How Important is Having Skin in the Game? Originator-Sponsor Affiliation and Losses on Mortgage-Backed Securities

55 Pages Posted: 1 Jan 2010 Last revised: 26 Jan 2012

See all articles by Cem Demiroglu

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: January 20, 2011

Abstract

This paper examines the relationship between mortgage originator loss exposure (i.e., risk retention) and the ex post performance and initial structure and pricing of mortgage-backed securities (MBS). We argue that originator risk retention varies positively with originator-sponsor and originator-servicer affiliation. Overall, we find that ex post loss and foreclosure rates are significantly higher for MBS in which originators are not affiliated with the sponsor or servicer. The relationship between ex post performance and affiliation is confined to low documentation mortgages in which originator screening based on “soft” information is likely to be most important in determining the creditworthiness of borrowers. Consistent with investors expecting ex post performance to vary with affiliation, we find that initial MBS yields are lower and the percentage of AAA-rated securities issued against the mortgage pool is higher for affiliated deals.

Keywords: Securitization, mortgage, MBS, cherry picking, skin in the game, screening, subprime crisis, credit crisis

JEL Classification: G21

Suggested Citation

Demiroglu, Cem and James, Christopher M., How Important is Having Skin in the Game? Originator-Sponsor Affiliation and Losses on Mortgage-Backed Securities (January 20, 2011). AFA 2012 Chicago Meetings. Available at SSRN: https://ssrn.com/abstract=1530231 or http://dx.doi.org/10.2139/ssrn.1530231

Cem Demiroglu (Contact Author)

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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