Following the 2007-2008 global financial crisis, housing finance remains a major potential source of systemic weakness. In light of this predicament, a substantial amount of effort has been put forth to develop regulation to effectively improve mortgage lending and the securitization of mortgage loans. Much of this regulatory effort, however, has a primarily microprudential focus – to correct market failures in order to increase economic efficiency. This article argues in favor of macroprudential regulation of mortgage lending – intended to reduce systemic risk, the risk that a cascading failure of financial system components undermines the system’s ability to generate capital, or increases the cost of capital, thereby harming the real economy. The first goal of this form of regulation is an ex ante goal of preventing systemic shocks in housing finance and the housing sector. While this article shows that this ex ante regulation could help to reduce the risk of systemic shocks, it could not realistically eliminate those shocks. Therefore the second goal of macroprudential regulation is an ex post goal of ensuring that housing finance, the housing sector, and the financial system itself are robust enough to resist contagion and mitigate adverse consequences when system shocks inevitably occur.
Steven L. Schwarcz,
Macroprudential Regulation of Mortgage Lending,
SMU L. Rev.