U.S. mortgage investors fear added legal costs

* Banks may try to pass along legal costs to investors

* Investors claim to have borne these costs before

* Future AG settlement could reach $4.3 billion- estimate

* Banks legal arguments may be shaky

By Dan Levine

SAN FRANCISCO, Oct 20 (BestGrowthStock) – U.S. mortgage bond
investors fear that they will end up bearing the legal costs of
bad foreclosure paperwork, instead of the banks that made the
errors.

Homeowners and their lawyers have accused banks of cutting
corners when trying to foreclose on thousands of homes,
through, for example, failing to get proper signatures on legal
affidavits.

Attorneys general in all 50 states said last week they are
looking into accusations that banks submitted false statements
and failed to properly review files before evicting
homeowners.

Even if banks successfully defend themselves against these
charges, their legal fees are likely to jump, investors said on
Wednesday. At issue is who will bear those costs, lawyers
said.

“Banks will try to shove it down the throats of investors,”
said attorney David Grais. “That’s what Countrywide did and it
succeeded handsomely.”

In a 2008 settlement between Bank of America (BAC.N: ) and
some 11 state attorneys general over predatory lending
allegations, the bank’s Countrywide unit agreed to modify $8.4
billion in loans.

Investors claimed they paid the costs in the form of lower
interest and principal payments. Last week a judge threw out a
lawsuit over the deal because the plaintiffs had not gathered
enough investors to bring a claim.

Mortgage bond investors hold more than half of the roughly
$11 trillion of U.S. residential home loans.

In the current foreclosure mess, in which there have been
nearly 3 million home foreclosures since January 2007 investors
are working hard to minimize their losses. They fear that money
that would have otherwise been paid to them as principal and
interest will instead be used to pay for settlements and
lawyers’ costs.

Banks may have a weak legal argument for taking investors
money for legal costs, said investor attorney Talcott Franklin.
Generally, the standard for recovering attorneys fees is that
the fees must be reasonable and necessary to the work
performed, Franklin said.

“I think it would be difficult for someone to argue that
fees associated with a false affidavit were reasonable or
necessary,” Franklin said.

PAST IS PROLOGUE?

The costs could be high. A potential settlement of the case
by the 50 attorneys general could range between $1.3 and $4.3
billion, according to a Royal Bank of Scotland estimate. Other
settlements could add to that figure.

Representatives for JPMorgan Chase Co (JPM.N: ) and Bank of
America declined to comment on the issue, while an Ally
spokeswoman did not respond to questions.

The Countrywide settlement in 2008 may not be similar to
the current state probes, however. Laurie Goodman, senior
managing director at Amherst Securities, thinks there is only a
small likelihood state attorneys general will be able to
leverage the current foreclosure problems into mass loan
modifications. And small monetary settlements will be harder
for servicers to pass along to the trusts, she said.

Geoff Greenwood, a spokesman for the Iowa attorney general,
said he is not aware of discussions surrounding these issues,
but added that “we are being fairly careful about our internal
deliberations.”
(Reporting by Dan Levine; Editing by Jackie Frank)

U.S. mortgage investors fear added legal costs