Number: RL34379
Title: Constitutional Issues Relating to Proposals for Legislation to Impose an Interest Rate Freeze/Reduction on Existing Mortgages
Authors: David H. Carpenter, American Law Division 
Abstract: This report presents an overview of Congress's authority, pursuant to the Commerce and Bankruptcy Clauses, to pass laws pertaining to mortgages, and reviews Contract Clause, Substantive Due Process, and Takings Clause jurisprudence. After explaining why Contract Clause and Substantive Due Process claims appear less relevant to the question, this report considers the test a court would likely use in assessing whether a federal interest rate freeze/reduction would offend the Takings Clause, while pointing out that courts could apply a different test in this situation. It also suggests that courts' analyses could vary according to whether they focus on the impact that an interest rate freeze/reduction has on whole MBS trusts or specific investment tranches of those trusts. Where the focus is on tranches of mortgage-backed securitized trusts, a federal interest rate freeze/reduction, in a minority of cases, potentially could be considered a "taking" requiring just compensation for the purpose of the Fifth Amendment. Such a finding would be even less likely where the focus is on the impact to whole trusts.
Pages: 16
Date: June 11, 2008