Securitization and Mortgage Default

Abstract

We find that private-securitized loans perform worse than observably similar, nonsecuritized loans, which provides evidence for adverse selection. The effect of securitization is strongest for prime mortgages, which have not been studied widely in the previous literature and, in particular, prime adjustable-rate mortgages (ARMs): These become delinquent at a 30 % higher rate when privately securitized. By contrast, our baseline estimates for subprime mortgages show that private-securitized loans default at lower rates. We demonstrate, however, that Bearly defaulting loans^account for this: those that were so risky that they defaulted before they could be securitized.

Securitization and credit quality in the European market

“…This is either because they usually have particular expertise on certain sectors, or because they have a lending relationship with the borrower that allows them to collect proprietary information over time. From an investor's perspective, a related argument is that even sophisticated investors might have neglected tail risks (Gennaioli, Shleifer, & Vishny, 2012).…”

The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities

“…But the average of this variable across all issuers is about 60 percent, suggesting that other issuers sold a significant fraction of deals without a pool specifically directed at the GSEs. 27 One notable observation from the table is that there is substantial variation in the GSE deal fraction variable both across issuers as well as over time for the same issuer.…”

“…This paper builds on a large literature that highlights the fact that the originate-to-distribute model of mortgage finance can give rise to a number of conflicts of interest (Ashcraft and Schuermann, 2008). Several studies have analyzed whether securitization gives rise to moral hazard in terms of originator screening incentives (Keys, Mukherjee, Seru, and Vig, 2010;Purnanandam, 2011;Keys, Seru and Vig, 2012;Bubb and Kaufman, 2014), as well as the observable risk characteristics of securitized loans and portfolio loans (Ambrose et al, 2005;Krainer and Laderman, 2009;Elul, 2011;Agarwal, Chang and Yavas, 2012;and Jiang, Nelson, and Vytlacil 2014b). Importantly, investors understand the misaligned incentives associated with securitization, and protect themselves from these frictions through contracting features (e.g., by requiring representations and warranties about loan quality), security design features (e.g., requiring higher subordination levels) or required risk premia (Begley and Purnanandum 2013).…”

Testing for Information Asymmetry in the Mortgage Servicing Market

“…Although a large body of theoretical and empirical literature has examined asymmetric information through the securitization process (see Ambrose et al, 2005;Keys et al, 2010Keys et al, , 2012Agarwal et al, 2012;Krainer and Laderman, 2014;Malekan et al, 2014;Albertazzi et al, 2015; and Elul, 2016, among many others), we are the first to investigate this second-stage asymmetric information problem. The above-mentioned studies focus on information asymmetry between lenders and investors at the first stage of securitization.…”