Assurances on Buybacks Cost a Lender

Expanding rapidly as the nation's biggest place mortgage company, Countrywide Home Loans quietly promised investors who bought its loans that it would repurchase some if householders got into fiscal difficulties.

But now that Countrywide itself is struggling, it may not be able to do so, making it even harder for troubled borrowers to cut down their involvement rates or make other alterations to their loans to avoid foreclosure.

The possibility that Countrywide may have got to purchase back mortgages that it sold come ups on the heels of its proclamation last hebdomad that the tightening recognition marketplaces had forced it to pull on its $11.5 billion line of recognition from a pool of banks, a move that sent the marketplace plummeting.

But yesterday, agreed to put $2 billion in Countrywide, buying preferable shares that carry an involvement charge per unit of 7.25 percentage and can be converted into common stock at $18 each.

"Bank of America's investing in Countrywide stands for a ballot of assurance and beef ups our balance sheet, enabling us to place Countrywide for future growing and success," Angelo R. Mozilo, main executive director of Countrywide, said in a statement.

Countrywide, with its stock depressed, had been seen as a prospect for a takeover. But any duty the company have to purchase back loans may perplex treatments with possible investors or buyers.

The redemption duties are discussed in Countrywide's prospectuses and pooling and service understandings that screen about $122 billion worth of mortgages packaged and sold to investors from early 2004 to April 1 of this year.

The understandings said that Countrywide Home Loans, a unit of measurement of , would purchase back mortgages in the pools if their footing were changed to assist borrowers stay current. Such alterations are known as loan modifications. In general, it is hard for householders to acquire loans modified if they are in a securitization pool.

It is ill-defined how many modified loans are involved. But it would be $1.2 billion for the company to repurchase 1 percentage of the loans in the pools at issue. Repurchasing 5 percentage would be $6.1 billion. When such as redemptions are made, the original amount of the loan is paid into the pool and divided among the investors.

Under the footing of the loan pools, the determination to modify a mortgage is left to the company that services it. Servicers trade directly with borrowers, taking in monthly mortgage payments and sending them out to the investors in the pools. Most of Countrywide's loans are serviced by its Home Loan Servicing unit.

But Countrywide's service unit of measurement may have got less inducement to assist troubled borrowers who are interested in working out their loans, analysts said, because doing so could set the parent company on the hook to purchase back a loan.

"With the volume of adjustable-rate mortgages that Countrywide have originated, their liquidness crunch potentially get rids of a feasible tool to maintain mortgages low-cost in the human face of at hand involvement charge per unit resets," said Kevin Byers, a principal at Parkside Associates, a consulting house in Capital Of Georgia and an authorization on securitizations.

According to company figures, last twelvemonth 45 percentage of Countrywide's loans had adjustable rates; many get with low rates and set to much higher levels.

Agreeing to purchase back loans that are modified is highly unusual and perhaps alone among pools issued by companies like Countrywide, Mr. Byers said. Pools backed by mortgages issued by and other government-sponsored entities typically include such as language.

It is likely that Countrywide set the linguistic communication into its understandings as an inducement to do its mortgage pools more attractive to investors, in bend generating more money for Countrywide when it sold them.

A Countrywide spokesman, Crick Simon, said that the company's service unit of measurement was interested lone in keeping loans performing and that its alteration determinations would be based on that goal.

"Investors charge per unit servicers based on their ability to maintain loans in a acting state and to turn nonperforming loans into performing loans," he said. "The fees collected for service are based on the loans performing."

Loans that range foreclosure are expensive for both loaners and servicers, Mr. St Simon added.

But servicers must also see the involvements of investors who bought the mortgage pools for the hard cash flowing they generate. If the hard cash flowing driblets because of loan modifications, some investors will be unhappy.

Mr. St Simon would not state how many loans Countrywide had modified and bought back as a consequence of the pooling agreements. But Countrywide's fiscal statements from last twelvemonth show that it bought fewer delinquent loans out of securitization physical things than in former years. Those purchases totaled $1.5 billion last year, down from $3.8 billion in 2005 and $3.4 billion in 2004.

Under most agreements, the amount of loans that tin be modified in any pool is limited to 5 percent, unless the mortgage borrowers are defaulting or look to be about to default. Mr. St Simon said that the pooling understandings indicating that Countrywide was obligated to purchase back modified loans applied only to mortgages that are not in danger of defaulting.

But the linguistic communication in the pooling understandings from 2004 through much of 2007 makes not state this clearly. Only as of April 1 make Countrywide's pool footing get stating that the company is not required to repurchase modified loans.

Mr. St Simon said this alteration in linguistic communication was made to clear up the original purpose of the agreements.

Many subprime loans being serviced by Countrywide are in trouble. As of June 30, almost one in four subprime loans serviced by the company were delinquent, up from 15 percentage in the time period a twelvemonth ago. Almost 10 percentage were delinquent by 90 years or more than versus last year's charge per unit of 5.35 percent.

Loans can be modified to seek to maintain householders from losing their property. Major alterations like reducing the involvement charge per unit are considered a loan modification.

Lesser alterations are not, strictly speaking, modifications. Getting a delinquent borrower current on a loan by adding the payments that are owed is considered a forbearance, not a loan modification.