Saturday, April 10, 2010
Robin Paul Malloy (Syracuse) has posted Mortgage Market Reform and the Fallacy of Self-Correcting Markets, Pace Law Review, Vol. 30, p. 79 (2009). The abstract:
The article discusses the mortgage market collapse in connection to the broader financial crisis. In developing the argument I proceed in several steps. First, I discuss the fallacy of self-correcting markets as a way of explaining the need for volitional and purposeful regulation in the housing and mortgage markets. This involves explaining that markets are not self-correcting; while Alan Greenspan and company waited for the invisible hand to appear and correct the mortgage markets, the system collapsed. Second, I provide an overview of the basic exchange relationships among the parties involved in the underlying real estate transaction, those in the primary and secondary mortgage market, and potential investors in mortgage related securities. Third, I explain the inapplicability of Hernado DeSoto's idea of parallel lives between underlying real estate transactions and the market for securities based on the mortgages in these underlying transactions. And, fourth, I suggest a series of regulatory and transactional reforms to consider for improving the soundness of the underlying real estate transaction and the operation of the primary mortgage markets. These reforms include: taking steps to reduce speculation in housing prices; eliminating incentives for over borrowing and over lending; and, adjusting the structure of the underlying real estate transaction to undermine an inverse prisoner’s dilemma problem. I also suggest that lawyers reassert themselves into doing basic real estate transactions and that real estate sales people and others be restricted to simply doing the sales work that they are trained to do.