DAVID J. REISS, Brooklyn Law School
Email: david.reiss@brooklaw.edu

The absence of stable financing options has long caused difficulties for owners of small multifamily buildings. Despite the ongoing maturation of a secondary mortgage market for small multifamily mortgages, this housing stock continues to shrink due to abandonment, demolition, foreclosure and other causes. As these buildings house many low-income households, some have suggested subsidizing the financing costs for the owners of these buildings. Any proposal to subsidize these landlords to meet affordable housing goals, however, should be predicated on determinations that (i) it is an efficient means to provide housing to the neediest tenants and (ii) the multifamily mortgage market is subject to failures that make such government intervention appropriate.

This article first describes what little is known about small multifamily properties and their owners. It then describes the lending environment for real estate entrepreneurs over the last hundred years. Finally, it evaluates the role the government should play in the small multifamily mortgage sector. The article concludes that subsidizing owners of small apartment building is an inefficient and unwarranted affordable housing policy and that more direct subsidies to low-income households, such as housing vouchers, are preferable.

JAGADEESH GOKHALE, Cato Institute
Email: jgokhale@cato.org
PETER VANDOREN, Cato Institute
Email: pvandore@cato.org

Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust - and the subsequent financial crisis and recession - would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.

Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.

VINCENT DILORENZO, St. John's University - School of Law
Email: dilorenv@stjohns.edu

This article examines the failure of the current regulatory structure to adequately protect consumers against risks in a home mortgage lending market characterized by complexity and limited transparency. It explores the reliance of bank regulators, particularly the Federal Reserve Board, on market discipline to control risks and the failure of market discipline. It also explores the Federal Reserve’s view that market intervention is only justified based on net societal benefits. This is a viewpoint that prevented regulatory intervention until the financial sector was in crisis, and a viewpoint that is at odds with the view of the Congress. This article urges a rejection of the net societal benefits standard as the determinant of regulatory intervention in the mortgage market.

EDDY WYMEERSCH, Ghent University - Financial Law Institute
Email: eddy.wymeersch@ugent.be

This paper gives an overview of the efforts, worldwide and on a regional i.e. European level basis for introducing more effective and better harmonised financial regulation. Recent initiatives especially the work of the G 20 and the creation of the Financial Stability Board (FSB) indicate greater interest for worldwide coordination of financial regulatory intervention. The financial crisis has however dealt a serious blow to previously existing international dialogue, and the fear exists that the main regulators would withdraw on their national battlefields. Major changes in the supervisory architecture are planned in the European Union: a proposal has been tabled to introduce a coordinated approach to regulation and to monitoring the way existing regulations are applied by putting into place a European system of Financial Supervisors. At the same time a new European Systemic Risk Board will be created. These, and comparable changes in the US may contribute to reactivate the regulatory dialogue.

EMILIOS AVGOULEAS, University of Manchester - School of Law
Email: EMILIOS.AVGOULEAS@MAN.AC.UK

The global financial crisis has exposed the many limits of disclosure as an effective regulatory tool in financial markets. First, the famed disciplining power of the market failed to constrain disastrous risk taking by banks. Second, most of the risks that led to the creation of the 2008 catastrophe were often fully disclosed but the markets failed to understand them. In the case of banks, disclosure-based market discipline failed mainly because of the implicit government guarantee. In the case of capital markets, the reasons for disclosure’s failure were product complexity and the impact of socio-psychological factors. Yet much of European Financial Regulation is based on the disclosure paradigm to remedy market failure, discipline market actors, improve investor/consumer choice, and prevent abuse. The EU needs to re-examine the role of disclosure in two contexts: prudential regulation of banks and retail investor protection. EU policy-makers should use empirical and experimental studies before any reform of the investor protection framework. Insertion of default options in a variety of financial contracts may be a necessary supplement to disclosure for retail investors. Furthermore, an independent EU financial products committee would be a better regulatory protection strategy than reliance on investor choice assisted by enhanced disclosure.