Understanding the Securitization of Subprime Mortgage Credit
Wharton Financial Institutions Center Working Paper No. 07-43
82 Pages Posted: 14 Dec 2007 Last revised: 11 Mar 2008
Date Written: March 2008
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: Suggested Citation