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Abstract

Private risk capital has virtually disappeared from the U.S. housing finance market since the market's collapse in 2008. This Essay argues that private risk capital is unlikely to return in any scale until the informational problems in housing finance are resolved so that investors can accurately gauge and price the risks they assume. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 represents a first step in reforming U.S. housing finance. It takes a multilayered approach by regulating both loan origination and securitization. Dodd- Frank's reforms, however, fail to address adequately the opacity of credit-risk information in mortgage markets and thus are insufficient to restore private risk capital. This Essay argues that such Dodd-Frank reforms as "skin-in-the-game" credit-risk retention fail to solve the informational problems in the housing finance market, as they merely replace one source of informational opacity with another. Instead, this Essay argues, it is necessary to institutionalize structural changes in the housing finance market, particularly the standardization of mortgage securitization, that force the production of information necessary for accurate risk-pricing.

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