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 among young, low-income, and minority borrowers, putting them on a road to economic comfort and stability. Sensible regulation of subprime lending should seek to curb abusive practices while preserving these benefits. This Article reviews the theories and evidence regarding the causes of the turmoil in the subprime market. It then turns to the question of the rising number of foreclosures in the subprime market in order to understand the causes of rising foreclosures. In particular, it examines the competing models of home foreclosures that have been developed in the economics literature-the "distress" model and the "option" model. Establishing a correct model of the causes of foreclosure in the subprime market is necessary for sensible and effective policy responses to the problem. The focus in this Article is on the consumer protection side of the equation. As this Article goes to press, the federal government has authorized a massive "bailout" of the banking industry, raising issues which largely lie outside the scope of this Article. New regulations and other interventions into the consumer side of the market have been modest.
Todd J. Zywicki & Joseph D. Adamson,
The Law and Economics of Subprime Lending,
U. Colo. L. Rev.
Available at: https://scholar.law.colorado.edu/lawreview/vol80/iss1/2