MBS Ratings and the Mortgage Credit Boom
AbstractWe study credit ratings on subprime and Alt-A mortgage-backed securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly-rated securities in each deal is decreasing in mortgage credit risk (measured either ex-ante or ex-post), suggesting ratings contain useful information for investors. However, we also find evidence of significant time-variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses, and large rating downgrades) amongst deals with observably higher-risk mortgages based on a simple ex-ante model, and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-89S.
Date of creation: 2010
Date of revision:
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Web page: http://center.uvt.nl
Credit Rating Agencies; Subprime Crisis; Mortgage-Backed Securities;
Other versions of this item:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
- NEP-BAN-2010-09-11 (Banking)
- NEP-FMK-2010-09-11 (Financial Markets)
- NEP-RMG-2010-09-11 (Risk Management)
- NEP-URE-2010-09-11 (Urban & Real Estate Economics)
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