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Interesting Provision of the Bailout Bill
From: David Farber <dave () farber net>
Date: Mon, 29 Sep 2008 05:05:51 -0400

Begin forwarded message:

From: "Hank Levine" <hlevine () lb3law com>
Date: September 28, 2008 11:10:11 PM EDT
To: <dave () farber net>
Subject: Interesting Provision of the Bailout Bill

For IP, if you'd like.

While reading through Emergency Economic Stabilization Bill of 2008, aka the Bailout Bill -- it's more interesting than it has any right to be, honest -- I came across the following nugget in the usually yawn- inducing Savings Clause [Section 119(b)(2)]:

Except as established in any contract, a servicer of pooled residential mortgages owes any duty to determine whether the net present value of the payments on the loan, as modified, is likely to be greater than the anticipated net recovery that would result from foreclosure to all investors and holders of beneficial interests in such investment, but not to any individual or groups of investors or beneficial interest holders, and shall be deemed to act in the best interests of all such investors or holders of beneficial interests if the servicer agrees to or implements a modification or workout plan when the servicer takes reasonable loss mitigation actions, including partial payments.

This language, which hasn't received any media attention that I am aware of, is interesting because one of the major barriers to the restructuring of mortgages in securitized mortgage pools is the fear that if the servicer of the pool writes down any of the mortgages (so that the owner can keep his or her house, for example) it will get sued by investors for breaching its fiduciary duty to maximize the value of their investment. The quoted language seems to be designed to eliminate this risk, thereby making it easier to restructure a mortgage when that's the economically sensible thing to do. In the long run -- and maybe even in the short run -- that could have a major impact on the market.

I could be wrong about this -- although I do a lot of work with statutes, I'm a telecom lawyer, not a finance type -- but it strikes me as potentially significant. Would someone who does this for a living care to comment?

[I didn't mis-copy by the way; the second "any" in the first line is in the bill, but I suspect it's a typo]

Hank Levine
Levine, Blaszak, Block & Boothby, LLP
2001 L Street, NW., Suite 900
Washington, DC 20036
( (202) 857-2540
2    Fax (202) 223-0833
+  hlevine () lb3law com

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in half a second, while it may take twenty years to blow him up with a
book. But the gunpowder destroys itself along with its victim, while a book
can keep on exploding for centuries. -Christopher Morley, writer

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