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
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: Suggested Citation