Owen Haney


Mortgage-backed Securities, Dodd-Frank Act, Securitized Loans, Systemic Risk


When lawmakers sought to reshape the financial industry through the passage of the Dodd-Frank Act in 2010, they specifically attacked the “moral hazard” in the asset-backed securities market that they believed was partly responsible for the collapse of global financial markets. Congress identified several practices in asset-backed securitizations that posed a risk to the world economy. In particular, regulators believed that the “originate-to-distribute” model, whereby loan originators—those parties armed with the best knowledge regarding the quality of the loans in the transaction and who consequently set underwriting standards—could sell off the loans without bearing any risk should those borrowers (homeowners in the residential mortgage-backed securities space, and businesses in the commercial mortgage-backed securities space) go into default.

With the adoption of risk-retention rules, lawmakers hoped that originators would be incentivized to provide accurate information to investors about the risk of securitized loans because they would now be required to hold a swatch of the securities themselves. In addition to requiring loan originators to keep some “skin in the game,” Dodd-Frank-era reforms increased disclosure requirements and altered the weighting of mortgage-backed securities for the purposes of risk-based capital rules so as to make them more expensive to investors.

In early March 2020, nearly ten years after the passage of Dodd-Frank, the stock market plunged to historic lows once more. Over the course of four days, the Dow Jones Industrial Average fell 26%. National unemployment suddenly rose to over 20%. Covid-19 had arrived in the United States, and the national financial immune system went into shock. Economic distress, unemployment, and stay-at-home orders heavily damaged American businesses, particularly brick-and-mortars. Commercial mortgages experienced rapid default because underlying businesses could not afford to make payments.

The corresponding commercial mortgage-backed securities industry went into a tailspin, and observers were left with this unsettling question: did Dodd-Frank do enough to eliminate the moral hazard and dangerous practices that led to the last financial meltdown, or would this exogenous viral shock expose wrongdoing capable of once again systemically crippling the world economy?



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