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The Need for Government Intervention to Protect and Advance the Public Interest in Consumer and Mortgage Credit Markets

Working paper #668
Eric S. Belsky and Susan M. Wachter

This paper examines mortgage credit markets and the need for government intervention to protect and advance the public interest. The authors identify as rationales for the public interest: positive and negative externalities, the promotion of equal access, and information asymmetry and principal agent problems. They point to the role of market conduct and structure, as well as information asymmetry and principal agent problems, as prominent sources for the U.S. mortgage debacle. While it is beyond the scope of this paper to outline a reform program, this paper points, in the aftermath of the crisis, to a need for a framework to address information and principal agent issues in the conduct and structure of mortgage markets. As a new framework for mortgage markets is developed, attention needs to be placed on the role that information on loan quality and pricing plays for borrowers’ and investors’ appropriate pricing and allocation of capital.

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