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
Date Written: November 12, 2018
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: Suggested Citation