Securitization and moral hazard: Evidence from credit score cutoff rules

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Mortgage originators use credit score cutoff rules to determine how carefully to screen loan applicants. Recent research has hypothesized that these cutoff rules result from a securitization rule of thumb. Under this theory, an observed jump in defaults at the cutoff would imply that securitization led to lax screening. We argue instead that originators adopted credit score cutoff rules in response to underwriting guidelines from Fannie Mae and Freddie Mac and offer a simple model that rationalizes such an origination rule of thumb. Under this alternative theory, jumps in default are not evidence that securitization caused lax screening. We examine loan-level data and find that the evidence is inconsistent with the securitization rule-of-thumb theory but consistent with the origination rule-of-thumb theory. There are jumps in the number of loans and in their default rate at credit score cutoffs in the absence of corresponding jumps in the securitization rate. We conclude that credit score cutoff rules provide evidence that large securitizers were to some extent able to regulate originators' screening behavior. Terms of use: Documents in EconStor mayJEL Classifications: D82, G01, G18, G21, G24, G28.

Securitization and Lending Competition

“…that conditional default rates rose between 1997-2000 and 2001-6. 6 Demyanyk and Van Hemert [12] …nd that conditional and unconditional default rates rose from 2001 to 2007. 7 6.…”

“…Hence, funds go to the negative-NPV project, which is clearly ine¢ cient. 6 They control for the loan interest rate, credit score, loan to value ratio, and dummy variables for adjustable rates, prepayment penalties, and whether the lender lacked documentation of the borrower's income or assets. 7 Their controls include the loan interest rate, borrower credit score, loan to value ratio, debt to income ratio, local changes in house prices and unemployment since origination, and dummies for prepayment penalties, owner-occupier status, and low documentation.…”

“…Bubb and Kaufman [6] The buyer commits to buying a smaller fraction of loans to intermediate borrowers in…”

Comparing Securitized and Balance Sheet Loans: Size Matters

“…Agarwal, Chang, and Yavas find no difference in the performance of securitized and portfolio mortgages in the subprime market. Ambrose, Lacour-Little, and Sanders (2005) and Bubb and Kaufman (2014) also find no evidence of adverse selection in the residential mortgage market. Jiang, Nelson, and Vytlacil (2013) find that securitized residential mortgages actually perform better than balance sheet loans.…”

Sorting Around the Discontinuity Threshold: The Case of a Neighbourhood Investment Programme

“…In addition, a number of studies offer examples of sorting around the discontinuity threshold. It seems to be the case that sorting is driven by incentives for potential receivers of the treatment to select themselves into the treatment, such as home owners, parents/schools, tax payers or traders on financial markets (e.g., Bayer et al 2007;Urquiola and Verhoogen 2009;Saez 2010;Bubb and Kaufman 2014;Vogl 2014). This research adds a novel case to this relatively new literature about the application of RD designs when there are opportunities for influencing the discontinuity threshold.…”