Information Exploitation? A Pre-Crisis RMBS Issuer's Private Information

Abstract

This paper describes an important borrower risk factor observed privately by the issuer of non-agency RMBS. The private information available to the issuer is drawn from behavioral cues exhibited early in the life of the loan. Mortgage borrowers that make their first six payments at least a day prior to the due date are 14.8 percentage points less likely to become delinquent (equivalent to a 91-point increase in FICO score). This effect is persistent, unobservable at loan origination, and privately observed by the issuer prior to securitization. Both the credit rating agencies and the investor do not appear to be aware of this risk factor. Surprisingly, issuers are quicker to securitize loans with positive private signals rather than less promising loans.