Friday, December 7, 2007

The Federal Bailout: Part I

On December 6, the President and Treasury Secretary announced a limited private response to the subprime mortgage crisis. RLR covered it here. At the same time, in the background the House Financial Services Commitee is working on a public response. Rep. Michael Castle (R-Del) introduced in November the Emergency Mortgage Loan Modification Act of 2007. The bill modifies the Truth in Lending Act to provide mortgage servicers a six-month 'safe harbor' from lawsuits by investors while servicers work out modifications to loan terms to stave off wide-spread default and foreclosures. The bill has drawn criticism that it retroactively affects private contracts ad may run afoul of constitutional protection for property rights.

The FDIC is urging a more conservative (and far more complicated) approach to the problem of investor disgruntlement. Through written testimony to the House Financial Services Committee, FDIC Chair Sheila Blair recommended that instead of a safe harbor style moratorium on investor litigation against servicers, the bill should impose, absent contract language to the contrary, an obligation on servicers to maximize the net present value of the loan pool for all investors, and expressly deeming servicers who implement across the board loan modifications as "acting in the best interests of investors," provided the modifications meet certain specified criteria. Bair's approach is more conservative than Castle's bill in that it clarifies servicers' obligations to investors in a way that is arguably consistent with existing law. But it is more aggressive, and costly for investors, in that it clamps down the lid on investors' legal redress against servicers forever, provided the servicer acts consistently with proposed provisions.

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