Originate-to-Distribute Model and the Subprime Mortgage Crisis

FDIC Working Paper No. 2010-08

54 Pages Posted: 9 Jan 2012

See all articles by Amiyatosh Purnanandam

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2010

Abstract

An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively poor quality mortgages. This result is not explained away by di erences in observable borrower quality, geographical location of the property or the cost of capital of high and low OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital- constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage induced risk-taking behavior significantly contributed to the current sub-prime mortgage crisis.

JEL Classification: G11, G12, G13, G14

Suggested Citation

Purnanandam, Amiyatosh, Originate-to-Distribute Model and the Subprime Mortgage Crisis (August 9, 2010). FDIC Working Paper No. 2010-08, Available at SSRN: https://ssrn.com/abstract=1982109 or http://dx.doi.org/10.2139/ssrn.1982109

Amiyatosh Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
157
Abstract Views
1,600
rank
1,474
PlumX Metrics