Consumer Law

Michael S. Barr et al. on Behaviorally Informed Home Mortgage Regulation

By Jeff Sovern

Michael S. Barr of Michigan, Sendhil Mullainathan of Harvard's Economics Department and the National Bureau of Economic Research (NBER), and Eldar Shafir of Princeton have co-authored "Behaviorally Informed Home Mortgage Regulation."  Here's the abstract:

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Full post as published by CL&P Blog on November 18, 2008 (boomark / email).