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Optimal securitization with moral hazard

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  • Hartman-Glaser, Barney
  • Piskorski, Tomasz
  • Tchistyi, Alexei
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    Abstract

    We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the “first loss piece.”

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11002832
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 104 (2012)
    Issue (Month): 1 ()
    Pages: 186-202

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    Handle: RePEc:eee:jfinec:v:104:y:2012:i:1:p:186-202

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Security design; Mortgage backed securities; Moral hazard;

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    References

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    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
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    16. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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    Citations

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    Cited by:
    1. Kiff, John & Kisser, Michael, 2011. "A Shot at Regulating Securitization," Discussion Papers 2011/7, Department of Business and Management Science, Norwegian School of Economics.
    2. Gürtler, Marc & Hibbeln, Martin, 2012. "How smart are investors after the subprime mortgage crisis? Evidence from the securitization market," Working Papers IF39V1, Technische Universität Braunschweig, Institute of Finance.
    3. Chemla, Gilles & Hennessy, Christopher A., 2013. "Skin in the Game and Moral Hazard," Economics Papers from University Paris Dauphine 123456789/11540, Paris Dauphine University.
    4. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    5. Malamud, Semyon & Rui, Huaxia & Whinston, Andrew, 2013. "Optimal incentives and securitization of defaultable assets," Journal of Financial Economics, Elsevier, vol. 107(1), pages 111-135.

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