Multiple Tranches, Information Asymmetry and the Impediments to Mortgage Renegotiation

64 Pages Posted: 24 Sep 2017 Last revised: 22 Feb 2019

See all articles by Sanket Korgaonkar

Sanket Korgaonkar

Pennsylvania State University - Smeal College of Business

Date Written: February 2019

Abstract

This paper examines how the creation of asset-backed security tranches disperses ownership of an asset–the pool of mortgages–subsequently impeding renegotiation of the underlying delinquent loans. I describe how multiplicity of tranches worsens the agency problem between a residential mortgage servicer and the mortgage-backed security deal sponsor, leading to a sub-optimal rate of loan modification. Using within-deal variation in the number and structure of tranches, I find that delinquent loans in pools collateralizing fewer tranches are more likely to be renegotiated. The results provide evidence for one channel through which mortgage securitization inhibited loan modifications during the Great Recession.

Keywords: Securitization, Mortgage Servicing, Loan Modifications, Financial Crisis

JEL Classification: G1, G21, D14, D82

Suggested Citation

Korgaonkar, Sanket, Multiple Tranches, Information Asymmetry and the Impediments to Mortgage Renegotiation (February 2019). Available at SSRN: https://ssrn.com/abstract=3040447 or http://dx.doi.org/10.2139/ssrn.3040447

Sanket Korgaonkar (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

355 Business Building
University Park, PA 16802
United States

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