Tuesday, August 2, 2011

Solomon & Minnes on Undercapitalization and the Mortgage Meltdown

Dov Solomon (Academic Center for Law & Businesss) and Odelia Minnes (Bar-Ilan) have posted Non-Recourse, No Down Payment and the Mortgage Meltdown: Lessons from Undercapitalization (Fordham Journal of Corporate Law).  Here's the abstract:

The recent global financial crisis, sparked by developments in the American mortgage market, provides a timely opportunity for a thorough analysis of the standard model for financing home purchases. The United States residential mortgage market has two prominent aspects: first, a significant part of mortgages are de facto non-recourse loans that allow the borrower to limit his liability solely to the collateral securing the loan; second, residential mortgages confer the aforementioned advantage on borrowers while requiring merely a minimal down payment, or no down payment at all. This article examines the implications of each of these aspects, as well as the interplay between them. The findings of this examination lead to the novel insight that a non-recourse mortgage with no initial down payment resembles the case of corporate undercapitalization. Utilizing legal analysis and remedies applied in the case of corporate undercapitalization lends insight into creating mortgage arrangements that properly balance the competing interests of the various players in the home ownership credit market.

Steve Clowney


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