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Legal & Economic Issues in Subprime Litigation


A Harvard Law School discussion paper from 2008, right around the time of the subprime mortgage industry crisis, highlights the legal and economic consequences of current difficulties in the subprime mortgage market. In Legal and Economic Issues in Subprime Litigation, authors Jennifer E. Bethel, Allen Ferrell, and Gang Hu provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities, and collateralized debt obligations, and examine several aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and write-downs of investment banks.

The authors also discuss the distinction between reasonable ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market.

Even eight years later, the country is still feeling some of the effects of the 2008 financial crisis. This paper is a fascinating look into how this crisis occurred, the unprecedented levels of litigation that have resulted from it, and some of the main legal issues that will play an important role in this litigation. We encourage you to follow the link above to read the full text of this analysis.

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