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http://ssrn.com/abstract=2215422
 
 

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Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market


Tomasz Piskorski


Columbia Business School - Finance and Economics

Amit Seru


University of Chicago - Booth School of Business

James Witkin


Columbia University - Columbia Business School

February 12, 2013

Journal of Finance, Forthcoming
Columbia Business School Research Paper No. 13-7
Fama-Miller Working Paper

Abstract:     
We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality -- misreported occupancy status of borrower and misreported second liens -- by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.

Number of Pages in PDF File: 74

Keywords: Misrepresentation, Underwriters, Mortgages, Subprime, Crisis, Fraud, Securitization, Banks, Intermediaries

JEL Classification: G14, G21, G24, G28, K22

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Date posted: February 13, 2013 ; Last revised: August 30, 2014

Suggested Citation

Piskorski, Tomasz and Seru, Amit and Witkin, James, Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market (February 12, 2013). Journal of Finance, Forthcoming; Columbia Business School Research Paper No. 13-7 ; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2215422 or http://dx.doi.org/10.2139/ssrn.2215422

Contact Information

Tomasz Piskorski
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

James Witkin
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
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