Working Paper: NBER ID: w20100
Authors: Paul S. Willen
Abstract: I consider four policies created to address the financial crisis: (1) the ability-to-repay requirement in mortgage underwriting; (2) reform of rating agency compensation, (3) risk retention in securitization, and (4) mandatory loan renegotiation. I show that according to standard models, policies (1)-(3) do not address the standard asymmetric information problems that afflict financial markets. Policy (4) could reduce the deadweight losses associated with asymmetric information but requires that policy makers allocate gains and losses.
Keywords: financial crisis; government policy; market failure; asymmetric information; risk retention
JEL Codes: D61; D82; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ability-to-repay requirement (G21) | deadweight losses (H21) |
| deadweight losses (H21) | fewer loans (G51) |
| fewer loans (G51) | harm to borrowers (G21) |
| reform of rating agency compensation (G18) | inaccurate ratings (Y30) |
| inaccurate ratings (Y30) | investors losing money (G19) |
| risk retention (G22) | moral hazard (G52) |
| risk retention (G22) | deadweight losses (H21) |
| mandatory loan renegotiation (G21) | foreclosures (G21) |
| mandatory loan renegotiation (G21) | optimal outcomes (L21) |