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Understanding the Securitization of Subprime Mortgage Credit

  • Ashcraft, Adam B.
  • Schuermann, Til

In this survey we provide an overview of the subprime mortgage securitization process and the seven key informational frictions which arise. We discuss how market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how the rating agencies assign credit ratings to mortgage-backed securities, and outline how the agencies monitor the performance of mortgage pools over time. Throughout the survey, we draw upon the example of a mortgage pool securitized by New Century during 2006.

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File URL: http://dx.doi.org/10.1561/0500000024
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Article provided by now publishers in its journal Foundations and Trends(R) in Finance.

Volume (Year): 2 (2008)
Issue (Month): 3 (June)
Pages: 191-309

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Handle: RePEc:now:fntfin:0500000024
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  1. Hanson, Samuel & Schuermann, Til, 2006. "Confidence intervals for probabilities of default," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2281-2301, August.
  2. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
  3. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  4. Reinhart, Carmen, 2002. "Financial crises, credit ratings, and bank failures: An introduction," MPRA Paper 13247, University Library of Munich, Germany.
  5. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, vol. 55(6), pages 2879-2902, December.
  6. Donald P. Morgan, 2007. "Defining and detecting predatory lending," Staff Reports 273, Federal Reserve Bank of New York.
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