Securitization: Cause or Remedy of the Financial Crisis?

19 Pages Posted: 28 Aug 2009 Last revised: 16 May 2012

See all articles by Adam J. Levitin

Adam J. Levitin

Georgetown University Law Center

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: August 27, 2009

Abstract

This article describes the causes of the boom and bust in the U.S. housing market, which brought down not just the U.S. financial system but the global economy. How did this vicious cycle begin? How did home prices appreciate so far and so fast? Why did rational investors not recognize and stop mispricing and investing in these loans on Wall Street? We offer a supply-side explanation of the mortgage crisis. At the root of the crisis was a new class of specialized mortgage lenders and securitizers unrestricted by regulations governing traditional lending and securitization. Eager to take profits in an originate-to-distribute lending model, aggressive lenders piled in by offering loans with low upfront costs, attracting first-time home buyers previously unable to afford houses, repeat buyers buying pricier homes and second homes, as well as speculators. These practices drove prices particularly high in Arizona, California, Florida, and Nevada, which had significant land-use regulations and environmental controls that reduced supply elasticity, leading increases in demand to trigger mostly higher prices instead of a greater supply of housing.

Keywords: securitization, mortgages, subprime, bubble, housing finance, MBS, mortgage-backed securities, credit default swaps, mispricing

JEL Classification: G21, K20, G24

Suggested Citation

Levitin, Adam J. and Pavlov, Andrey D. and Wachter, Susan M., Securitization: Cause or Remedy of the Financial Crisis? (August 27, 2009). Georgetown Law and Economics Research Paper No. 1462895, U of Penn, Inst for Law & Econ Research Paper No. 09-31, Available at SSRN: https://ssrn.com/abstract=1462895 or http://dx.doi.org/10.2139/ssrn.1462895

Adam J. Levitin (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area ( email )

Vancouver, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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