Law Commons^™

Avenues To Foreign Investment In China’S Shipping Industry—Have Lease Financing Arrangements And The Free Trade Zones Opened Markets For Foreign Non-Bank Investment?, Rick Beaumont

Rick Beaumont

No abstract provided.

Avenues To Foreign Investment In China’S Shipping Industry—Have Lease Financing Arrangements And The Free Trade Zones Opened Markets For Foreign Non-Bank Investment?, Rick Beaumont

Rick Beaumont

No abstract provided.

The Fhfa's Proposed Single Security Structure, David J. Reiss

David J Reiss

The Federal Housing Finance Agency (FHFA) has posted a Request for Input on “the proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac.” The FHFA states it is most concerned with achieving “maximum secondary market liquidity” (Request for Input, at 8)

I am skeptical about the reasons for this move to a Single Security and whether it will achieve maximum liquidity. Moreover, it is unclear to me that this move reflects an urgent need for the FHFA, the two companies, originating lenders or borrowers. While I have no doubt that it …

The Future Of The Private Label Securities Market, David J. Reiss

David J Reiss

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with …

Dodd-Frank’S Risk Retention Requirement: The Incentive Problem, Amy L. Mcintire

Amy L. McIntire

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law (Dodd-Frank). Promulgated by Congress to promote the financial stability of the United States by improving accountability and transparency in the financial system, the bill represented an almost complete overhaul of the entire financial regulation system. Specifically, a provision in the bill mandated that securitizers “retain not less than five percent of the credit risk for any asset,” and this requirement became known as the “risk retention requirement.” Legislators hoped that, by forcing securitizers to hold onto a percentage of the risk …

Who Should Be Providing Mortgage Credit To American Households?, David J. Reiss

David J Reiss

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance …

What Role Can An International Financial Centre’S Law Play In The Development Of A Sunrise Industry? The Case Of Hong Kong And Solar Powered Investments, Bryane Michael

Bryane Michael (bryane.michael@stcatz.ox.ac.uk)

How can international financial centres like Hong Kong increase assets under management – and thus their size and ranking? Most policymakers and their advisors wrongly answer this question by focusing on financial institutions, and the law that governs them. Instead, policymakers need to start by looking at actual markets. What new tastes and technologies need funding? How can such funding fit into already existing geographies of production, distribution and finance? In this paper, we show how a focus on funding sunrise industries can help increase assets under management for the financial institutions operating in an international financial centre like Hong …

Goliath Versus Goliath In High-Stakes Mbs Litigation, David J. Reiss, Bradley T. Borden

David J Reiss

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles …

Ten Dollars For 10,736 Mortgages: Should Nominal Consideration Supersede Real Property Recording Law, John P. Hunt

John P Hunt

Our review of mortgage securitization transactions from 2005 to 2007 suggests that many intermediate mortgage transfers structured as promissory note sales involved the exchange of only nominal or other dubious consideration. The Uniform Commercial Code requires consideration “sufficient to support a simple contract” as a prerequisite for treatment of a transaction as a promissory note sale. Treatment as a sale triggers the Code’s “mortgage follows the note” provisions, which may protect transactions from claims that the mortgages involved are unenforceable, are vulnerable to competing claimants, or were never transferred in the first place. Mortgage securitization transactions are potentially exposed to …

Competition And Crisis In Mortgage Securitization, Michael N. Simkovic

Michael N Simkovic

U.S. policymakers often treat market competition as a panacea. However, in the case of mortgage securitization, policymakers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S. history - during the 1880s, the 1920s, and the 2000s - and every time it has failed. Most recently, competition between mortgage securitizers led to a race to the bottom on mortgage underwriting standards that ended in the late 2000s financial crisis. This article provides original evidence that when competition was less intense and securitizers had more market power, securitizers acted to monitor mortgage originators and to maintain …

All In One Basket: The Bankruptcy Risk Of A National Agent-Based Mortgage Recording System, John P. Hunt

John P Hunt

Mortgage Electronic Registration Systems, Inc. (“MERS, Inc.”) owns legal title to some 30 million mortgages in the United States. The company, which was a key part of the mortgage securitization apparatus in the late 1990s and 2000s, is now under intense pressure from public and private lawsuits and investigations and faces a very real threat of insolvency. Policymakers are looking ahead to potential replacements for MERS, Inc., as a recent Fed staff proposal for a substitute system indicates. This Article examines what might happen to the mortgages that MERS, Inc. at least nominally owns in the event that the company …

