Legal and Policy Choices in the Aftermath of the Subprime and Mortgage Financing Crisis

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 policy considerations that legislators and regulators must balance in developing effective regulation and not overregulation. These policy issues include: the benefits of the secondary mortgage; the globalization of capital; prevention of fraud and predatory lending; personal responsibility vs. paternalism; market discipline vs. regulation; ending racial discrimination in lending; the role of intermediation in creating the crisis; the current state of the American dream of home ownership; and addressing risk shifting vehicles. The second part of the essay examines how the development of the secondary market has changed mortgage law in the various states. It discusses the benefits, and costs, of the nationalization of real estate documents and terms brought by Fannie Mae and Freddie Mac and speculates on how conservatorship of these institutions may affect this trend. The essay also looks at modernization of state mortgage law in light of the secondary market, through vehicles such as MERS, and the lessons that the crisis teaches about the modernization trend. It argues that the beneficial aspects of modernization should be retained and suggests other changes that would better reflect commercial reality (e.g., changes in assignment rules for mortgages, documentation for foreclosure), but asserts that increased consumer protection and transparency are also necessary for fair and effective secondary market transactions