http://baselinescenario.com/2008/12/04/subprime-mortgage-sec-regulation/
The Baseline Scenario [econ blog] December 4, 2008 at 10:00 am
How the SEC Could Have Regulated Subprime Mortgages
From a new paper (link below):
Kafka would have loved this story: According to our current
understanding of U.S. law there is far better consumer protection for
people who play the stock market than for people who are duped into
buying a house with an exotically structured subprime mortgage, even
when the mortgage instrument is immediately packaged and sold as part
of a security.
The crux of the matter is that securities transactions - notably, the
sale of a security to a customer by a broker - are governed by SEC
regulations, which impose a fiduciary relationship on the broker,
meaning, among other things, that the broker can only sell financial
products that are suitable for that customer. However, no such rule
governs the relationship of a homebuyer to a mortgage broker or
company, meaning that behavior by the latter must be actually
fraudulent before it can be sanctioned.
Jonathan Macey, Maureen O'Hara, and Gabe Rosenberg (two of whom are at
my very own Yale Law School) have a new paper (abstract and download
available) arguing not only that mortgage brokers should have a
fiduciary responsibility to their customers, but that they already do
under two reasonable interpretations of existing SEC regulations. (It
has to do with whether a complex subprime mortgage is already a
security or, failing that, whether it is related to a security
transaction.) This means that the SEC could have been regulating these
things all along.
Written by James Kwak