Academic

Cohen & O'Byrne on Law, Emotion, & the Subprime Mortgage Crisis

By Lawrence Solum

Ronnie Cohen and Shannon K. O'Byrne (Christopher Newport University and University of Alberta) has posted Burning Down the House: Law, Emotion, and the Subprime Mortgage Crisis (Real Property, Trust and Estate Law Journal, Forthcoming) on SSRN. Here is the abstract:

This paper contends that an important but under-explored cause of the United States? subprime mortgage crisis is contract law?s derisory response to emotion and the defective risk allocation model that it helped to generate. Contract law cannot deal proactively or fairly with emotions ? including irrational public enthusiasm and the deep desire for home ownership ? because it views the world through the steely eyes of the reasonable man. As a countermand, the law must work to stave off disastrous subprime loans, especially for the honest, first-time buyer, by acknowledging that housing contracts have a concentrated emotional overlay. The paper examines legislative reform to date, which has made some progress in re-establishing the financial link between originating lender and borrower (which securitization has recently disrupted) as well as in requiring enhanced and meaningful mortgagee disclosure in order to ameliorate contract law?s inability to address the emotional component of many mortgage transactions.

Full post as published by Legal Theory Blog on February 24, 2011 (boomark / email).