Did Securitization Lead to Lax Screening ? Evidence From Subprime Loans 2001-2006 ∗

Theories of financial intermediation suggest that securitization, the act of converting illiquid loans into liquid securities, could reduce the incentives of financial intermediaries to screen borrowers. We empirically examine this question using a unique dataset on securitized subprime mortgage loan contracts in the United States. We exploit a specific rule of thumb in the lending market to generate an exogenous variation in ease of securitization and compare the composition and performance of lenders’ portfolios around the ad-hoc threshold. Conditional on being securitized, the portfolio that is more likely to be securitized defaults by around 20% more than a similar risk profile group with a lower probability of securitization. Crucially, these two portfolios have similar observable risk characteristics and loan terms. Since our findings are conditional on securitization, we conduct additional analyses to address selection on the part of borrowers, lenders, or investors as explanations. Our results suggest that securitization does adversely affect the screening incentives of lenders.

[1]  Douglas W. Diamond.  Financial Intermediation and Delegated Monitoring , 1984 .

[2]  Yuliya Demyanyk,et al.  Understanding the Subprime Mortgage Crisis , 2008 .

[3]  Glenn B. Canner,et al.  The role of specialized lenders in extending mortgages to lower-income and minority homebuyers , 1999 .

[4]  Philip E. Strahan,et al.  NBER WORKING PAPER SERIES SECURITIZATION AND THE DECLINING IMPACT OF BANK FINANCE ON LOAN SUPPLY: EVIDENCE FROM MORTGAGE ACCEPTANCE RATES , 2022 .

[5]  Sendhil Mullainathan,et al.  Do Firm Boundaries Matter , 2001 .

[6]  J. Tirole,et al.  Financial Intermediation, Loanable Funds, and The Real Sector , 1997 .

[7]  David V. Pritchett.  Econometric policy evaluation: A critique , 1976 .

[8]  Elena Loutskina.  Does Securitization affect Bank Lending? Evidence from Bank Responses to Funding Shocks , 2005 .

[9]  J. Tirole,et al.  Exit Options in Corporate Finance: Liquidity versus Incentives , 2004 .

[10]  Marco Pagano,et al.  Collateral Versus Project Screening: A Model of Lazy Banks , 2001 .

[11]  Coffee,et al.  Liquidity Versus Control: The Institutional Investor as Corporate Monitor , 1991 .

[12]  George G. Pennacchi.  Loan Sales and the Cost of Bank Capital , 1988 .

[13]  S. Chomsisengphet,et al.  The evolution of the subprime mortgage market , 2006 .

[14]  M. C. Jones,et al.  A reliable data-based bandwidth selection method for kernel density estimation , 1991 .

[15]  Raghuram G. Rajan,et al.  Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking , 1999, Journal of Political Economy.

[16]  M. Puri,et al.  On Loan Sales, Loan Contracting, and Lending Relationships , 2007 .

[17]  David Card,et al.  Tipping and the Dynamics of Segregation in Neighborhoods and Schools , 2006 .

[18]  Frank J. Fabozzi,et al.  Collateralized Debt Obligations: Structures and Analysis , 2002 .

[19]  P. Calem,et al.  Neighborhood patterns of subprime lending: Evidence from disparate cities , 2004 .

[20]  Mark Doms,et al.  Subprime mortgage delinquency rates , 2007 .

[21]  P. Calem.  Hitting the Wall: Credit as an Impediment to Homeownership By , 2003 .

[22]  Kenneth Temkin,et al.  Subprime Markets, the Role of GSEs, and Risk Based Pricing , 2002 .

[23]  Christine A. Parlour,et al.  Loan Sales and Relationship Banking , 2008 .

[24]  Ernst G. Maug,et al.  Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control? , 1998 .

[25]  A. Yezer,et al.  Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply , 2005 .

[26]  Amir Sufi.  Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans , 2007 .

[27]  A. Bhide.  The hidden costs of stock market liquidity , 1993 .

[28]  Peter Eisenman,et al.  Houses of Cards , 1987 .

[29]  Giovanni Dell'Ariccia,et al.  Credit Booms and Lending Standards : Evidence from the Subprime Mortgage Market Prepared by Giovanni Dell ’ Ariccia , Deniz Igan , and Luc Laeven , 2008 .

[30]  Joan V. Robinson,et al.  The Nature of the Firm , 2004 .

[31]  J. Stein,et al.  Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms , 2000 .

[32]  Gary B. Gorton,et al.  Banks and Loan Sales: Marketing Non-Marketable Assets , 1990 .

[33]  Karen Pence.  Foreclosing on Opportunity: State Laws and Mortgage Credit , 2003, Review of Economics and Statistics.

[34]  A. Morrison.  Credit Derivatives, Disintermediation and Investment Decisions , 2001 .

[35]  R. Mclean.  Subprime Mortgages: America's Latest Boom and Bust , 2009 .

[36]  David S. Lee,et al.  Economic Impacts of New Unionization on Private Sector Employers: 1984–2001 , 2004 .

[37]  M. Petersen,et al.  Does Distance Still Matter? The Information Revolution in Small Business Lending , 2000 .