Neglected Risks in the Communication of Residential Mortgage-Backed Securities Offerings

Journal of Finance forthcoming

57 Pages Posted: 19 Jan 2019 Last revised: 24 Feb 2023

See all articles by Harold H. Zhang

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Feng Zhao

University of Texas at Dallas - Jindal School of Management

Xiaofei Zhao

Georgetown University - McDonough School of Business

Date Written: November 12, 2018

Abstract

Examining the contractual disclosures during the sale of private-label residential mortgage-backed securities (RMBS) before the 2008 financial crisis, we find that textual contents in the risk-factor section predict subsequent losses and yet were not reflected in pricing. Insurance companies, especially life insurers and insurers with low regulatory capital ratios, are more exposed to textual risks. Consistent with issuers' hedging litigation risks with disclosures, we find that textual contents are associated with second-lien underreporting and preissuance written communications. Overall, we find that investors neglected risks in the purportedly safe assets before the crisis.

Keywords: Neglected Risks, Institutional Investors, Written Communications, Textual Risks

JEL Classification: G00, G01, G18, G21, G22

Suggested Citation

Zhang, Harold Huibing and Zhao, Feng and Zhao, Xiaofei, Neglected Risks in the Communication of Residential Mortgage-Backed Securities Offerings (November 12, 2018). Journal of Finance forthcoming, Available at SSRN: https://ssrn.com/abstract=3318526

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Feng Zhao

University of Texas at Dallas - Jindal School of Management ( email )

800 W. Campbell Rd. SM 31
Richardson, TX 75080
United States
972-883-5815 (Phone)

Xiaofei Zhao (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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