Abstract
A central question surrounding the current subprime crisis is whether the securitization process reduced the incentives of financial intermediaries to carefully screen borrowers. We examine this issue empirically using data on securitized subprime mortgage loan contracts in the United States. We exploit a specific rule of thumb in the lending market to generate exogenous variation in the ease of securitization and compare the composition and performance of lenders' portfolios around the ad hoc threshold. Conditional on being securitized, the portfolio with greater ease of securitization defaults by around 10%-25% more than a similar risk profile group with a lesser ease of securitization. We conduct additional analyses to rule out differential selection by market participants around the threshold and lenders employing an optimal screening cutoff unrelated to securitization as alternative explanations. The results are confined to loans where intermediaries' screening effort may be relevant and soft information about borrowers determines their creditworthiness. Our findings suggest that existing securitization practices did adversely affect the screening incentives of subprime lenders.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 307-362 |
| Number of pages | 56 |
| Journal | Quarterly Journal of Economics |
| Volume | 125 |
| Issue number | 1 |
| DOIs | |
| State | Published - Feb 2010 |
Funding
∗We thank Viral Acharya, Effi Benmelech, Patrick Bolton, Daniel Bergstresser, Charles Calomiris, Douglas Diamond, John DiNardo, Charles Good-hart, Edward Glaeser, Dwight Jaffee, Chris James, Anil Kashyap, Jose Liberti, Gregor Matvos, Chris Mayer, Donald Morgan, Adair Morse, Daniel Paravisini, Karen Pence, Guillaume Plantin, Manju Puri, Mitch Petersen, Raghuram Ra-jan, Uday Rajan, Adriano Rampini, Joshua Rauh, Chester Spatt, Steve Schaefer, Henri Servaes, Morten Sorensen, Jeremy Stein, James Vickery, Annette Vissing-Jorgensen, Paul Willen, three anonymous referees, and seminar participants at Boston College, Columbia Law, Duke, the Federal Reserve Bank of Philadelphia, the Federal Reserve Board of Governors, the London Business School, the London School of Economics, Michigan State, NYU Law, Northwestern, Oxford, Princeton, Standard and Poor’s, the University of Chicago Applied Economics Lunch, and the University of Chicago Finance Lunch for useful discussions. We also thank numerous conference participants for their comments. Seru thanks the Initiative on Global Markets at the University of Chicago for financial support. The opinions expressed in the paper are those of the authors and do not reflect the views of the Board of Governors of the Federal Reserve System or Sorin Capital Management. Shu Zhang provided excellent research assistance. All remaining errors are our responsibility. [email protected], tmukherjee@ sorincapital.com, [email protected], [email protected].
ASJC Scopus subject areas
- Economics and Econometrics
