2011] THE MORTGAGE MELTDOWN: 543
LESSONS FROM UNDERCAPITALIZATION
encouraging borrowers to take out no-money-down loans, can be
attributed to a host of factors.
53
Most markedly, the burgeoning
securitization market permitted lenders to assign to third- and fourth-
parties the default risks associated with mortgages.
54
Under this
complex assignment process, parties could neither foresee nor insulate
themselves from the effects of the ensuing subprime mortgage crisis.
55
Securitization is one of the most important financial tools in a
modern economy.
56
It enables a company, the “originator,” to use its
assets that produce a predictable cash flow to achieve interim financing
for its business activity.
57
The securitization process is based on
separating specific receivables from the originator’s other assets and
selling them to a Special Purpose Vehicle (“SPV”). The SPV finances
the purchase of the receivables by issuing Asset-Backed Securities
(“ABS”) (i.e., securities that are backed by the receivables).
58
The cash
flow produced by the securitized receivables is used as the source of
funds to pay the investors in the ABS.
59
The practice of securitization emerged from the sale of securities
53. Arguably, one such factor was the intense competition amongst banks. See
generally Jacob A. Bikker et al., Misspecification in the Panzar-Rosse Model:
Assessing Competition in the Banking Industry, (De Nederlandsche Bank, Working
Paper No. 114, 2006), available at http://www.dnb.nl/binaries/Working%
20Paper%20114-2006_tcm46-146771.pdf (exploring competition in the banking
sector).
54. See Mortgage Foreclosure Hearing, supra note 5; Mian & Sufi, supra note 5;
Keys et al., supra note 5; Laeven et al., supra note 5.
55. For a discussion of how the complexity in modern financial markets acts as a
catalyst of market failure, see Steven L. Schwarcz, Regulating Complexity in Financial
Markets, 87 W
ASH. U. L. REV. 211 (2009).
56. Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1, 24 (1996); Thomas
E. Plank, Bankruptcy Professionals, Debtor Dominance, and the Future of Bankruptcy:
A Review and a Rhapsody on a Theme, 18 B
ANKR. DEV. J. 337, 362 (2002) (reviewing
D
AVID A. SKEEL, JR., DEBT’S DOMINION: A HISTORY OF BANKRUPTCY IN AMERICA
(2001)); Edward M. Iacobucci & Ralph A. Winter, Asset Securitization and Asymmetric
Information, 34 J.
LEGAL STUD. 161, 162 (2005).
57. Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 STAN. J.L. BUS. &
FIN. 133, 135 (1994); The Comm. on Bankr. & Corp. Reorganization of the Ass’n of
the Bar of the City of N.Y., Structured Financing Techniques, 50 B
US. LAW. 527, 529
(1995); Robert Stark, Viewing the LTV Steel ABS Opinion in its Proper Context, 27 J.
CORP. L. 211, 213 (2002).
58. Iacobucci & Winter, supra note 56, at 164.
59. Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution,
Current Issues and New Frontiers, 69 T
EX. L. REV. 1369, 1376 (1991).