The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages

36 Pages Posted: 12 Feb 2018 Last revised: 28 Feb 2018

Date Written: February 9, 2018

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposed requirements on securitization sponsors to retain not less than a 5% share of the aggregate credit risk of the assets they securitize. This paper examines whether loans securitized in deals sold after the implementation of risk-retention requirements look different from those sold before. Using a difference-in-difference empirical framework, I find that risk retention implementation is associated with mortgages being issued with markedly higher interest rates, yet notably lower loan-to-value ratios and higher income to debt-service ratios. Combined, these findings suggest that the implementation of risk retention rules has achieved a policy goal of making securitized loans safer, yet at a significant cost to borrowers.

Keywords: Dodd-Frank, Securitization, Risk retention, Mortgages, CMBS

JEL Classification: G14, G21, G23

Suggested Citation

Furfine, Craig, The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages (February 9, 2018). Available at SSRN: https://ssrn.com/abstract=3121219 or http://dx.doi.org/10.2139/ssrn.3121219

Craig Furfine (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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