Mortgage Market Deregulation and Moral Hazard: Equity Stripping Under Sanction of Law

Abstract

This article examines the failure of the current regulatory structure to adequately protect consumers against risks in a home mortgage lending market characterized by complexity and limited transparency. It explores the reliance of bank regulators, particularly the Federal Reserve Board, on market discipline to control risks and the failure of market discipline. It also explores the Federal Reserve’s view that market intervention is only justified based on net societal benefits. This is a viewpoint that prevented regulatory intervention until the financial sector was in crisis, and a viewpoint that is at odds with the view of the Congress. This article urges a rejection of the net societal benefits standard as the determinant of regulatory intervention in the mortgage market.