Did Securitization Lead to Lax Screening? Evidence from Subprime Loans

Keys, Benjamin J.; Mukherjee, Tanmoy K.; Seru, Amit; Vig, Vikrant

doi:10.2139/ssrn.1108677

Cited by 178 publications

(159 citation statements)

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“…or securitizations (Gorton and Pennacchi 1995;Calomiris 2008;Rajan, Seru, and Vig 2009;Keys, Mukherjee, Seru, and Vig 2010;Purnandam 2011). 16 Until sold or securitized, OTD loans expose the originator to the same risks as retained loans.…”

Section: Descriptionmentioning

confidence: 99%

Asleep at the Wheel (Again)? Bank Audits During the Lead‐Up to the Financial Crisis

Doogar

Rowe

Sivadasan

2014

Contemporary Accting Res

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We present the first large‐sample empirical evidence on U.S. auditors' responses to changes in entity‐level audit risk during 2006–2007, the period leading up to the financial crisis of 2008–2009. Treating fiscal year 2005 engagements as a pre‐crisis benchmark, we find that audit attention during fiscal year 2006 and 2007 bank audit engagements shifted in line with the shifting audit risks. One implication of these findings is that auditors were able to recognize and respond to financial statement impacts of the macroeconomic shocks that unfolded during the lead‐up to the crisis. Another implication is that auditors' failure to issue advance warnings of increasing auditee riskiness during the time leading up to the financial crisis more likely reflects limitations of extant accounting and auditing rules rather than a lack of auditor awareness or attention to those risks.

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Section: Descriptionmentioning

confidence: 99%

Asleep at the Wheel (Again)? Bank Audits During the Lead‐Up to the Financial Crisis

Doogar

Rowe

Sivadasan

2014

Contemporary Accting Res

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“…A key question is whether the large and heterogeneous effects of housing wealth on consumption estimated by Mian et al and Mian and Sufi (2014) are specific to that particular US boom-bust house price cycle. The 2002-6 boom in US house prices was accompanied by a sharp increase in subprime mortgage lending and lax screening of borrowers (Keys et al, 2010), while the subsequent collapse in housing wealth triggered a wave of mortgage defaults, bank failures, and a sharp tightening of lending standards. It is possible that these events amplified the usual effect of housing wealth on consumption, and differentially affected high-and low-income households.…”

Section: Introductionmentioning

confidence: 99%

Housing Wealth Effects: Cross‐sectional Evidence from New Vehicle Registrations

Gillitzer

Wang

2016

Economic Record

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We investigate the relationship between housing wealth and consumption using postcode‐level variation in house prices and administrative data on new passenger vehicle registrations as a proxy for consumption. We find a robust cross‐sectional relationship, and in our preferred specification estimate an elasticity of new passenger vehicle registrations with respect to gross housing wealth of 0.4–0.5, which based on our preferred calibration implies a marginal propensity to consume for total consumption of less than 0.5 cents. Notably, we find evidence that the relationship between house prices and new vehicle registrations is heterogeneous in income.

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“…As a result, mortgage quality has deteriorated over time. The deterioration of mortgage quality and underwriting standards before the collapse of the housing market has been documented in multiple studies (e.g., Jaffee, Lynch, Richardson, & Nieuwerburgh, 2009;Keys et al, 2010;Purnanandam, 2011). Poor underwriting practice is considered to be one of the key factors behind the collapse of the housing market.…”

Section: Meanwhile the Bank Holding Company Act Of 1956 And Mcfaddenmentioning

confidence: 99%

CEO compensation and mortgage origination in the banking industry

Sun

2018

Corporate Governance

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Manuscript Type Empirical Research Question/Issue This study examines the relationship between bank CEO compensation and mortgage origination practices before the 2008 financial crisis. It extends the discussion about the degree of responsibility of executive compensation for the crisis, by testing whether bank CEO equity incentives contributed to the growth in high‐risk mortgages before the collapse of the mortgage market. Research Findings/Insights Using a unique dataset of comprehensive loan origination records and CEO compensation in an inclusive sample of publicly traded U.S. banks, this study finds strong evidence that CEO compensation vega is positively associated with the riskiness of mortgages before the collapse of the mortgage market and some evidence that compensation delta is negatively associated with the riskiness of mortgages. Theoretical/Academic Implications This study contributes to the understanding of the role of executive compensation in the 2008 financial crisis. Consistent with prior research, it provides further empirical support that compensation vega induces risk‐taking. Moreover, in the context of the financial industry, the findings illustrate the potential adverse effect of high‐vega compensation of bank CEOs, as such compensation may have contributed to the build‐up of high‐risk mortgages prior to the crisis. Practitioner/Policy Implications Following the financial crisis, a series of policy changes towards regulating and reforming executive compensation in financial firms has been implemented. This study offers important insights for the reform and design of executive compensation in the financial sector. In particular, practitioners and policymakers should examine the incentive structures of bank executives (such as compensation delta and vega) in order to appropriately influence risk‐taking.

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Did Securitization Lead to Lax Screening? Evidence from Subprime Loans

Cited by 178 publications

References 0 publications

Asleep at the Wheel (Again)? Bank Audits During the Lead‐Up to the Financial Crisis

Asleep at the Wheel (Again)? Bank Audits During the Lead‐Up to the Financial Crisis

Housing Wealth Effects: Cross‐sectional Evidence from New Vehicle Registrations

CEO compensation and mortgage origination in the banking industry

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