Dodd-Frank, Securitization, And The Subprime Mortgage Crisis, Stephen P. Hoffman

Stephen P. Hoffman

There are few things more constant in life than the rise and fall of financial markets. When markets crash, however, we are forced to restore them while learning from our mistakes. In the wake of the recent subprime mortgage crisis, Congress has drastically but deservedly overhauled the regulation of financial markets in order to not only prevent such disasters in the future, but to help restore financial stability more quickly if and when they do occur. In this Paper, I provide a background of the events leading up to the most devastating financial crisis since the Great Depression, focusing on …

The Uncertainty Of “True Sale” Analysis In Originator Bankruptcy, Stephen P. Hoffman

Stephen P. Hoffman

While much of law is complex or unclear, it is unusual for a judge to comment that a legal doctrine is so unsettled that courts “could flip a coin” to decide an issue. Unfortunately for practitioners, determining what constitutes a “true sale” for bankruptcy purposes is such an issue. Add to this the recent novel and innovative processes of structured finance and asset-backed securitization, and you have the stuff of law students’—and corporate counsels’—nightmares. As a result, courts and legislatures need to provide clarity in this area so that originators can safely structure investments and transactions, not only for the …

Complexity, Innovation And The Regulation Of Modern Financial Markets, Dan Awrey

Dan Awrey

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory; the Modigliani and Miller capital structure irrelevancy principle; the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in …

The End Of Mortgage Securitization? Electronic Registration As A Threat To Bankruptcy Remotenes, John P. Hunt, Richard Stanton, Nancy Wallace

John P Hunt

A central tenet of asset securitization in the United States—that assets are bankruptcy remote from their sponsors—may be threatened by innovations in the transfer of mortgage loans from the loan-originators (sponsors) to the legal entities that own the mortgage pools (the Special Purpose Vehicles (SPVs)). The major legal argument advanced in the paper is that because the mortgage is an interest in real property, the bankruptcy-remoteness rules applicable to real property, including § 544(a)(3) of the Bankruptcy Code, create a risk to the bankruptcy remoteness of mortgage transactions unless proper recording occurs. We review the traditional mortgage transfer process and …

Is Competition The Solution Or The Problem? An Analysis Of U.S. Mortgage Securitization, Michael N. Simkovic

Michael N Simkovic

This article’s original contribution to the literature about the causes of the U.S. mortgage crisis of the late 2000s is to analyze two important causes that have thus far only been discussed in passing. First, this article provides evidence that fragmentation of the securitization market in the mid-2000s and competition between mortgage securitizers undermined securitizers’ ability to control originators, and that such competition led to a race to the bottom on underwriting standards. Second, this article provides evidence of a shift in market power away from securitizers and toward originators during the mid-2000s, and argues that this shift in power …

Dodd-Frank And Basel Iii’S Skin In The Game Divergence And Why It Is Good For The International Banking System, Eric M. Thompson

Eric M Thompson

The recent financial collapse has illuminated many problems with the global financial system. One of these problems was that the financial system developed in a way that allowed banks to profit by simply making more loans instead of quality loans. After the financial collapse, regulators scrambled to enact new legislation to better manage the financial system and avoid the problems that caused the collapse. One way in which regulators attempted to improve the system was to remove the ability of banks to generate limitless loans in which the banks had no stake. Two such pieces of regulation, the Dodd-Frank Wall …

“Offsetting” Crisis? – Climate Change Cap And Trade Need Not Contribute To Another Financial Meltdown, Victor B. Flatt

Victor B Flatt

Much of the fear of a cap and trade system to control greenhouse gases concerns the financial instruments that will be created in such a system and the concern that they will lead to another financial crisis. This belief may have been a major contributor to the defeat of cap and trade in the U.S. Senate. However, greenhouse gas cap and trade systems can be structured to avoid the problem of toxic assets that led to the financial crisis while still retaining real greenhouse gas control with an efficient market. Given that cap and trade still exists in many greenhouse …

Obeying The Letter And Violating The Spirit, Jeffrey Martin

Jeffrey Martin

Tens of millions of home mortgage loans, with a face value running into the trillions of dollars, may not be collectable. Furthermore, the owners of those homes may not be able to get clear title in the event that they pay off the mortgage. The Mortgage Electronic Recordation System is a foundational piece of the modern American mortgage system, and is thus at the base of the financial system as a whole. This system has come under substantial legal challenges in recent years. In some forums MERS has prevailed; in others it has not. The uncertainty surrounding transfers of interests …

Lessons In Price Stability From The U.S. Real Estate Market Collapse, Andrea J. Boyack

Andrea J Boyack

The U.S. residential housing market collapse illustrates the consequences of ignoring risk while funding mortgage borrowing. Collateral over-valuation was a foundational piece of the crisis. Over the past few decades, secondary markets, securitization, policy and psychology increased the flow of funds into real estate. At the same time, financial market segmentation divorced risk from reward. Increased mortgage capital availability, unmitigated by proper risk allocation, led to real estate price inflation. Social trends and government policies exacerbated both the mortgage capital over-supply and the risk-valuation disconnect.

