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Non-Recourse, No Down Payment and the Mortgage Meltdown: Lessons from Undercapitalization

43 Pages Posted: 29 Jul 2011  

Dov Solomon

College of Law and Business - Ramat Gan Law School

Odelia Minnes

Ono Academic College

Date Written: July 24, 2011

Abstract

The recent global financial crisis, sparked by developments in the American mortgage market, provides a timely opportunity for a thorough analysis of the standard model for financing home purchases. The United States residential mortgage market has two prominent aspects: first, a significant part of mortgages are de facto non-recourse loans that allow the borrower to limit his liability solely to the collateral securing the loan; second, residential mortgages confer the aforementioned advantage on borrowers while requiring merely a minimal down payment, or no down payment at all. This article examines the implications of each of these aspects, as well as the interplay between them. The findings of this examination lead to the novel insight that a non-recourse mortgage with no initial down payment resembles the case of corporate undercapitalization. Utilizing legal analysis and remedies applied in the case of corporate undercapitalization lends insight into creating mortgage arrangements that properly balance the competing interests of the various players in the home ownership credit market.

Keywords: Mortgage, Recourse, Down Payment, Homeownership, Foreclosure, Negative Equity, Strategic Default, Undercapitalization, Piercing the Corporate Veil, Subordination

JEL Classification: D1, G21, G28, G31, G32, K22, K23, L85, R21, R31

Suggested Citation

Solomon, Dov and Minnes, Odelia, Non-Recourse, No Down Payment and the Mortgage Meltdown: Lessons from Undercapitalization (July 24, 2011). Fordham Journal of Corporate and Financial Law, Vol. 16, p. 529, 2011; Bar Ilan University Public Law Working Paper. Available at SSRN: https://ssrn.com/abstract=1894029

Dov Solomon (Contact Author)

College of Law and Business - Ramat Gan Law School ( email )

26 Ben-Gurion St.
Ramat Gan
Israel
972-3-6000800 (Phone)

HOME PAGE: http://www.clb.ac.il/english/lectures/dov_solomon.htm

Odelia Minnes

Ono Academic College ( email )

104 Zahal St.
Kiryat Ono, 55000
Israel

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