On December 1, Greenwich Financial Services Distressed Mortgage Fund 3. LLC and QED LLC filed a putative class action lawsuit on behalf of themselves and other similarly situated persons against Countrywide Financial (now a subsidiary of Bank of America) based on the modification of approximately 400,000 home mortgage loans held in some 374 securitization pools that Countrywide services. The legal claims are based on contract: under the pooling and servicing agreements that cover each of the pools, Countrywide’s modification of a mortgage loan allegedly triggers Countrywide’s duty to purchase the loans on which such modification resulted in a reduction of payments to the holders of the securities issued by the pools. Plaintiffs seek a declaratory judgment from the Supreme Court of the State of New York that Countrywide must now purchase all of the loans it modified.

While this action may be the first of what will be many lawsuits against servicers who modify home loans, this particular complaint is significant because the Countrywide modification plan is the result of a settlement on October 6, 2008 with the attorneys general of fifteen states. The attorneys general had claimed that Countrywide had engaged in unfair and deceptive practices in connection with its loan origination and servicing businesses. Countrywide settled the matters by agreeing, among other things, to a modification plan with certain parameters including modifications to loans so that first-year payments of principal, interest, taxes, and insurance would not exceed 34 percent of the borrower’s income. The plaintiffs’ lawsuit purports to “make no complaint about the settlement between the [a]ttorneys [g]eneral and Countrywide” and presents an interesting question about the relative strength of state civil claims and investor claims.