Securitization and Mortgage Default
- 811 Downloads
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.
KeywordsMortgage 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.
- Adelino M (2009) How much do investors rely on ratings? The case of mortgage backed securities. ManuscriptGoogle Scholar
- Ashcraft A, Schuermann T (2008) Understanding the securitization of subprime mortgage credit. Federal Reserve Bank New York Staff Report 318Google Scholar
- 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
- Foote CL, Gerardi K, Goette L, Willen PS (2009) Reducing foreclosures. Federal Reserve Bank of Boston Public Policy Discussion Paper 09–2Google Scholar
- Ghent A, Kudlyak M (2011) Recourse and residential mortgage default: theory and evidence from U.S. States. Rev Financ Stud 24:9Google Scholar
- Gorton G (2008) The Panic of 2007. Yale ICF Working Paper 08–24Google Scholar
- 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
- 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
- James C (1987) The use of loan sales and standby letters of credit by commercial banks. J Monet Econ 22:399–422Google Scholar
- Kendall L (1996) Securitization: a new era in American finance. In: Kendall LT, Fishman MJ (eds) A primer on securitization. MIT Press, CambridgeGoogle Scholar
- 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