The Dodd-Frank Act and Housing Finance: Can It Restore Private Risk Capital to the Securitization Market?
Adam J. Levitin
Georgetown University Law Center
Andrey D. Pavlov
Simon Fraser University (SFU) - Finance Area
Susan M. Wachter
University of Pennsylvania - Wharton School, Department of Real Estate
December 15, 2011
Yale Journal on Regulation, Forthcoming
U of Penn, Inst for Law & Econ Research Paper No. 11-35
Georgetown Law and Economics Research Paper No. 11-32
Private risk capital has virtually disappeared from the U.S. housing finance market since the market’s collapse in 2008. This Article argues that private risk capital is unlikely to return on any scale until the informational problems in housing finance are resolved so that investors can accurately gauge and price the risks they assume.
The Dodd-Frank Act represents a first step in reforming the U.S. housing finance. It takes a multi-layered approach, regulating both loan origination and securitization. Dodd-Frank’s reforms, however, fail to adequately address the opacity of credit risk information in mortgage markets and thus are insufficient for the restoration of private risk capital.
The Article argues that Dodd-Frank reforms like “skin-in-the-game” credit risk retention fail to solve the informational problems in the housing finance market, as they merely replace one informational opacity with another. Instead, the Article argues, it is necessary to institute structural changes in the housing finance market, particularly the standardization of mortgage securitization, that force the production of information necessary for accurate risk-pricing.
Number of Pages in PDF File: 27
Keywords: Real estate, mortgages, financial regulation, reform, Dodd-Frank Act, mortgage-backed securities, lending models, credit risk information, securitized assets, information shrouding, underpricing, standardization, information asymmetry, risk pricing
JEL Classification: G21, K22, K23, L15, L50, R31
Date posted: December 10, 2011 ; Last revised: May 15, 2012