Understanding the Securitization of Subprime Mortgage Credit

119 Pages Posted: 14 Jun 2010

See all articles by Adam B. Ashcraft

Adam B. Ashcraft

Federal Reserve Bank of New York

Til Schuermann

Oliver Wyman

Multiple version iconThere are 2 versions of this paper

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

Ashcraft, Adam B. and Schuermann, Til, Understanding the Securitization of Subprime Mortgage Credit (June 14, 2010). Foundations and Trends in Finance, Vol. 2, No. 3, pp. 191-309, 2006, Available at SSRN: https://ssrn.com/abstract=1624982

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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