Accidental Suicide Pacts and Creditor Collective Action Problems: The Mortgage Mess, the Deadweight Loss, and How to Get the Value Back

23 Pages Posted: 15 Oct 2013  

Robert C. Hockett

Cornell University - Law School

Date Written: October 14, 2013

Abstract

Sustained economic recovery will remain elusive in America, post-crash, until principal is reduced on some 10-13 million underwater home mortgage loans across the nation. Yet in the case of privately securitized loans, these write-downs are all but impossible to carry out on the requisite scale because bubble-era securitization contracts, which now effectively function as suicide pacts among bondholders, would require collective action by millions of geographically dispersed passive investors in order to authorize write-downs or sales out of securitization trusts. The solution, this article suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, using money supplied by mortgage backed securities holders. Collective action problems such as those presently faced by the latter require collective agents for their solution. Since (a) bubble-era securitization contracts prevent trustees and loan servicers from playing that role, (b) the federal government seems to face collective action challenges of its own, and (c) the underwater mortgage problem is in any event locally concentrated in character, state and local governments are now those best suited to salvaging value for bondholders, homeowners, and their cities alike.

Suggested Citation

Hockett, Robert C., Accidental Suicide Pacts and Creditor Collective Action Problems: The Mortgage Mess, the Deadweight Loss, and How to Get the Value Back (October 14, 2013). Cornell Law Review, Vol. 98, No. 55, 2013. Available at SSRN: https://ssrn.com/abstract=2340347

Robert C. Hockett (Contact Author)

Cornell University - Law School ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States

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