Securitization and moral hazard: evidence from credit score cutoff rules
AbstractMortgage originators use credit score cutoff rules to determine how carefully to screen loan applicants. Recent research has hypothesized that these cutoff rules result from a securitization rule of thumb. Under this theory, an observed jump in defaults at the cutoff would imply that securitization led to lax screening. We argue instead that originators adopted credit score cutoff rules in response to underwriting guidelines from Fannie Mae and Freddie Mac and offer a simple model that rationalizes such an origination rule of thumb. Under this alternative theory, jumps in default are not evidence that securitization caused lax screening. We examine loan-level data and find that the evidence is inconsistent with the securitization rule-of-thumb theory but consistent with the origination rule-of-thumb theory. There are jumps in the number of loans and in their default rate at credit score cutoffs in the absence of corresponding jumps in the securitization rate. We conclude that credit score cutoff rules provide evidence that large securitizers were to some extent able to regulate originators' screening behavior.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 11-6.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-BAN-2011-10-09 (Banking)
- NEP-FMK-2011-10-09 (Financial Markets)
- NEP-URE-2011-10-09 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007.
"Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures,"
07-15, Federal Reserve Bank of Boston.
- Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
- Imbens, Guido W. & Lemieux, Thomas, 2008.
"Regression discontinuity designs: A guide to practice,"
Journal of Econometrics,
Elsevier, vol. 142(2), pages 615-635, February.
- Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Working Papers 13039, National Bureau of Economic Research, Inc.
- Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Technical Working Papers 0337, National Bureau of Economic Research, Inc.
- Vikrant Vig & Amit Seru & Tomasz Piskorski, 2009.
"Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis,"
2009 Meeting Papers
1169, Society for Economic Dynamics.
- Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
- John Krainer & Elizabeth Laderman, 2009. "Mortgage loan securitization and relative loan performance," Working Paper Series 2009-22, Federal Reserve Bank of San Francisco.
- repec:oup:rfinst:v:25:y::i:7:p:2071-2108 is not listed on IDEAS
- McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
- Ryan Bubb & Alex Kaufman, 2011. "Further investigations into the origin of credit score cutoff rules," Working Papers 11-12, Federal Reserve Bank of Boston.
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009.
"Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization,"
2009-17, Federal Reserve Bank of Atlanta.
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization," NBER Working Papers 15159, National Bureau of Economic Research, Inc.
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization," Public Policy Discussion Paper 09-4, Federal Reserve Bank of Boston.
- 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.
- Keys, Benjamin J. & Mukherjee, Tanmoy & Seru, Amit & Vig, Vikrant, 2009. "Financial regulation and securitization: Evidence from subprime loans," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 700-720, July.
- Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2012.
"Trend growth expectations and US house prices before and after the crisis,"
12/2012, Deutsche Bundesbank, Research Centre.
- Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2012. "Trend growth expectations and U.S. house prices before and after the crisis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 394-409.
- Bhardwaj, Geetesh & Sengupta, Rajdeep, 2012. "Subprime mortgage design," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1503-1519.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio).
If references are entirely missing, you can add them using this form.