The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities
56 Pages Posted: 27 Jul 2014 Last revised: 27 Sep 2016
Date Written: August 25, 2016
This paper examines how Fannie Mae and Freddie Mac (the GSEs), the dominant investors in subprime mortgage-backed securities before the 2008 financial crisis, affected the collateral composition in this market. Mortgages included in security pools designed for the GSEs performed better than those backing other securities in the same deals, holding observable risk constant. Consistent with the transmission of private information, these effects are concentrated in low documentation loans, and for issuers that were highly dependent on the GSEs and were corporate affiliates of the mortgage originators. Our results extend the importance of concentrated claimholders to information-insensitive arm's-length debt.
Keywords: mortgage default, GSEs, securitization, private information
JEL Classification: G17, G21, G23
Suggested Citation: Suggested Citation