The Dodd-Frank Act inadequately addresses the underlying asset valuation problem. Federal regulation may support market …

• The Credit Crisis And Subprime Litigation: How Fraud Without Motive ‘Makes Little Economic Sense’, Peter Hamner

Peter Hamner

The recent collapse of the financial markets spurred numerous lawsuits seeking a faulty party. Many plaintiffs argue that market participants committed securities fraud. They claim that deficient subprime loans caused the financial crisis. These risky loans were allegedly originated by banks to be sold off to third parties. The subprime loans were securitized and spread throughout the financial markets. The risk these loans presented was allegedly not disclosed to the buyers of the loans and securities on the loans. As these deficient loans and securities began to default the financial markets came to a halt. This article argues that securities …

What’S In A Name? The Role Of Danielson In The Taxation Of Credit Card Securitizations, Grace S. Lee

Grace S Lee

While the doctrine of substance over form has been a part of tax law for over seventy years, courts look disfavorably upon taxpayers who invoke the doctrine to argue against the forms of their own transactions under what is commonly referred to as the Danielson rule. Although the Danielson rule appears sound on its face, it holds less force when applied outside of its original context. In particular, the Danielson rule should not apply when the form given to a transaction is given for non-tax reasons, such as to achieve a particular accounting treatment. The taxation of credit card securitizations …

What’S In A Name? The Role Of Danielson In The Taxation Of Credit Card Securitizations, Grace S. Lee

Grace S Lee

While the doctrine of substance over form has been a part of tax law for over seventy years, courts look disfavorably upon taxpayers who invoke the doctrine to argue against the forms of their own transactions under what is commonly referred to as the Danielson rule. Although the Danielson rule appears sound on its face, it holds less force when applied outside of its original context. In particular, the Danielson rule should not apply when the form given to a transaction is given for non-tax reasons, such as to achieve a particular accounting treatment. The taxation of credit card securitizations …

Secret Liens And The Financial Crisis Of 2008, Michael N. Simkovic

Michael N Simkovic

This article explains the roots of financial crises in one of the oldest and most fundamental problems of commercial law: hidden leverage. Common law courts wrestled with this problem for centuries and developed a time-tested solution: the doctrine of secret liens. If the debtor becomes insolvent, the doctrine of secret liens punishes secret lien holders by subordinating their claims to those of other creditors. In other words, by overriding privately negotiated payment priorities, the doctrine of secret liens creates incentives for transparency. This article argues that legal changes over the last 80 years eroded the doctrine of secret liens, and …

Securitization Of Patents And Its Continued Viability In Light Of The Current Economic Conditions, Aleksandar Nikolic

Aleksandar Nikolic

No abstract provided.

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 …

Innovative Destruction: Structured Finance & Credit Market Reform In The Bubble Era, Aaron J. Unterman

Aaron J. Unterman

The combination of unregulated financial innovation and human greed has, and will continue to have, dire effects on the international economy. The financial crisis which began in the American sub-prime housing market, and spread across the globe, has devastated the structured finance industry and cast doubts on the new era of credit risk transfer, which had come to represent the achievements of financial innovation. This paper explores the role structured finance played in the credit crisis, dissecting the complex instruments which drove the industry and allowed the American sub-prime housing market to infect the international economy. This paper argues that …

Exporting Risk: Global Implications Of The Securitization Of Us Housing Debt, Aaron J. Unterman

Aaron J. Unterman

The process of securitization has revolutionized the global debt market creating vast investment opportunities while fundamentally altering the dynamics of lending risk. Asset securitization allows risks to be transferred from mortgage lenders to investors through the sale of mortgage-backed securities. This detachment of risk has led to a lack of accountability within the industry and the creation of the infamous US sub prime mortgage market. This piece examines the effect of securitization on the international capital market focusing on the legal and economic implications of the rise and fall of the US housing market. It argues that this failure is …

The Regulation Of Covered Bonds Issued By Italian Banks, Valentina Miscia

Bocconi Legal Papers

The present work aims to provide an overview on the regulation of covered bonds which is in force in some European countries (Germany, France and Spain), and then to deeply analyze the recently-enacted Italian regulation. After a brief introduction on what covered bonds are, an insight into Law no.130, 30th April 1999 is given, also in comparison with securitization operations. A specific reading is provided with respect to regulation set by the Treasury Ministerial Decree no.310, 14th December 2006, and the Bank of Italy Instructions no.501981, 17th May 2007. The work focuses on authorized issuers and special purpose vehicles, on …

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 …