Understanding the securitization of subprime mortgage credit
AbstractIn 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 InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 318.
Date of creation: 2008
Date of revision:
Other versions of this item:
- Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
- NEP-ALL-2008-04-12 (All new papers)
- NEP-BAN-2008-04-12 (Banking)
- NEP-URE-2008-04-12 (Urban & Real Estate Economics)
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