The Global Submprime Crisis as Explained by the Contrast between American Contracts Law and Civil Law Countries' Law, Practices and Expectations in Real Estate Transactions: How American Lack of Informed Consent Contributes to the Global Crisis in Subprime Mortgage Investments as Does the Absence of the Civil Law Notary
80 Pages Posted: 30 Oct 2011
Date Written: October 29, 2011
A significant cause of the subprime mortgage crisis in the United States is that borrowers often have a general lack of understanding or actual misunderstanding of their loan obligations and of the default remedies available to their lenders. Nevertheless, they virtually always are bound by the terms of the documents they have signed even though these are usually “form” contracts. Global investors that purchased securitized mortgages on the secondary market suffered serious losses. Global investors purchasing products in American subprime residential mortgages may have assumed, incorrectly, that the more protective consumer laws incorporated for example in the European Union (EU) Directives applied. Global investors may have misplaced their reliance on informed assent of borrowers and even the notion that the mortgages were suitable for the borrowers who made them. Global investors may have misplaced their faith in the American regulatory system including the Securities and Exchange Commission and the ratings agencies when they bought interests in securitized American residential subprime mortgages. Moreover, global investors, especially those in civil law legal systems, may have assumed, incorrectly, that a role similar to that of the civil law notary exists in the American residential mortgage process. In civil law countries a civil law notary supervises and approves all transactions involving real estate, including mortgages, and provides counseling to borrowers about the suitability of taking on the obligations of their loan. These mistakes about the American residential mortgage process may explain global enthusiasm for investing in the American loan market.
Yet, Ignorance of the law is not an excuse for either the consumer, or for the investor in their debt. Investors all over the world misunderstood, to their detriment, several important aspects of American contracts law, specifically as applied to the residential mortgage industry. Many who misunderstood the intricacies of American mortgage law and practice and who invested in securitized mortgage products will have little reprieve from their ignorance. It is argued that “…an analysis of the subprime crisis and proposed solutions is incomplete if international and comparative perspectives are not brought to bear.” The goal of this article is to focus on some of the misplaced assumptions that may have tempted global investors to buy yet another product “made in America.” A comparison of the American residential real estate law and practice as well as the mortgage law and procedures with those in countries that depend on a civil law notary as the lawyer for the transaction may complete the perspectives. A comparison of American contracts law, even in consumer transactions like residential mortgages, with the European Union (“EU”) Directive approach to protecting consumers in conjunction with the role of the civil law notary in the preventative administration of justice should explain why so many global investors in Residential Securitized Mortgage Securities (RSMS) were mistaken in their belief that these were sound investments.
A better understanding of comparative law differences in the law and practice of real estate transactions is essential. Understanding these differences will better inform global investors purchasing mortgages and other real estate assets situated in the United States. The article uses the Italian example as the basis for the comparative law perspective. And, American transactional attorneys would benefit from understanding the role of the “attorney for the transaction” that the civil law notary plays in most of Europe and other civil law countries. This article provides attention to comparative transactional justice that only now is beginning to receive the same attention as the civil law model of dispute resolution has.
Keywords: subprime mortgage, crisis, global, comparative law, contracts, real estate law, practice, transactions, civil law notary, EU Directives
JEL Classification: F21,G15, G38, K11, K12, L14
Suggested Citation: Suggested Citation