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Automated Underwriting and the Profitability of Mortgage Securitization

  • Wayne Passmore
  • Roger W. Sparks
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    This paper develops a game-theoretic model of mortgage securitization, which is then used to examine a potential effect of automated underwriting. The paper's primary supposition is that automated underwriting lowers the costs to competitive mortgage originators and a monopolist securitizer of identifying mortgage applicants who are good credit risks. Faced with lower underwriting costs, originators will screen a larger number of mortgage applicants in the hopes of holding more good risks in their portfolios and passing through more bad risks to the securitizer. This mounting adverse-selection problem causes the securitizer's expected revenues to decline; this effect can outweigh the cost-saving benefit of automated underwriting, causing the securitizer's return on equity to fall. Copyright American Real Estate and Urban Economics Association.

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    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 28 (2000)
    Issue (Month): 2 ()
    Pages: 285-305

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    Handle: RePEc:bla:reesec:v:28:y:2000:i:2:p:285-305
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