What mortgage-backed securities and lemons have in common

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Stanford profs Kenneth Scott and John Taylor had an op-ed in yesterday’s WSJ arguing for “mandated transparency” in mortgage securitization. This brought to mind a conversation I had last week with  Andrew Dubinsky, who runs a lending software company called Encomia and would love it if somebody mandated more disclosure in mortgage securitization.

Right now, of course, mortage applications are paper extravaganzas, and the vast majority of what gets written on that paper never makes its way to investors. Dubinsky estimates that 2,000 to 2,500 data points are collected when you get or refinance a mortgage. Bundle that mortgage with 499 others into a mortgage-backed security and you’re talking about between 1 million and 1.25 million “discrete pieces of data,” as Dubinsky puts it.

What happens when that MBS is brought to market? The rating agencies get to see 16 data points. Investors get access to two.

These would seem to have the makings of a market for lemons, no?

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