Law Commons^™

Deterring "Double-Play" Manipulation In Financial Crisis: Increasing Transaction Cost As A Regulatory Tool, Lin (Lynn) Bai, Rujing Meng

Faculty Articles and Other Publications

The sub-prime mortgage crisis that originated in the United States has triggered a global credit crunch, threatening the solvency of emerging markets that have relied heavily on foreign debt, and resulting in the devaluation of their currencies. Currency market interventions by the central banks in countries with a currency board system lead to higher short-term interest rates and further declinations in the local stock market. This economic setting invites the double-play manipulation strategy that simultaneously attacks both the local currency and the stock market. History has shown that a central bank’s stock market intervention is costly and that sustaining the …

Code, Crash, And Open Source: The Outsourcing Of Financial Regulation To Risk Models And The Global Financial Crisis, Erik F. Gerding

Erik F. Gerding

The widespread use computer-based risk models in the financial industry in the last two decades enabled the marketing of more complex financial products to consumers, the growth of securitization and derivatives, and the development of sophisticated risk management strategies by financial institutions. Over this same period, regulators increasingly delegated or outsourced vast responsibility for regulating risk in both consumer finance and financial markets to these private industry models. The proprietary risk models of financial institutions thus came to serve as a “new financial code” that regulated transfers of risk among consumers, financial institutions, and investors.

The spectacular failure of financial …

Code, Crash, And Open Source: The Outsourcing Of Financial Regulation To Risk Models And The Global Financial Crisis, Erik F. Gerding

Publications

The widespread use of computer-based risk models in the financial industry during the last two decades enabled the marketing of more complex financial products to consumers, the growth of securitization and derivatives, and the development of sophisticated risk-management strategies by financial institutions. Over this same period, regulators increasingly delegated or outsourced vast responsibility for regulating risk in both consumer finance and financial markets to these privately owned industry models. Proprietary risk models of financial institutions thus came to serve as a "new financial code" that regulated transfers of risk among consumers, financial institutions, and investors.

The spectacular failure of financial-industry …

The Great Bailout Of 2008-09, Frederick Tung

Faculty Scholarship

My task today is to talk about the financial crisis. I only have a short time to talk, so rather than try to give you a comprehensive analysis of events, I'm going to offer some of my own idiosyncratic takes on what has been happening. In addition, I will introduce my own small reform proposal for regulating bank risk taking. So, I'll give you a little bit of news, a little bit of weather, a little bit of everything.

Where are we now? Let us begin with a statement Henry Paulson made six months ago while Bear Steams was getting …

Legal And Policy Choices In The Aftermath Of The Subprime And Mortgage Financing Crisis, Gerald Korngold

Articles & Chapters

This essay, delivered at a symposium at the University of South Carolina in October 2008 and forthcoming in South Carolina Law Review, sets out initial thoughts about to the legal and policy choices that decision makers must address in the aftermath of the subprime crisis that has since triggered a global financing crunch. After tracing a narrative of how subprime lending grew into a mortgage financing crisis and then a broader financial dislocation, the essay addresses two issues. First, while it is commonly stated that increased regulation will be required in secondary mortgage markets going forward, the essay explores competing …

Lessons From The Subprime Debacle: Stress Testing Ceo Autonomy, Steven A. Ramirez

Saint Louis University Law Journal

No abstract provided.

The Law And Economics Of Subprime Lending, Todd J. Zywicki, Joseph D. Adamson

University of Colorado Law Review

The collapse of the subprime mortgage market has led to calls for greater regulation to protect homeowners from unwittingly trapping themselves in high-cost loans that lead to foreclosure, bankruptcy, or other financial problems. Weighed against the losses of the widespread foreclosure crisis are the benefits of financial modernization that have accrued to many American families who have been able to become homeowners who otherwise would not have access to mortgage credit. The bust of the subprime mortgage market has resulted in high levels of foreclosures and unparalleled problems on Wall Street. However, the boom generated unprecedented levels of homeownership, especially …

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, …

Deeply And Persistently Conflicted: Credit Rating Agencies In The Current Regulatory Environment, Timothy E. Lynch

Timothy E. Lynch

Credit rating agencies have a pervasive and potentially devastating influence on the financial well-being of the public. Yet, despite the recent passage of the Credit Rating Agency Reform Act, credit rating agencies enjoy a relative lack of regulatory oversight. One explanation for this lack of oversight has been the appeal of the potentially self-regulating nature of credit rating agencies that claim to rely deeply on their reputational standing within the financial world. There are strong arguments for doubting this reputational concern, including the conflicting self-interest of credit rating agencies whose profits are gained or lost depending on their ability to …

Subprime Market Roller Coaster Disaster, Willa E. Gibson

Willa E Gibson

This essay discusses the economic and societal implications of the subprime market losses with an emphasis on the federal regulators’ inability to curtail such losses. It discusses collateralized mortgage obligations and how these debt securities fueled the subprime market. The essay discusses how each of the players – lenders, debtors, investment bankers, securities firms and investors – speculated on homes whose values were a mere illusion. It describes how each party along the chain starting with the lender, used basic risk-shifting principles to engage in reckless speculation assuming they could externalize the cost associated with their behavior. It also identifies …

Federal Regulation And Legislation In The Wake Of The Subprime Mortgage Meltdown: A Legal Philosophical Analysis Of Federal Government Responses To Market Bubbles, Joshua Wirth

Fordham Journal of Corporate & Financial Law

No abstract provided.

The Federal Government’S Implied Guarantee Of Fannie Mae And Freddie Mac’S Obligations: Uncle Sam Will Pick Up The Tab, David J. Reiss

David J Reiss

This article provides the most comprehensive statutory analysis to date of the federal government’s implied guarantee of Fannie Mae and Freddie Mac’s financial obligations. Fannie and Freddie together have $4.45 trillion in mortgage-related obligations. The magnitude of their obligations can only be understood in comparison to the amount of outstanding U.S. government debt -- $5.04 trillion. Given the ongoing meltdown of the residential mortgage market, it is important that the implied guarantee be understood for what it is, a contingent liability of the federal government. After explaining the nature of the implied guarantee and the risks that it poses, the …

Critical Mass: Restricting Advocates’ Rights Under The Community Reinvestment Act, Ruth S. Uselton

NYLS Law Review

No abstract provided.

Racial Disparities In Subprime Home Mortgage Lending In New York City: Meaning And Implications, Richard Marsico, Jane Yoo

NYLS Law Review

No abstract provided.

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 …

Turning A Blind Eye: Wall Street Finance Of Predatory Lending

Patricia A. McCoy

Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization …

Rethinking Disclosure In A World Of Risk-Based Pricing

Patricia A. McCoy

The residential mortgage market in the United States has changed significantly since the passage of current federal mortgage disclosure laws in the 1960s and 1970s. In this Article, Professor Patricia McCoy advocates for the reform of these traditional disclosure rules. After describing the evolution of the subprime mortgage market and providing a description of current federal disclosure laws, she explores how these new market dynamics cause the traditional disclosure rules to break down in the subprime market. Professor McCoy concludes with proposals to counteract false advertising practices, facilitate "meaningful comparison-shopping, and formulate streamlined disclosures addressing loan applicants' greatest concerns in …

The Litigation Financing Industry: The Wild West Of Finance Should Be Tamed Not Outlawed, Susan Lorde Martin

Fordham Journal of Corporate & Financial Law

No abstract provided.

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 …