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A Primer on the Role of Securitization in the Credit Market Crisis of 2007

18 Pages Posted: 8 Jan 2009 Last revised: 17 Feb 2009

John D. Martin

Baylor University - Department of Finance, Insurance & Real Estate; Baylor University - Department of Finance, Insurance & Real Estate

Date Written: January 7, 2009

Abstract

In this paper I review the role of securitization in the credit markets and in particular the possible contribution of securitization to the credit crisis of 2007-2008. Based on this review I make the following observations: (i) over the last three decades the originate-to-distribute via securitization model has come to dominate the U.S. credit markets; (ii) the originate-to-distribute model has many possible advantages but brings with it a potentially fatal principal agent problem in the credit screening process; (iii) the growing complexity of the securitization process has given rise to a "market for lemons" problem that may well have contributed to the collapse of the market for securitized issues; and (v) the collapse of the mortgage backed securities market resulted in the use of distress prices by financial institutions to mark-to-market their portfolios and this may well have contributed to the panic that resulted in the failure of the affected financial institutions.

Keywords: Asset Backed Finance, Securitization, Credit Market Crisis

JEL Classification: G21, G23, G24, G28

Suggested Citation

Martin, John D., A Primer on the Role of Securitization in the Credit Market Crisis of 2007 (January 7, 2009). Available at SSRN: https://ssrn.com/abstract=1324349 or http://dx.doi.org/10.2139/ssrn.1324349

John D. Martin (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

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