Understanding the Securitization of Subprime Mortgage Credit

Wharton Financial Institutions Center Working Paper No. 07-43

FRB of New York Staff Report, No. 318

82 Pages Posted: 14 Dec 2007 Last revised: 11 Mar 2008

Adam B. Ashcraft

Federal Reserve Bank of New York

Til Schuermann

Oliver Wyman

Multiple version iconThere are 2 versions of this paper

Date Written: March 2008

Abstract

In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that 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 rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, we draw upon the example of a mortgage pool securitized by New Century Financial during 2006.

Keywords: subprime mortgage credit, securitization, rating agencies, principal agent, moral hazard

JEL Classification: G24, G28

Suggested Citation

Ashcraft, Adam B. and Schuermann, Til, Understanding the Securitization of Subprime Mortgage Credit (March 2008). Wharton Financial Institutions Center Working Paper No. 07-43; FRB of New York Staff Report, No. 318. Available at SSRN: https://ssrn.com/abstract=1071189 or http://dx.doi.org/10.2139/ssrn.1071189

Adam B. Ashcraft

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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