages packaged and sold to investors from early 2004 to April 1 of this year.
The agreements said that Countrywide Home Loans, a unit of Countrywide Financial, would buy back mortgages in the pools if their terms were changed to help borrowers remain current. Such changes are known as loan modifications. In general, it is difficult for homeowners to get loans modified if they are in a securitization pool.
It is unclear how many modified loans are involved. But it would cost $1.2 billion for the company to repurchase 1 percent of the loans in the pools at issue. Repurchasing 5 percent would cost $6.1 billion ...
But Countrywide's servicing unit may have less incentive to help troubled borrowers who are interested in working out their loans, analysts said, because doing so could put the parent company on the hook to buy back a loan.
First of all, it's absolutely laughable that anyone would write that Countrywide's PSAs state it will "buy back mortgages in the pools if their terms were changed to help borrowers remain current." The reality of nearly every PSA ever written is the exact opposite.
It's not as if Countrywide didn't try to explain the reality of how PSAs work to the reporter, either:
Mr. Simon [A Countrywide spokesperson] said that the pooling agreements indicating that Countrywide was obligated to buy back modified loans applied only to mortgages that are not in danger of defaulting.
In other words and in a very general sense, Countrywide has to pay par to the noteholder if it wants to take a performing loan out of the pool to modify and then ostensibly resecuritize it -- no different than the effect of prepayments, really. But reality be damned -- Gretchen found a change in the PSAs!
... the language in the pooling agreements from 2004 through much of 2007 does not state this clearly. Only as of April 1 do Countrywide's pool terms begin stating that the company is not required to repurchase modified loans.
Mr. Simon said this change in language was made to clarify the original intent of the agreements.
In her haste to suggest that she understood PSAs better than Countrywide, it might have helped Gretchen to speak to the investors on the other side of the fence and see if they were indeed planning on pushing distressed loan modifications back into Countrywide's lap. Either the laughter or stunned silence on the other line might have helped clear this up.
When it comes to loan modifications, maybe there's a story about where the line is between performing and non-performing and at what point a servicer should begin looking at loan modifications as part of a proactive loss mitigation strategy. Maybe a story about how PSAs need to be modified to give servicers greater leeway to perform necessary loan mods during loss mitigation. But not this. Not a story wrongfully characterizing Countrywide simply because the reporter didn't take enough time to understand the real issue at hand.
Tanta's take sums this issue up nicely
That Countrywide guy probably tried his level best to explain this to her, but he clearly didn't make any headway. What CFC did was re-write the prospectus to make it clear to anyone like, well, Gretchen, that we were not talking about loss-mit here.