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.
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.
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