Securitization and the Growth of Subprime Mortgage Lending

Abstract

Did private mortgage securitization contribute causally to the recent subprime lending boom, or was it simply a slightly more convenient way to finance lending that would have occurred anyway? We exploit a natural experiment in which the S&P rating agency increased costs of securitizing specific types of mortgages from certain states. We find significant reductions in total originations of affected mortgage types following the change, suggesting that securitization played a causal role in fueling mortgage expansion. We also, however, find suggestive evidence for an increase in mortgages held on books of financial institutions that partially offset the restriction of securitization.

Keywords: Mortgage Securitization, Natural Experiment, Ratings, Subprime Mortgages