January 01, 2012

Law, Emotion, and the Subprime Mortgage Crisis

An important cause of the subprime mortgage crisis was contract law’s derisory response to emotion and the defective risk-allocation model that contract law helped generate in both the common law and the regulatory environment. A proper understanding of emotion in mortgage markets is essential to determine whether recently enacted federal legislation addressing mortgage lending reform has hit its mark.

Emotion in the mortgage contract. The dream of home ownership is a long-standing part of America’s cultural fabric. First-time buyers were a group particularly motivated by the American Dream—home ownership gave them the opportunity to escape the rental market.

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