The Panic of 2008
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The Panic of 2008

Causes, Consequences and Implications for Reform

Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr

The Panic of 2008 brings together scholars from a variety of disciplines to examine the causes and consequences of the global credit crisis, the subsequent collapse of the financial markets, and the following recession. The book evaluates the crisis in historical context, explores its various legal, economic, and financial dimensions, and considers various possibilities for reform. The Panic of 2008 is one of the first in-depth efforts to study the crisis as it was in the very earliest stage of resolution, and establishes a foundation for thinking about and evaluating current reform efforts and the likelihood of recurrence.
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Chapter 6: Federal Preemption, Regulatory Failure and the Race to the Bottom in US Mortgage Lending Standards

Patricia A. McCoy


Patricia A. McCoy* INTRODUCTION In the debate over the Great Recession of 2008–2009, much attention has been paid to whether consumer financial protection should continue to be dispersed among state and federal regulators or transferred to a single federal agency dedicated solely to consumer protection, as the Obama Administration has proposed. In this chapter, I argue that the Administration’s proposal is essential for three reasons. First, during the housing bubble, our system of fragmented regulation drove lenders to shop for the easiest legal regime. Second, the ability of lenders to switch charters put pressure on banking regulators – both state and federal – to relax credit standards. Finally, banking regulators have routinely sacrificed consumer protection for the short-term profitability of banks. Creating one, dedicated consumer credit regulator charged with consumer protection would establish uniform standards and enforcement for all lenders and help prevent another death spiral in lending.1 The reasons for the breakdown of the home mortgage market and the private-label market for mortgage-backed securities are well known by now. In this chapter, I focus on lax lending standards for residential mortgages, which were a leading cause of today’s credit crisis and recession. Our broken system of mortgage finance and the private actors in that system – ranging from mortgage brokers, lenders, and appraisers to the rating agencies and securitizers – bear direct responsibility for this breakdown in standards. The story does not stop there. In 2006, depository institutions and their affiliates, which were regulated by federal banking regulators, originated about 54 per...

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