Competition, Innovation and Crises: Evidence from 20 Million Securitized Loans

48 Pages Posted: 9 Aug 2021 Last revised: 19 Oct 2022

See all articles by Peter H. Haslag

Peter H. Haslag

Vanderbilt University - Finance

Kandarp Srinivasan

Northeastern University - D’Amore-McKim School of Business

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: June 21, 2022

Abstract

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

Haslag, Peter H. and Srinivasan, Kandarp and Thakor, Anjan V., Competition, Innovation and Crises: Evidence from 20 Million Securitized Loans (June 21, 2022). Available at SSRN: https://ssrn.com/abstract=3900710 or http://dx.doi.org/10.2139/ssrn.3900710

Peter H. Haslag

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

HOME PAGE: http://https://www.sites.google.com/site/peterhaslag/

Kandarp Srinivasan (Contact Author)

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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