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Adverse selection in mortgage securitization

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  • Agarwal, Sumit
  • Chang, Yan
  • Yavas, Abdullah

Abstract

Using several large data sets of mortgage loans originated between 2004 and 2007, we find that in the prime mortgage market, banks generally sold low-default-risk loans into the secondary market while retaining higher-default-risk loans in their portfolios. In contrast, these lenders retained loans with lower prepayment risk relative to loans they sold. Securitization strategy of lenders changed dramatically in 2007 as the crisis set in with most unwilling to retain higher-default-risk loans in return for lower prepayment risk. Contrary to the prime market, the subprime market does not exhibit any clear pattern of adverse selection.

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Bibliographic Info

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

Volume (Year): 105 (2012)
Issue (Month): 3 ()
Pages: 640-660

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Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:640-660

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

Related research

Keywords: Mortgage; Securitization; Default; Adverse selection;

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References

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  1. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October.
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Citations

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Cited by:
  1. Peter Kondor & Ana Babus, 2013. "Trading and Information Diffusion in Over-the-Counter Markets," 2013 Meeting Papers 792, Society for Economic Dynamics.
  2. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2013. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," NBER Working Papers 19606, National Bureau of Economic Research, Inc.
  3. Ambrose, Brent W. & Diop, Moussa, 2014. "Spillover effects of subprime mortgage originations: The effects of single-family mortgage credit expansion on the multifamily rental market," Journal of Urban Economics, Elsevier, vol. 81(C), pages 114-135.

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