Foreclosure doomsday scenario (cont'd)

Warnings were sounded last week that the mess over foreclosure paperwork might provide an opportunity for investors who got suckered into mortgage-backed securities. And so it's happened: A group of institutional bond investors has raised objections to the handling of 115 bond deals issued by affiliates of Countrywide Financial. From the WSJ:

The investor actions, which seek to have certain loans be repurchased among other things, come as Bank of America on Monday took steps to defuse claims that its foreclosure troubles are deep-seated. The bank on Monday said it was restarting the foreclosure of more than 100,000 homes. The letter, to Bank of New York Mellon Corp. and Bank of America, cited Bank of America's "failure to observe and perform, in material respects" its duties as the servicer for the bond deals. The failure to properly handle the loans "has materially affected the rights" of bondholders, the letter said.

This could be a big deal if banks were required to buy back those bonds - so big, in fact that the government might be forced to intervene. But just because the bondholders are stepping up efforts to recoup their losses doesn't mean the courts with go along. And time is running out:

Under New York contract law, investors generally have six years from the time of a securitization to put back loans that violate representations and warranties, [NY securities lawyer David] Grais says. State securities law generally gives investors one to four years after they discover a legal violation to put back bonds that weren't accurately described in disclosure documents.