Abstract

http://ssrn.com/abstract=2359679
 


 



Due Diligence with Residential Mortgage Backed Securities


Merritt B. Fox


Columbia University - Law School

November 25, 2013

Columbia Law and Economics Working Paper No. 462

Abstract:     
In seeking to explain how securitized funds became available for the large volume of mortgages that were inappropriately extended in the runup to the financial crisis, a number of commentators have argued that credit rating agencies and the market itself were unaware of the low quality of the assets backing many residential mortgage back securities (RMBS) offerings and that this lack of awareness was the result of inadequate due diligence. These concerns prompted a number of due diligence related provisions in the Dodd-Frank Act that are now the subject of SEC rule-making.

These developments raise two central questions: what is the socially appropriate level of due diligence that should be undertaken by persons preparing RMBS offering documents and credit ratings, and what is the proper role of regulation, if any, in assuring this level of due diligence. The paper reviews the general theory of asymmetric information in economics and applies this theory to the particular institutional features of securitized mortgage finance. The desirability of two possible policy options are discussed. One is direct regulation of the conduct of due diligence by certain securitization process participants. The other is imposition of liability on such participants for investor losses if these participants do not engage in due diligence that meets a governmentally determined standard.

The paper then engages in a review and assessment of the due-diligence-related provisions of Dodd-Frank and of the rules that have been adopted or are currently proposed by the SEC pursuant to these Dodd-Frank provisions or otherwise in reaction to the perceived role of RMBS offerings in the financial crisis. The paper concludes with a set of recommendations.

Number of Pages in PDF File: 102

Accepted Paper Series


Download This Paper

Date posted: November 27, 2013  

Suggested Citation

Fox, Merritt B., Due Diligence with Residential Mortgage Backed Securities (November 25, 2013). Columbia Law and Economics Working Paper No. 462. Available at SSRN: http://ssrn.com/abstract=2359679

Contact Information

Merritt B. Fox (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
Feedback to SSRN


Paper statistics
Abstract Views: 499
Downloads: 139
Download Rank: 122,827

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.313 seconds