Competition, Innovation and Crises: Evidence from 20 Million Securitized Loans
48 Pages Posted: 9 Aug 2021 Last revised: 19 Oct 2022
Date Written: June 21, 2022
We connect two disparate facts associated with the spike in innovation in securitized mortgages prior to the Global Financial Crisis: 1) rapid rise in loan-level innovation is associated with greater securitization activity by private MBS issuers (“sponsors”), and 2) innovation in the collateral of prime MBS, an economically large portion (~$90bn) of which became delinquent, preceded that of subprime MBS in the early boom period (2001-2004). Using exogenous variation in sponsor activity from a regulatory change, we find that increased sponsor competition drove the innovation in securitized mortgages. Sponsor-induced innovation led to riskier mortgages being packaged into Prime deals, consistent with the obfuscation motives of sponsors.
Keywords: securitization, competition, financial innovation, mortgage, financial crisis
JEL Classification: G2, K2
Suggested Citation: Suggested Citation