Going for broke: New Century Financial Corporation, 2004-2006
AbstractUsing loan level data, we investigate the lending behavior of a large subprime mortgage issuer prior to its bankruptcy in the beginning of 2007. In 2004, this firm suddenly started to massively issue new loans contracts that featured deferred amortization ("interestonly loans") to high income and high FICO households. We document that these loans were not only riskier, but also that their returns were more sensitive to real estate prices than standard contracts. Implicitly, this lender dramatically increased its exposure to its own legacy asset, which is what a standard model of portfolio selection in distress would predict. We provide additional evidence on New Century’s lending behavior, which are consistent with a risk shifting strategy. Finally, we are able to tie this sudden change in behavior to the sharp monetary policy tightening implemented by the Fed in the spring of 2004. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions.
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 Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 649.
Date of creation: Sep 2010
Date of revision:
Contact details of provider:
Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
Other versions of this item:
- Landier, Augustin & Sraer, David & Thesmar, David, 2010. "Going for broke: New Century Financial Corporation, 2004-2006," TSE Working Papers 10-199, Toulouse School of Economics (TSE).
- NEP-ALL-2010-12-11 (All new papers)
- NEP-BAN-2010-12-11 (Banking)
- NEP-FMK-2010-12-11 (Financial Markets)
- NEP-MAC-2010-12-11 (Macroeconomics)
- NEP-URE-2010-12-11 (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.:
- Tomasz Piskorski & Alexei Tchistyi, 2010. "Optimal Mortgage Design," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3098-3140, August.
- Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
- Challe, Edouard & Mojon, Benoit & Ragot, Xavier, 2013.
"Equilibrium risk shifting and interest rate in an opaque financial system,"
European Economic Review,
Elsevier, vol. 63(C), pages 117-133.
- Edouard Challe & Benoit Monjon & Xavier Ragot, 2012. "Equilibrium Risk Shifting and Interest Rate in an Opaque Financial System," Working Papers hal-00719952, HAL.
- Challe, E. & Mojon, B. & Ragot, X., 2012. "Equilibrium Risk Shifting and Interest Rate in an Opaque Financial System," Working papers 391, Banque de France.
- González-Aguado, Carlos & Suarez, Javier, 2011. "Interest Rates and Credit Risk," CEPR Discussion Papers 8398, C.E.P.R. Discussion Papers.
- repec:hal:psewpa:hal-00719952 is not listed on IDEAS
- Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, in: Housing and the Financial Crisis, pages 143-204 National Bureau of Economic Research, Inc.
- John Thanassoulis, 2011. "Industrial Structure, Executives' Pay And Myopic Risk Taking," Economics Series Working Papers 571, University of Oxford, Department of Economics.
- Rancière, Romain & Tornell, Aaron, 2011. "Financial Black-Holes: The Interaction of Financial Regulation and Bailout Guarantees," CEPR Discussion Papers 8248, C.E.P.R. Discussion Papers.
- Sylvain Champonnois, 2011. "The limits of market discipline: proprietary trading and aggregate risk," 2011 Meeting Papers 1013, Society for Economic Dynamics.
- Beck, Paul J. & Narayanamoorthy, Ganapathi S., 2013. "Did the SEC impact banks' loan loss reserve policies and their informativeness?," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 42-65.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.