Home -> Law Blog Directory -> Law Students Blogs -> Nuts & Boalts

Law Students

: Nuts & Boalts

SF Gate: Investors Should Pony Up, Too

Via the SF Gate:

Congress' bailout of Fannie Mae and Freddie Mac, which effectively guarantees the debt they sold to investors, is fundamentally at odds with a basic principle of contract law that every first year law student must master: the written terms of the contract apply even if those terms are contrary to any verbal ([or] oral) statements made by the other party to the contract. The bailout says that this cornerstone of contract law doesn't apply to investors who purchased Fannie and Freddie debt securities. Even though the debt obligations issued by Fannie and Freddie are not by their written terms guaranteed by the federal government, Fannie and Freddie officials made oral statements that led investors to believe otherwise.

On the other hand, individual borrowers are being held to the precise terms of the mortgage-debt instruments they signed with financially devastating results for many.

I assume the "cornerstone of contract law" is the parol evidence rule, and is actually a tad more complex than the author, adjunct professor James Tuthill, from the University of San Francisco School of Law, makes out in this piece. All the same, his point is well-taken.

Professor Tuthill goes on to explain that if the loan agreements are going to be modified to deliver a new benefit (i.e., a federal guarantee)to investors, those investors need to provide consideration in return (presumably by restructuring consumers' loan plans). While that argument is probably now precluded by the statute that enacted the bailout, Professor Tuthill's observation does make gut-level sense, at least to me.

If it doesn't make gut-level sense to you, try thinking about it another way (i.e., Armen's way): it only seems fair that when parties enter into a contractual relationship, the decision to enter into a new, materially different, contractual relationship should be mutually bargained for -- otherwise the contractual relationship one party expected to enter into may be different from the contractual relationship that party actually entered into, and to which that party is ultimately bound.

Yuck. The point being, Congress could share a little love with borrowers, too.

Full post as published by Nuts & Boalts on August 07, 2008 (boomark / email).