Unsafe Loans in a Deregulated U.S. Mortgage Market

Abstract

This article explores actual market outcomes in a deregulated mortgage market to ascertain if market discipline can be relied upon to ensure safe and sound loan products. In part one of this article the bank regulators' decisions to deregulate the mortgage market are set forth. In part two the outcomes generated by such a legal environment are presented. Such outcomes reveal steadily increasing availability and acceptance of risky loan products, resulting in equity stripping due to subsequent defaults. In part three of the article an alternative regulatory approach is offered - one that imposes a minimum, required level of safety for all loan products.