Other People's Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business
Regulatory history explaining how a thrift-charter lender grew unsupervised.
Summary
Taub, a law professor and former mutual fund lawyer, argues that the 2008 crisis was the second act of a story that began with the savings and loan crisis, and that the same pattern of deregulation, regulatory capture and bailout repeated because the first episode was resolved in a way that removed accountability without changing the structure.
The legal history is her contribution. She traces the preemption of state consumer protection laws by federal banking regulators, which removed the only authorities actively policing mortgage lending; the Office of Thrift Supervision's competition with other regulators for institutions to supervise, which produced a race to the least demanding standard; the deregulation sequence through Garn-St Germain, Riegle-Neal and Gramm-Leach-Bliley; and the specific legal changes that gave repurchase agreements and derivatives safe harbour from bankruptcy stays, which she argues turned an orderly failure process into a run.
She follows individual homeowners and specific loans through the securitisation chain, which grounds the legal argument in what happened to identifiable people, and she covers the foreclosure documentation failures and the servicing conflicts that followed.
The book is argued from a clear position, that the industry captured its regulators and that the response protected creditors at the expense of homeowners. It is well documented and the legal detail is accurate. Readers looking for a balanced account of the policy choices made in 2008 will find it unsympathetic to the officials involved, and its treatment of the constraints those officials faced is thin.
Key takeaways 7
- Federal preemption of state consumer protection law removed the only regulators actively policing mortgage underwriting before the crisis.
- Regulators competed for institutions to supervise, because their budgets depended on the assessments those institutions paid, which produced a race toward the least demanding standard.
- Bankruptcy safe harbours for repurchase agreements and derivatives converted an orderly failure process into an immediate run on any troubled institution.
- The savings and loan crisis established that losses would be socialised without structural change, which set the expectation that governed behaviour twenty years later.
- Mortgage servicing conflicts meant the party deciding whether to modify a loan had different incentives from the investors who owned it.
- Foreclosure documentation failures were systemic rather than clerical, because the securitisation chain had not maintained the legal records transfers required.
- The 2008 response protected creditors and left household debt intact, which repeated the distributional choice made in the earlier episode.
Who should read it
Investors and policy readers who want the legal and regulatory history behind the mortgage crisis, argued from a critical position.
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