Who Owns This House?


Most people by now know the story of how speculation in mortgage-backed securities, along with a host of exotic derivatives built around them, created our banking crisis. The bursting of the housing bubble brought down some of our country’s largest financial institutions and plunged us into the Great Recession that began late in 2007. We have fought our way partly back, yet today the ongoing explosion of foreclosures—and the growing realization that many of these foreclosures have been initiated without the required legal documentation—has exposed the possibility of a new chapter in the crisis.

First, some background. Traditionally, most mortgages were issued by banks that hoped to make money on the interest they charged, and thus had good incentives to ensure that borrowers were creditworthy—and that the paperwork necessary in the event of a foreclosure was in order. In the 1980s, however, a secondary market in residential mortgages developed in which lenders (or “originators,” as they are known in that market) did not plan to make money from the interest on the loan, but instead sold them for a quick profit to bond issuers, who in turn repackaged them into mortgage-backed securities to sell to investors. This secondary market pumped a lot of new money into the mortgage market, making credit...

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About the Author

Eduardo Moisés Peñalver is the Allan R. Tessler Dean of the Cornell Law School. He is the author of numerous books and articles on the subjects of property and land use law.