Working Paper

False security: how securitization failed to protect arrangers and investors from borrower claims

Abstract: The future of housing finance is in a state of flux. In February 2011, the Obama Administration released a proposal outlining three plans for the future of housing finance. In all three plans, Freddie Mac and Fannie Mae will be phased out over a period of years and replaced with a private securitization market, which may be backed, in whole or in part, by a government guarantee. Whether the final plan relies upon government-guaranteed securities or private-label securities, Congress will have to resolve a range of complex legal aspects of securitization, from the bankruptcy remoteness of pools of securities to setting national standards for loans and financing. One issue that does not appear to be getting much attention is the potential liability of the parties to a securitization for the unlawful actions of loan originators. In this paper, the authors take the position that any new housing finance system must clarify the liability of participants in the securitization pipeline so that the market can more accurately price securities up front and create incentives for more effective compliance programs to stop problem loans from entering the pipeline.

Keywords: Housing - Finance; Subprime mortgage;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2011

Number: 1109