With several U.S. subprime lenders tumbling towards bankruptcy, the question arises: has market deregulation failed? Do exotic lending products constitute a market failure rather than progress?
A recent paper argues otherwise, finding that deregulation and the subsequent rapid development of the mortgage markets has allowed home buyers to buy houses according to future incomes rather than just current income and wealth, thus effectively expanding the universe of home owners in the U.S. What role did the Government Sponsored Enterprises Fannie Mae and Freddie Mac play in mortgage markets becoming more efficient? None, according to the authors.
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