The Impact of Securitization on the Extension of Subprime Credit

49 Pages Posted: 2 Nov 2011

See all articles by Taylor Nadauld

Taylor Nadauld

Brigham Young University

Shane M. Sherlund

Federal Reserve Board of Governors

Date Written: October 1, 2011

Abstract

This paper investigates the relationship between securitization activity and the extension of subprime credit. The analysis is motivated by two sets of compelling empirical facts. First, the origination of subprime mortgages exploded between the years 2003-2005. Second, the securitization of subprime loans increased substantially over the same time period, driven primarily by the five largest independent broker/dealer investment banks. We argue that the relative shift in the securitization activity of investment banks was driven by forces exogenous to factors impacting lending decisions in the primary mortgage market, and resulted in lower ZIP code denial rates, higher subprime origination rates, and higher subsequent default rates. Consistent with recent findings in the literature, we provide evidence that the increased securitization activity of investment banks reduced lenders incentives to carefully screen borrowers.

Keywords: Securitization, subprime mortgages, financial intermediation

JEL Classification: G21, G24

Suggested Citation

Nadauld, Taylor and Sherlund, Shane M., The Impact of Securitization on the Extension of Subprime Credit (October 1, 2011). Available at SSRN: https://ssrn.com/abstract=1953331 or http://dx.doi.org/10.2139/ssrn.1953331

Taylor Nadauld (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States

Shane M. Sherlund

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Mailstop 93
Washington, DC 20551
United States
202-452-3589 (Phone)
202-728-5887 (Fax)

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