The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities

58 Pages Posted: 4 Apr 2015

See all articles by Manuel Adelino

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

W. Scott Frame

Federal Reserve Bank of Atlanta

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2014

Abstract

This paper examines how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the largest investors in subprime private-label mortgage-backed securities (PLS), influenced the risk characteristics and prices of the deals in which they participated. To identify the causal effect of the GSEs, we use the fact that PLS deals in which Fannie Mae and Freddie Mac purchased securities included separate mortgage pools: one specifically created for the GSEs and one or more others directed at other triple-A investors. Using within-deal variation, we find that the pools bought by Fannie Mae and Freddie Mac had similar ex-ante risk characteristics but performed much better ex-post relative to other mortgage pools in the same deals. These effects were concentrated in low-documentation loans and in issuers that were highly dependent on Fannie Mae and Freddie Mac. Our results extend the importance of disciplining effects of large claimholders beyond information-sensitive securities, such as equities and bank debt, to information-insensitive arm's-length debt.

Keywords: mortgage default, GSEs, securitization, private information

JEL Classification: G17, G21, G23

Suggested Citation

Adelino, Manuel and Frame, W. Scott and Gerardi, Kristopher S., The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities (April 1, 2014). FRB Atlanta Working Paper No. 2014-4. Available at SSRN: https://ssrn.com/abstract=2580291 or http://dx.doi.org/10.2139/ssrn.2580291

Manuel Adelino

Duke University ( email )

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

W. Scott Frame

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404 498 8783 (Phone)
404 498 8810 (Fax)

Kristopher S. Gerardi (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

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