September 19, 2011

The Huffington Post reported on Saturday, September 17 that Countrywide Financial’s losses could compel its parent company Bank of America Corporation to “put the unit on the bankruptcy block”. Countrywide Financial, the parent company which was purchased by B of A in 2008 (before it purchased Countrywide Home Loans separately in 2009) could file BK independantly as it maintained a separate legal identity notwithstanding the 2008 sale to B of A. According to the article, B of A has lost more than $22 billion from its consumer mortgage division in the past year, in large part because of loan losses and litigation settlements linked to Countrywide.

In August, AIG sued B of A for over $10 billion, claiming B of A was liable for Countrywide’s mortgage bonds as its legal successor thereto. Previously, the Association of Financial Guaranty Insurers, which insures securitized mortgage loans, had demanded that B of A exercise its repurchase options on billions of “bad” mortgage loans. B of A took the position that each loan had to be evaluated separately, but a court ruling prevented B of A from furthering that position, which would have dragged the litigation on for years.

What effect a CTW Bankruptcy would have on active and pending foreclosures is unknown, but what we do know, from our experience in the American Home Mortgage and Accredited Home Loans Bankruptcies (both of which were filed in the U.S. Bankruptcy Court for the District of Delaware) is that a separate borrowers’ Committee should be formed ASAP after any such filing, which committee should be independant of any “unsecured creditors” Committee. One reason is that one of the first things a lender does when it files Bankruptcy is to file Motions for permission to destroy documents, claiming that maintaining voluminous amounts of documents is a “burden on the estate”. The disasterous effect on borrowers seeking discovery in foreclosure actions involving CTW with the granting of any such Motion is beyond obvious.

The second reason is that the unsecured creditors’ Committee does not have any reason or impetus to exercise remedies to protect mortgage loan borrowers, as they have their own interests which are obviously diverse from (and sometimes antagonistic to) the interests of mortgage loan borrowers. Unless borrowers set up their own separate Committee with people who understand borrowers’ interests and will take aggressive action to protect borrowers, the rights of borrowers could be negatively impacted or lost outright in any lender bankruptcy.

We saw this personally when an attempt was made in the Accredited Bankruptcy to form such a Committee. The Motion for appointment of the separate borrowers’ Committee was denied by the Court because a pro se borrower, who herself was in foreclosure, was already on the general unsecured creditor’s Committee, claiming that she was “representing” the interests of mortgage loan borrowers. The position was thus taken by the Debtor lender that “borrowers are already represented within the Unsecured Creditors’ Committee” (which obviously and in reality they were not), and that a separate borrowers’ Committee would be “redundant”.

We also know from the AHM Bankruptcy that it is possible that the servicing unit could be sold separately out of the BK, as AHMSI (American Home Mortgage Servicing Inc.) was to an individual who then initiated thousands of foreclosures nationwide in the name of AHMSI as “servicer” while the parent “lender”, which filed BK in 2007, remained (and is still) in BK.

Bottom line is that borrowers have to keep a watchful and close eye on the maneuverings of B of A as to its “Countrywide Unit”, and prepare, in advance, for any Bankruptcy filing.

Jeff Barnes, Esq.,