Further Investigations into the Origin of Credit Score Cutoff Rules

43 Pages Posted: 29 Aug 2011 Last revised: 29 Nov 2011

See all articles by Ryan Bubb

Ryan Bubb

New York University School of Law; European Corporate Governance Institute (ECGI)

Alex Kaufman

Board of Governors of the Federal Reserve System

Date Written: August 24, 2011

Abstract

Keys, Mukherjee, Seru, and Vig (2010) argue that the evidence presented in Bubb and Kaufman (2009) is based on an inappropriate pooling of loans sold to private-label securitizers with loans sold to the government sponsored enterprises (GSEs). In this paper we investigate the issues raised by the authors and conclude that they do not change our basic analytical approach or conclusions. We examine samples that do not pool together loans sold to these two types of purchasers - a sample of loans bought by the GSEs, a sample of loans originated in 2008-2009 after the private-label market collapsed, and a sample of jumbo loans - and find discontinuities in the number and default rate of loans at credit score cutoffs in the absence of corresponding discontinuities in the securitization rate. We also examine a key assumption underlying their estimates - that no loans are both at risk of being sold to the GSEs and at risk of being sold to private-label securitizers - and show that the data are inconsistent with that assumption. We find that 18 percent of conforming loans in our sample at some time switched between GSE and private-label ownership, demonstrating that the GSEs and private-label securitizers competed for the same loans. Additionally, we show that lender screening cutoffs grew steadily over the period 1997-2010 during which the private-label market rose and collapsed.

Keywords: Financial Crisis, Moral Hazard, Mortgages, Securitization, Credit Scores

JEL Classification: D82, G01, G18, G24, G28

Suggested Citation

Bubb, Ryan and Kaufman, Alex, Further Investigations into the Origin of Credit Score Cutoff Rules (August 24, 2011). Available at SSRN: https://ssrn.com/abstract=1919005 or http://dx.doi.org/10.2139/ssrn.1919005

Ryan Bubb (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212)992-8871 (Phone)

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=34148

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Alex Kaufman

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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