Securitization and Mortgage Default
38 Pages Posted: 2 Apr 2015
Date Written: March 2015
We find that private-securitized loans perform worse than observably similar, nonsecuritized loans, which provides evidence for adverse selection. The effect of securitization is strongest for prime mortgages, which have not been studied widely in the previous literature and particular prime adjustable-rate mortgages (ARMs): These become delinquent at a 30 percent higher rate when privately securitized. By contrast, our baseline estimates for subprime mortgages show that private-securitized loans default at lower rates. We show, however, that “early defaulting loans” account for this: those that were so risky that they defaulted before they could be securitized.
Keywords: Mortgage default, securitization, adverse selection
JEL Classification: D82, G21
Suggested Citation: Suggested Citation