Formulaic Transparency: The Hidden Cost of Mass Securitization

Abstract

Housing finance, fair lending, and fair credit reporting rules the US induce widespread reliance on credit bureau scores by originators of residential mortgages and consumer loans. Reliance on scores that issuers cannot control -- but can disclose to investors -- has helped raise loans securitized in the US to more than five times European levels. But, because the scores exclude material information, lending mistakes also increase, skewing the distribution of credit against creditworthy borrowers.

Keywords: securitization, financial stability, financial regulation, liquidity, contracting

JEL Classification: G10, G18, G28, G38, K22, N21