False Security: How Securitization Failed to Protect Arrangers and Investors from Borrower Claims

79 Pages Posted: 12 Apr 2011

See all articles by Kathleen C. Engel

Kathleen C. Engel

Suffolk University Law School

Thomas James Fitzpatrick

Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: April 11, 2011

Abstract

The future of housing finance is in a state of flux. In February 2011, the Obama Administration released a proposal outlining three plans for the future of housing finance. In all three plans, Freddie Mac and Fannie Mae will be phased out over a period of years and replaced with a private securitization market, which may be backed, in whole or in part, by a government guarantee. Whether the final plan relies upon government-guaranteed securities or private-label securities, Congress will have to resolve a range of complex legal aspects of securitization, from the bankruptcy remoteness of pools of securities to setting national standards for loans and financing. One issue that does not appear to be getting much attention is the potential liability of the parties to a securitization for the unlawful actions of loan originators. In this paper, the authors take the position that any new housing finance system must clarify the liability of participants in the securitization pipeline so that the market can more accurately price securities up front and create incentives for more effective compliance programs to stop problem loans from entering the pipeline.

Suggested Citation

Engel, Kathleen and Fitzpatrick, Thomas James, False Security: How Securitization Failed to Protect Arrangers and Investors from Borrower Claims (April 11, 2011). FRB of Cleveland Working Paper No. 11-09. Available at SSRN: https://ssrn.com/abstract=1807180 or http://dx.doi.org/10.2139/ssrn.1807180

Kathleen Engel (Contact Author)

Suffolk University Law School ( email )

120 Tremont Street
Boston, MA 02108-4977
United States
617-994-6831 (Phone)

HOME PAGE: http://www.law.suffolk.edu/directories/administrator.cfm?InstructorID=1111

Thomas James Fitzpatrick

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

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