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Further investigations into the origin of credit score cutoff rules

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  • Ryan Bubb
  • Alex Kaufman

Abstract

Keys, Mukherjee, and Vig (2010a) argue that the evidence presented in Bubb and Kaufman (2009) is based on an inappropriate pooling of loans sold to private-label securitizers with loans sold to the government sponsored enterprises (GSEs). In this paper we investigate the issues raised by the authors and conclude that they do not change our basic analytical approach or conclusions. We examine samples that do not pool together loans sold to these two types of purchasers?a sample of loans bought by the GSEs, a sample of loans originated in 2008?2009 after the private-label market collapsed, and a sample of jumbo loans?and find discontinuities in the number and default rate of loans at credit score cutoffs in the absence of corresponding discontinuities in the securitization rate. We also examine a key assumption underlying their estimates?that no loans are both at risk of being sold to the GSEs and at risk of being sold to private-label securitizers?and show that the data are inconsistent with that assumption. We find that 18 percent of conforming loans in our sample at some time switched between GSE and private-label ownership, demonstrating that the GSEs and private-label securitizers competed for the same loans. Additionally, we show that lender screening cutoffs grew steadily over the period 1997?2010 during which the private-label market rose and collapsed.

Suggested Citation

  • Ryan Bubb & Alex Kaufman, 2011. "Further investigations into the origin of credit score cutoff rules," Working Papers 11-12, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:11-12
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    References listed on IDEAS

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    1. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
    2. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    3. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    4. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
    5. repec:oup:rfinst:v:25:y::i:7:p:2071-2108 is not listed on IDEAS
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    Cited by:

    1. Bhardwaj, Geetesh & Sengupta, Rajdeep, 2014. "Subprime cohorts and loan performance," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 236-252.
    2. Ryan Bubb & Alex Kaufman, 2011. "Securitization and moral hazard: evidence from credit score cutoff rules," Public Policy Discussion Paper 11-6, Federal Reserve Bank of Boston.

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    Keywords

    Mortgage loans; Credit scoring systems;

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