Originate-to-Distribute Model and the Subprime Mortgage Crisis

53 Pages Posted: 22 Jul 2008 Last revised: 20 May 2010

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2010

Abstract

An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively poor quality mortgages. This result is not explained away by differences in observable borrower quality, geographical location of the property or the cost of capital of high and low OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital-constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage induced risk-taking behavior significantly contributed to the current sub-prime mortgage crisis.

Keywords: Sub-prime crisis, originate-to-distribute, screening, bank loans, risk-management, incentives

JEL Classification: G11, G12, G13, G14.

Suggested Citation

Purnanandam, Amiyatosh K., Originate-to-Distribute Model and the Subprime Mortgage Crisis (April 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1167786 or http://dx.doi.org/10.2139/ssrn.1167786

Amiyatosh K. Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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