Information Failure and the U.S. Mortgage Crisis

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

40 Pages Posted: 6 Oct 2010 Last revised: 28 Nov 2012

Adam J. Levitin

Georgetown University Law Center

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate

Date Written: October 27, 2010

Abstract

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.

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

Suggested Citation

Levitin, Adam J. and Wachter, Susan M., Information Failure and the U.S. Mortgage Crisis (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. Available at SSRN: https://ssrn.com/abstract=1687301 or http://dx.doi.org/10.2139/ssrn.1687301

Adam J. Levitin

Georgetown University Law Center ( email )

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

Susan M. Wachter (Contact Author)

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

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