Securitization and Loan Performance: A Contrast of Ex Ante and Ex Post Relations in the Mortgage Market

Abstract

This study presents an intriguing contrast of the ex ante and ex post relations between mortgage securitization and loan performance using a comprehensive dataset from a major national mortgage bank. While the paper supports that the bank applies lower screening efforts on loans that have higher ex ante probability of being securitized, it further shows that loans remaining on the bank’s balance sheet are, ex post, of worse quality than sold loans. Most of the differences can be explained away by secondary market investors’ information advantage over the originating bank due to the time lag between loan origination and loan sale. While many blame the presence of the secondary market for the emergence of “liars’ loans,” we find that ironically these loans hurt the originating bank more than it did the secondary market.

Keywords: securitization, loan performance, mortage market

JEL Classification: D82, G21