Countrywide Financial Corp., the home lender acquired by Bank of America Corp., was sued by Greenwich Financial Services Fund over claims an agreement to reduce payments on mortgages by $8.4 billion would hurt investors (See: Bank of America agrees to purchase Countrywide Financial Corp).

The hedge fund claims investors will be harmed by Bank of America's settlement, reached on behalf of Countrywide, with 15 state attorneys general. The value of trusts that bought 400,000 mortgages will decline under the deal, the fund said.

In the proposed class action, or group lawsuit, the Greenwich, Connecticut-based fund demands a declaration that ''Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts,'' said David Grais, a lawyer for the fund. Grais said Countrywide could owe the trusts $80 billion.

Countrywide, ensnared by the sub-prime mortgage crisis, was the largest US mortgage lender before Bank of America bought it for $2.5 billion on 1 July. Under an agreement announced in October with 15 state attorneys general, Countrywide will modify mortgages for about 400,000 homeowners to settle allegations of predatory lending. (See: FBI probes Countrywide's financial practices)

''Countrywide plans not to absorb the $8.4 billion reduction in mortgage payments itself, even though it was Countrywide's own conduct of which the attorneys general complained,'' the fund said in the complaint filed yesterday in New York State Supreme Court in Manhattan. Under the settlement, the mortgage lender would ''pass most or all of that reduction on to the trusts that purchased mortgage loans from Countrywide,'' the fund said in the complaint.

Bank of America said it was "disappointed in this attack on a program intended to keep at risk families in their homes" and help stabilize the housing market.

"Countrywide believes that plaintiffs' lawsuit represents an unlawful effort to assert rights of the trusts," the bank said in a statement. "Accordingly, Countrywide intends to pursue plaintiffs for any and all remedies available to it, including the recovery of its costs incurred in having to defend this improper action."

It defended itself by saying that loan modifications have been ''occurring for decades without objections or challenges, so we are especially troubled at the timing of this complaint. No one benefits if we allow these homeowners to advance toward ultimate foreclosure. We are confident any attempt to stop this program will be legally unsupportable,'' the bank added.

The lawsuit relates to two series of securitizations known as CWL and CWALT. Countrywide has denied it is required to repurchase all loans in these two securitizations that it modifies, the complaint said. It said the plaintiffs do not oppose the settlement between the attorneys general and Countrywide but seek a declaration from the court that the lender "is required to purchase any loan on which it agrees to reduce the payments."

The complaint also said that if the trusts "are forced to absorb the reduction in payments occasioned by Countrywide's settlement of the allegations against it, then the value of the securities that those trusts sold to investors will decline."

The October deal calls for Countrywide to modify at least 50,000 mortgage loans from Monday, the day the mortgage modification program began, to 31 March next year, lawyers for the bond investors said.

As for the huge settlement the complainants have mentioned, the concerned lawyer Grais explained, ''We believe that the average unpaid principal balance of these loans is approximately $200,000. If so, and if the court grants the declaration we seek in this complaint, then Countrywide (and its parent Bank of America) would be liable to pay the trusts approximately $80 billion ($200,000 multiplied by 400,000 mortgages) for the loans it modifies.''