Did Securitization Lead to Lax Screening? Evidence from Subprime Loans
Benjamin J. Keys
Harris School of Public Policy
Tanmoy K. Mukherjee
Sorin Capital Management, LLC
Amit Seru
University of Chicago – Booth School of Business and NBER
Vikrant Vig
London Business School
December 25, 2008
EFA 2008 Athens Meetings Paper
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Abstract:
A central question surrounding the current subprime crisis is whether the securitization process reduced the incentives of financial intermediaries to carefully screen borrowers. We empirically examine this issue 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 exogenous variation in the 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 10-25% more than a similar risk profile group with a lower probability of securitization. We conduct additional analyses to rule out selection on the part of borrowers, lenders, or investors as alternative explanations. The results are confined to loans where intermediaries’ screening effort may be relevant and soft information about borrowers determines their creditworthiness. Our findings suggest that existing securitization practices did adversely affect the screening incentives of lenders.
