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Optimal securitization with moral hazard

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

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.”

Suggested Citation

  • Hartman-Glaser, Barney & Piskorski, Tomasz & Tchistyi, Alexei, 2012. "Optimal securitization with moral hazard," Journal of Financial Economics, Elsevier, vol. 104(1), pages 186-202.
  • Handle: RePEc:eee:jfinec:v:104:y:2012:i:1:p:186-202
    DOI: 10.1016/j.jfineco.2011.12.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    2. Kawai, Keiichi, 2015. "Reputation for quality and adverse selection," European Economic Review, Elsevier, vol. 76(C), pages 47-59.
    3. Gilles Chemla & Christopher A. Hennessy, 2014. "Skin in the Game and Moral Hazard," Post-Print hal-01457063, HAL.
    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. Kiff, John & Kisser, Michael, 2014. "A shot at regulating securitization," Journal of Financial Stability, Elsevier, vol. 10(C), pages 32-49.
    6. Wilde, Christian & Krahnen, Jan Pieter, 2017. "Skin in the game in ABS transactions: A critical review of policy options," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168296, Verein für Socialpolitik / German Economic Association.
    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. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, C.E.P.R. Discussion Papers.
    9. repec:dau:papers:123456789/11540 is not listed on IDEAS
    10. Rose Neng Lai & Robert Order, 2014. "Securitization, Risk-Taking and the Option to Change Strategy," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 343-362, June.
    11. Afrasiab Mirza & Eric Stephens, 2016. "Securitization and Aggregate Investment Efficiency," Carleton Economic Papers 16-05, Carleton University, Department of Economics, revised 24 Jan 2017.
    12. Pagès, H., 2009. "Bank incentives and optimal CDOs," Working papers 253, Banque de France.
    13. repec:gam:jrisks:v:5:y:2017:i:4:p:55-:d:115890 is not listed on IDEAS
    14. Krahnen, Jan Pieter & Wilde, Christian, 2017. "Skin-in-the-game in ABS transactions: A critical review of policy options," SAFE White Paper Series 46, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    15. Georges Dionne & Sara Malekan, 2017. "Optimal Form of Retention for Securitized Loans under Moral Hazard," Risks, MDPI, Open Access Journal, vol. 5(4), pages 1-13, October.
    16. repec:oup:rcorpf:v:2:y:2014:i:2:p:154-187. is not listed on IDEAS

    More about this item

    Keywords

    Security design; Mortgage backed securities; Moral hazard;

    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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