February 01, 2008

The Legal Infrastructure of Subprime and Nontraditional Home Mortgages

Patricia A. McCoy, Elizabeth Renuart

UCC08-5: In this chapter, we provide a critical analysis of the legal landscape of residential mortgage lending and explain how federal law abdicated regulation of the subprime market. In the loan origination market, federal deregulation and preemption of state law combined to produce a system of dual regulation of home mortgages which precipitated a race to the bottom in mortgage lending standards. In the process, numerous aggrieved borrowers were left with little or no recourse for abusive lending practices. Even borrowers who do have valid claims and defenses against their originators find their legal safety net similarly frayed. That is because in cases where their loans were securitized – as were the vast majority of loans – the antiquated legal doctrines surrounding securitization strip those borrowers of most claims and defenses in foreclosure actions brought by securitized trusts. This laissez-faire state of residential mortgage law, combined with the absence of elementary legal protections for the nation’s most vulnerable borrowers, have coalesced to produce the worst foreclosure crisis in the United States since the Great Depression…

Category: Working Papers

Read More About: Housing Markets & Conditions, Homeownership, Affordability