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The impact of the originate-to-distribute model on banks before and during the financial crisis

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  • Richard J. Rosen

Abstract

The growth of securitization made it easier for banks to sell home mortgage loans that they originated. I explore how mortgage sales affected banks in the years leading up to the financial crisis that began in 2007 and how their pre-crisis mortgage sales affected banks during the crisis. Loan sales are important because most banks sell mortgages as part of the securitization process, but few actually do the securitization. I find that stock returns increase when banks increase sales of mortgages used for refinancing rather than home purchase, suggesting that some banks scale up lending during refi booms. It is this flexibility that is both a plus and a potential minus of this model, since banks profited by scaling up during refi booms, but borrowers during refi booms were riskier than at other times, possibly adding risk to the financial system. I also find that losses during the financial crisis were related to pre-crisis mortgage sales, with the losses being roughly of the same magnitudes as the gains due to mortgage sales from 2001-2006.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2010-20.

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Date of creation: 2010
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Handle: RePEc:fip:fedhwp:wp-2010-20

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Keywords: Financial crises ; Financial crises - United States;

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References

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  1. Gary B. Gorton & Nicholas S. Souleles, 2007. "Special Purpose Vehicles and Securitization," NBER Chapters, in: The Risks of Financial Institutions, pages 549-602 National Bureau of Economic Research, Inc.
  2. Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
  3. George Pennacchi, . "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 7-87, Wharton School Rodney L. White Center for Financial Research.
  4. Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
  5. 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.
  6. Barbara Casu & Andrew Clare & Anna Sarkisyan & Stephen Thomas, 2011. "Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies," The European Journal of Finance, Taylor & Francis Journals, vol. 17(9-10), pages 769-788, November.
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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. Duchin, Ran & Sosyura, Denis, 2014. "Safer ratios, riskier portfolios: Banks׳ response to government aid," Journal of Financial Economics, Elsevier, vol. 113(1), pages 1-28.

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