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Optimal securitization with moral hazard

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  • Hartman-Glaser, Barney
  • Piskorski, Tomasz
  • Tchistyi, Alexei
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    Abstract

    We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the “first loss piece.”

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11002832
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 104 (2012)
    Issue (Month): 1 ()
    Pages: 186-202

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    Handle: RePEc:eee:jfinec:v:104:y:2012:i:1:p:186-202
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Security design; Mortgage backed securities; Moral hazard;

    Find related papers by JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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    Cited by:

    1. Afrasiab Mirza & Eric Stephens, 2016. "Securitization and Aggregate Investment Efficiency," Carleton Economic Papers 16-05, Carleton University, Department of Economics, revised 28 Apr 2016.
    2. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    3. Kawai, Keiichi, 2015. "Reputation for quality and adverse selection," European Economic Review, Elsevier, vol. 76(C), pages 47-59.
    4. Malamud, Semyon & Rui, Huaxia & Whinston, Andrew, 2013. "Optimal incentives and securitization of defaultable assets," Journal of Financial Economics, Elsevier, vol. 107(1), pages 111-135.
    5. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2015. "Regulating deferred incentive pay," IMFS Working Paper Series 91, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    6. Kiff, John & Kisser, Michael, 2011. "A Shot at Regulating Securitization," Discussion Papers 2011/7, Department of Business and Management Science, Norwegian School of Economics.
    7. Gürtler, Marc & Hibbeln, Martin, 2012. "How smart are investors after the subprime mortgage crisis? Evidence from the securitization market," Working Papers IF39V1, Technische Universität Braunschweig, Institute of Finance.
    8. Pagès, H., 2009. "Bank incentives and optimal CDOs," Working papers 253, Banque de France.
    9. Dionne, Georges & Malekan, Sara, 2015. "Optimal form of retention for securitized loans under moral hazard," Working Papers 15-4, HEC Montreal, Canada Research Chair in Risk Management.
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