Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, December 11, 2011

Levitin et al. on Dodd-Frank and Housing Finance

The Dodd-Frank Act and Housing Finance, by Adam J. Levitin, Georgetown University Law Center; Andrey D. Pavlov, Simon Fraser University (SFU) - Finance Area; and Susan M. Wachter, University of Pennsylvania - The Wharton School - Real Estate Department; was recently posted on SSRN.  Here is the abstract:

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.

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