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Did Securitization Lead to Lax Screening? Evidence from Subprime Loans

59 Pages Posted: 3 Mar 2008 Last revised: 11 Jan 2009

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Tanmoy K. Mukherjee

Sorin Capital Management, LLC

Amit Seru

Stanford University

Vikrant Vig

London Business School

Date Written: December 25, 2008

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.

Keywords: Securitization, screening, incentives, subprime, defaults, mortgages, disintermediation, subprime crisis, consumer credit

JEL Classification: G21

Suggested Citation

Keys, Benjamin J. and Mukherjee, Tanmoy K. and Seru, Amit and Vig, Vikrant, Did Securitization Lead to Lax Screening? Evidence from Subprime Loans (December 25, 2008). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1093137 or http://dx.doi.org/10.2139/ssrn.1093137

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

Tanmoy K. Mukherjee

Sorin Capital Management, LLC ( email )

400 Atlantic St.
12th floor
Stamford, CT 06901
United States

Amit Seru (Contact Author)

Stanford University ( email )

650 Knight Management
Stanford, CA 94305
United States

Vikrant Vig

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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