Advanced Search
MyIDEAS: Login to save this paper or follow this series

Going for broke: New Century Financial Corporation, 2004-2006

Contents:

Author Info

  • Landier, Augustin
  • Sraer, David
  • Thesmar, David

Abstract

Using 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 Info

If 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.
File URL: http://tse-fr.eu/images/doc/wp/fit/10-199.pdf
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 10-199.

as in new window
Length:
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:tse:wpaper:23478

Contact details of provider:
Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Tomasz Piskorski & Alexei Tchistyi, 2010. "Optimal Mortgage Design," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3098-3140, August.
  2. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. repec:hal:psewpa:hal-00719952 is not listed on IDEAS
  3. 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.
  4. John Thanassoulis, 2011. "Industrial Structure, Executives' Pay And Myopic Risk Taking," Economics Series Working Papers 571, University of Oxford, Department of Economics.
  5. González-Aguado, Carlos & Suarez, Javier, 2011. "Interest Rates and Credit Risk," CEPR Discussion Papers 8398, C.E.P.R. Discussion Papers.
  6. Edouard Challe & Benoit Monjon & Xavier Ragot, 2012. "Equilibrium Risk Shifting and Interest Rate in an Opaque Financial System," Working Papers hal-00719952, HAL.
  7. Sylvain Champonnois, 2011. "The limits of market discipline: proprietary trading and aggregate risk," 2011 Meeting Papers 1013, Society for Economic Dynamics.
  8. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:tse:wpaper:23478. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.