Did Securitization Lead to Lax Screening? Evidence from Subprime Loans

Securitization and Mortgage Default

“…This is indeed what they find, for subprime ARMs. We confirm the results of Keys et al (2009) for our sample of subprime ARMs. However, we do not find a significant interaction between documentation type and private securitization for our other subsamples.…”

“…For example, the recently released U.S Treasury report on regulatory reform notes that B[t]he lack of transparency and standards in markets for securitized loans helped to weaken underwriting standards,^and the report goes on to propose that issuers be required to maintain a 5 % stake in any securitization. 2 This has also been supported in recent academic work, for example, Mian and Sufi (2009), and Keys et al (2009).…”

“…As Keys et al (2009) suggest, the asymmetry of information between lenders and investors is likelier to be more pronounced for low documentation loans, and thus one might expect a stronger effect from securitization. This is indeed what they find, for subprime ARMs.…”

“…From the perspective of this paper, however, the key limitation of the analysis in Keys et al (2009) is that they can only examine the effect of securitization for a narrow subset of loansthose in the neighborhood of their cutoff. By contrast, our approach allows us to examine a much broader segment of the mortgage market.…”

“…The most prominent of these is Keys et al (2009). This paper uses loan-level data but only for securitized loans (from the Loan Performance [LP] ABS database).…”