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Understanding the securitization of subprime mortgage credit

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  • Adam B. Ashcraft
  • Til Schuermann

Abstract

In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, we draw upon the example of a mortgage pool securitized by New Century Financial during 2006.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 318.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:318

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Related research

Keywords: Subprime mortgage ; Investments - Government policy ; Investment banking ; Mortgage loans ; Mortgage-backed securities ; Predatory lending ; Credit ratings;

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  1. Doron Kliger & Oded Sarig, . "The Information Value of Bond Ratings," Rodney L. White Center for Financial Research Working Papers 13-97, Wharton School Rodney L. White Center for Financial Research.
  2. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  3. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York.
  4. Hanson, Samuel & Schuermann, Til, 2006. "Confidence intervals for probabilities of default," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2281-2301, August.
  5. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
  6. Carmen M. Reinhart, 2002. "An Introduction," World Bank Economic Review, World Bank Group, vol. 16(2), pages 149-150, August.
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