Competition and Crisis in Mortgage Securitization

While a system of suppressed competition may have its

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While a system of suppressed competition may have its own flaws—perhaps mortgages would become more expensive, perhaps access to credit for marginal borrowers would be reduced—taxpayers would be safer. And to the extent that higher mortgage pricing results in higher profits and higher dividends to the Treasury—that is, if the government can capture the full upside of mortgage funding during profitable years, rather than taking only a minority of the upside through taxation and guarantee fees—profits could be used to repay the debt incurred during the most recent financial sector bailouts and to build reserves for future crises. The Treasury’s proposed approach—a gradual shrinking of the GSEs and FHA—could lead to a more fragmented, competitive, and dangerous securitization market in which for-profit institutions backed by implied government guarantees once again compete for market share and revenue. The results of this analysis are by no means definitive, but they raise questions about the Treasury’s assumptions and doubts about its proposals for reforming housing finance. At a minimum, more study should be undertaken before the Treasury moves forward with a program of radical reform. More traditional alternatives—such as a return to the concentrated, government-led market structure and conservative underwriting standards that prevailed from the mid-1940s to the late 1960s—should be considered in light of empirical evidence linking such structures to greater financial stability in the U.S. residential mortgage market. 218. See FCIC R EPORT , supra note 74, at 89 (describing how one large mortgage originator used specialization to cut costs and sell mortgages for 0.55% less than competing firms). Although this particular firm was engaged in fraudulent practices, efficiency is possible without fraud. Id. at 12–14, 89 (“For decades, a version of the originate-to-distribute model produced safe mortgages. Fannie and Freddie had been buying prime, conforming mortgages since the 1970s, protected by strict underwriting standards.”). 219. See O RG . FOR E CON . C O - OPERATION & D EV ., supra note 49, at 27 (arguing that although recent financial crises in the United States, Scandinavia, and Asia “suggest that liberalisation and competition contribute to financial crises . . . the relationship between competition and stability depends on the regulatory framework”); Andrea Beltratti & René M. Stulz, Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation (Nat’l Bureau of Econ. Research Paper Series, Working Paper 15180, 2009) (providing empirical evidence that banks in countries with more independent regulators and higher capital requirements performed better than other banks during the financial crisis); supra note 214 (discussing a possible link between consumer protection and financial system stability).
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Christopher Reinemann
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