Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response

Can law create trust? Can law make people more trustworthy? These are some of the questions posed by scholars across the political spectrum interested in the impact of law on society. There is no shortage of arguments on both sides of these questions: that law can be a tool for promoting trust, or destroying it. This Article is an attempt to address these questions through an analysis of a single market, to explore the interplay between law and trust in a situation of abject market failure: the subprime mortgage crisis in the United States. Initially, I will introduce the concept of social capital, as it has been defined by sociologists, historians, legal scholars and economists, and provide an overview of the arguments concerning the effects of law on trust and social capital. I will then provide a history of the subprime mortgage crisis and examine some of the key facets of the market that created the conditions necessary for its collapse, looking specifically at the following: (1) the relationship between the borrower, mortgage broker and lender and the incentives created by the mortgage securities market; (2) the asymmetries of information that pervade these relationships; (3) the terms of the mortgage and subsequent security agreements and the likelihood that borrowers in default might enjoy relief from foreclosure. After this analysis, I will review the extent to which changes in the legal and regulatory framework failed to take into account the role that social capital plays in the mortgage market and whether legal institutions in place are adequate to respond to the collapse of the market and the lasting impact of discrimination in that market. I will then propose responses to the causes for the subprime mortgage crisis that take into account the role that social capital can play in mortgage finance transactions and analyze the extent to which these proposals might strengthen this market at present and into the future.