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Optimal securitization with moral hazard

  • Hartman-Glaser, Barney
  • Piskorski, Tomasz
  • Tchistyi, Alexei
Registered author(s):

    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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    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

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