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The Market For Subprime Lending: A Law And Economics Analysis Of Market Failures And Policy Responses, Diego Valiante

Diego Valiante

Subprime mortgages represent a relevant wealth accumulation tool for low-income borrowers, and may promote efficient social policies. However, as recently brought to attention by the financial crisis, origination and distribution services are affected by strong information asymmetries and cognitive biases (rational and irrational). The failure of the subprime mortgages market was triggered by a mixture of irrational and opportunistic behaviours, as well as a lack of regulation, supervision and efficient disclosure. This paper, therefore, sheds lights on four areas of this market, highlighting causes and proposing remedies to structural failures. Therefore, the paper discusses: the financial architecture of the subprime …