Collateralized Debt Obligations and the Tragedy of the Anticommons

By Joshua Hall

cdos financial crisis anti-commons mortgages

The tragedy of the anticommons occurs when a piece of property or resource has multiple owners and each has veto rights over use or changes to a resource. In the tragedy of the commons, a resource gets overused because no one can stop anyone from accessing the resource. In the tragedy of the anticommons, exclusionary powers can lead to underutilization. Collateralized debt obligations (CDOs) in a market with falling housing prices would seem to be an anticommons. People with equity in their homes who could stay in their homes if they could modify their loan are unable to do so because their mortgage has an unknown number of owners. The transaction costs of getting all of these CDO owners to agree on modification terms, makes foreclosure almost inevitable. This anticommons seems to have contributed to the high rate of foreclosures that occurred post 2008 financial crisis. Further research is needed into solutions to this anticommons, be it contractual or regulatory. As Heller (1998) notes in his Harvard Law Review article on the topic, "once an anticommons emerges, collecting rights into usable property bundles can be brutal and slow."

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