Information Failure and the U.S. Mortgage Crisis
Adam J. Levitin
Georgetown University Law Center
Susan M. Wachter
University of Pennsylvania - Wharton School, Department of Real Estate
October 27, 2010
In THE AMERICAN MORTGAGE SYSTEM: RETHINK AND REFORM, Susan Wachter and Marty Smith, eds., University of Pennsylvania Press, Forthcoming
University of Pennsylvania Institute for Law & Economics Research Paper No. 10-19
This paper argues that during the housing bubble, housing finance markets failed to price risk correctly because of information failure caused by the complexity and heterogeneity of private-label mortgage-backed securities and structured finance products. Addressing the informational problems with mortgage securitization is critical not just for avoiding future housing bubbles but for rebuilding American housing finance. The continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression, depends on the continued viability of securitization. The paper proposes that mortgage securitization and origination be standardized as a way of reducing complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.
Number of Pages in PDF File: 40
Keywords: Credit Crunch, Financial Crisis, Mortgage Pools, Rating Agencies, Subprime Mortgage Credit, Asset Bubbles, Open Information, Transparency, MBS, Informationally Shrouded Mortgages, Default Risk, Securitization, Standardization
JEL Classification: G21, K22, L85, R31
Date posted: October 6, 2010 ; Last revised: November 28, 2012
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