Understanding the Securitization of Subprime Mortgage Credit
119 Pages Posted: 14 Jun 2010
Date Written: June 14, 2010
In this survey we provide an overview of the subprime mortgage securitization process and the seven key informational frictions which arise. We discuss how market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how the rating agencies assign credit ratings to mortgage-backed securities, and outline how the agencies monitor the performance of mortgage pools over time. Throughout the survey, we draw upon the example of a mortgage pool securitized by New Century during 2006.
Keywords: Subprime mortgage credit, securitization, rating agencies, principal agent, moral hazard
JEL Classification: G24, G28
Suggested Citation: Suggested Citation