Competition and Crisis in Mortgage Securitization

Canadian Law & Economics Association Conference, September 2011

54 Pages Posted: 2 Oct 2011 Last revised: 11 Jan 2012

Michael Simkovic

USC Gould School of Law; Harvard Law School - John M. Olin Center for Law and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2011


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U.S. policymakers often treat market competition as a panacea. However, in the case of mortgage securitization, policymakers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S. history - during the 1880s, the 1920s, and the 2000s - and every time it has failed. Most recently, competition between mortgage securitizers led to a race to the bottom on mortgage underwriting standards that ended in the late 2000s financial crisis. This article provides original evidence that when competition was less intense and securitizers had more market power, securitizers acted to monitor mortgage originators and to maintain prudent underwriting. However, securitizers’ ability to monitor originators and maintain high standards was undermined as competition shifted market power away from securitizers and toward originators. Although standards declined across the market, the largest and most powerful of the mortgage securitizers, the Government Sponsored Enterprises (“GSEs”), remained more successful than other mortgage securitizers at maintaining prudent underwriting. This article proposes reforms based on lessons from the recent financial crisis: merge the GSEs with various government agencies’ mortgage operations to create a single dedicated mortgage securitization agency that would seek to maintain market stability, improve underwriting, and provide a long term investment return for the benefit of taxpayers.

Keywords: mortgage, securitization, GSE, Fannie, Freddie, privatization, market structure, competition, bailout, taxpayer, treasury, underwriting, risk

JEL Classification: D4, D6, D7, G18, G2, G32, H1, H23, H81, H82, K2, L00, P00

Suggested Citation

Simkovic, Michael, Competition and Crisis in Mortgage Securitization (September 15, 2011). Canadian Law & Economics Association Conference, September 2011. Available at SSRN:

Michael Simkovic (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Harvard Law School - John M. Olin Center for Law and Economics ( email )

Cambridge, MA 02138
United States

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