The crisis in real estate mortgage lending that erupted in the United States in 2007 shook the foundations of the American financial system. The crisis was caused in part by mortgage loan originators, who lent improvidently to unqualified buyers on over-valued property, and by unsophisticated and ill-advised borrowers, who undertook obligations that they did not understand and were unable to bear over time.
To what extent would this crisis have been preventable had the mortgage loan documentation system provided neutral and independent advice to borrowers as well as lenders about their contemplated real estate and loan transactions? The American system of real estate conveyancing and mortgaging provides buyers-mortgagors, in particular, with no effective advice at the time they enter into what are often the biggest legal transactions of their lives.
In France, on the other hand, the institution of the civil law notary offers all parties to a real estate purchase and mortgage transaction neutral and independent legal advice and transaction completion. French mortgages thus tend to be more “mainstream,” with fewer one-sided terms than in their American counterparts. This kind of neutral transactional advice and documentation appears to be cost-effective in comparison with the classical common law model of individual lawyers representing all parties. The expense of individual representation often leads, as a practical matter, to weaker parties, such as home buyers, going without representation or advice at all.
Although some have speculated that a notarial system would have reined in the excesses that culminated in the American financial crisis, probably that goes too far. Greed and short-sightedness on the part of lenders and borrowers alike lay at the root of the mortgage “meltdown.” Neutral documentation professionals based on a civil law notarial model might have been able to affect the most extreme transactions. They would not be substitutes for strong regulation of mortgage loan origination function and the entities in that business.