Journal of Financial Services Research

, Volume 49, Issue 2–3, pp 281–309 | Cite as

Securitization and Mortgage Default



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 “early defaulting loans” account for this: those that were so risky that they defaulted before they could be securitized.


Mortgage lending Securitization Adverse selection Mortgage default 



The author thanks Mitchell Berlin, Philip Bond, Paul Calem, Larry Cordell, Scott Frame, Will Goetzmann, Robert Hunt, David Musto, Leonard Nakamura, Richard Rosen, Amit Seru, Anthony Sanders, Nicholas Souleles, and Paul Willen, as well as participants at the Wharton Macro Finance Lunch, the FDIC Mortgage Default Symposium, the Yale Financial Crisis Conference, the Mid-Atlantic Research Conference, Ben-Gurion University, Tel-Aviv University, and the Conference on Enhancing Prudential Standards in Financial Regulations. I am particularly indebted to Mathan Glezer, Bob O’Loughlin, and Ted Wiles for outstanding research support.


  1. Adelino M (2009) How much do investors rely on ratings? The case of mortgage backed securities. ManuscriptGoogle Scholar
  2. Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Evanoff D (2011) The role of securitization in mortgage renegotiation. J Financ Econ 102:3CrossRefGoogle Scholar
  3. Agarwal S, Chang Y, Yavas A (2012) Adverse selection in mortgage securitization. J Financ Econ 105:3CrossRefGoogle Scholar
  4. Ambrose B, LaCour-Little M, Sanders A (2005) Does regulatory capital arbitrage, reputation, or asymmetric information drive securitization? J Financ Serv Res 28:1CrossRefGoogle Scholar
  5. Ashcraft A, Schuermann T (2008) Understanding the securitization of subprime mortgage credit. Federal Reserve Bank New York Staff Report 318Google Scholar
  6. Berger AN, Udell GF (1990) Collateral, loan quality, and bank risk. J Monet Econ 25:1CrossRefGoogle Scholar
  7. Bubb R, Kaufman A (2014) Securitization and moral hazard: evidence from a lender cutoff rule. J Monet Econ 63:1CrossRefGoogle Scholar
  8. Calem P, Henderson C, Liles J (2010) ‘Cream-Skimming’ in subprime mortgage securitizations: which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007? Federal Reserve Bank of Philadelphia Working Paper 10–8Google Scholar
  9. Demarzo P, Duffie D (1999) A liquidity-based model of security design. Econometrica 1999(67):65–99CrossRefGoogle Scholar
  10. Elul R, Souleles NS, Chomsisengphet S, Glennon D, Hunt R (2010) What ‘Triggers’ mortgage default? Am Econ Rev 100:2CrossRefGoogle Scholar
  11. Foote CL, Gerardi K, Goette L, Willen PS (2009) Reducing foreclosures. Federal Reserve Bank of Boston Public Policy Discussion Paper 09–2Google Scholar
  12. Ghent A, Kudlyak M (2011) Recourse and residential mortgage default: theory and evidence from U.S. States. Rev Financ Stud 24:9Google Scholar
  13. Gorton G (2008) The Panic of 2007. Yale ICF Working Paper 08–24Google Scholar
  14. Gorton G, Souleles NS (2007) Special purpose vehicles and securitization. In: Stulz R, Carey M (eds) The risks of financial institutions. University of Chicago Press, ChicagoGoogle Scholar
  15. Gross DB, Souleles NS (2002) An empirical analysis of personal bankruptcy and delinquency. Rev Financ Stud 15(1):319–347CrossRefGoogle Scholar
  16. Haughwout A, Mayer C, Tracy J (2009) Subprime mortgage pricing: the impact of race, ethnicity, and gender on the cost of borrowing. Federal Reserve Bank of New York Staff Report 368Google Scholar
  17. James C (1987) The use of loan sales and standby letters of credit by commercial banks. J Monet Econ 22:399–422Google Scholar
  18. Jiang W, Nelson A, Vytlacil E (2014) Securitization and loan performance: a contrast of ex ante and ex post relations in the mortgage market. Rev Financ Stud 27(2):454–483CrossRefGoogle Scholar
  19. Kendall L (1996) Securitization: a new era in American finance. In: Kendall LT, Fishman MJ (eds) A primer on securitization. MIT Press, CambridgeGoogle Scholar
  20. Keys B, Mukherjee T, Seru A, Vig V (2009) Did securitization lead to lax screening? Evidence from subprime loans. Q J Econ 125:1Google Scholar
  21. Krainer J, Laderman E (2014) Mortgage loan securitization and relative loan performance. J Financ Serv Res 45:1CrossRefGoogle Scholar
  22. Mian A, Sufi A (2009) The consequences of mortgage credit expansion: evidence from the U.S. mortgage default crisis. Q J Econ 124(4):1449–1496CrossRefGoogle Scholar
  23. Parlour C, Plantin G (2008) Loan sales and relationship banking. J Financ 63(3):1291–1314CrossRefGoogle Scholar
  24. Piskorski T, Seru A, Vig V (2010) Securitization and distressed loan renegotiation: evidence from the subprime mortgage crisis. J Financ Econ 97:369–397CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Research DepartmentFederal Reserve Bank of PhiladelphiaPhiladelphiaUSA

Personalised recommendations