Law Commons^™

The Great Collapse: How Securitization Caused The Subprime Meltdown, Kurt Eggert

Kurt Eggert

This Article builds on existing criticism of securitizing subprime loans and argues that one of the primary causes of the subprime meltdown and the resulting economic collapse was the structure of securitization as applied to subprime and other non-prime residential loans, along with the resecuritization of the resulting mortgage-backed securities. Securitization weakened underwriting by discouraging originators from gathering “soft information” about the likelihood of borrower default and instead caused loan originators and other market participants to focus almost exclusively on such “hard information” as FICO scores and loan to value ratios. At each stage of the loan and securitization process, …

Testimony On 'Subprime Mortgage Market Turmoil: Examining The Role Of Securitization', Kurt Eggert

Kurt Eggert

This testimony, before the Senate Subcommittee on Securities, Insurance, and Investments, April 17, 2007, examines the role of securitization in the subprime market turmoil, describing how securitization atomized the lending process and turned over the de facto regulation of the subprime market to private entities such as rating agencies and investment banks. The testimony attributes the meltdown of the subprime market, the increased default rate and threat of rising foreclosures, as well as the difficulty of crafting an adequate response to that meltdown, to the effects of securitization. Securitization led to weakened and inconsistent underwriting standards and allowed many borrowers …

Limiting Abuse And Opportunism By Mortgage Servicers, Kurt Eggert

Kurt Eggert

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

The causes of such practices and the market forces that can rein them in are discussed. A case study of one mortgage servicer describes its unfair treatment of borrowers and the reforms imposed by federal regulators and other market participants. Both regulatory agencies and rating agencies appear to …

2003 Testimony On Securitization And Predatory Lending In A Hearing On 'Protecting Homeowners: Preventing Abusive Lending While Preserving Access To Credit', Kurt Eggert

Kurt Eggert

This 2003 Congressional Testimony warns of the dangers of securitizing subprime loans. After defining "predatory lending" and describing the process of securitization, it argues that securitizing subprime loans has many dangers. While some have claimed that securitizing loans lowers loan costs to borrowers, the reverse might be true and securitization may actually increase the costs of loans to borrowers. This testimony states that securitization undermines loan underwriting. As originators immediately sell their loans and so face less risk of loss even if a borrower defaults, the originators naturally will spend less time and effort screening potential loans for default, thus …