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Did Securitization Lead to Lax Screening? Evidence from Subprime Loans

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Author Info

  • Benjamin J. Keys

    (Federal Reserve Board of Governors.)

  • Tanmoy Mukherjee

    (Sorin Capital Management.)

  • Amit Seru

    (University of Chicago, Booth School of Business.)

  • Vikrant Vig

    (London Business School.)

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. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 1 (February)
Pages: 307-362

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:1:p:307-362

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  1. Agency Costs in the Mortgage Securitization Market
    by Jonas Feit in Conscience Warrior on 2013-05-13 13:27:00
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