Did Securitization Lead to Lax Screening? Evidence from Subprime Loans*

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ID: 297686
2010
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Abstract
A central question surrounding the current subprime crisis is whether the securitization process reduced the incentives of financial intermediaries to carefully screen borrowers. We examine this issue empirically using data on securitized subprime mortgage loan contracts in the United States. We exploit a specific rule of thumb in the lending market to generate exogenous variation in the ease of securitization and compare the composition and performance of lenders' portfolios around the ad hoc threshold. Conditional on being securitized, the portfolio with greater ease of securitization defaults by around 10%–25% more than a similar risk profile group with a lesser ease of securitization. We conduct additional analyses to rule out differential selection by market participants around the threshold and lenders employing an optimal screening cutoff unrelated to securitization as alternative explanations. The results are confined to loans where intermediaries' screening effort may be relevant and soft information about borrowers determines their creditworthiness. Our findings suggest that existing securitization practices did adversely affect the screening incentives of subprime lenders.
Reference Key
openalex_W4256240690 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Benjamin J. Keys, Tanmoy K. Mukherjee, Amit Seru, Vikrant Vig
Journal the quarterly journal of economics
Year 2010
DOI
10.1162/qjec.2010.125.1.307
URL
https://doi.org/10.1162/qjec.2010.125.1.307
Keywords Keywords not found

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