Securitization and Mortgage Default

Abstract

The academic literature, the popular press, and policymakers have all debated securitization's contribution to the poor performance of mortgages originated in the run-up to the recent crisis. Theoretical arguments have been advanced on both sides, but the lack of suitable data has made it difficult to assess them empirically. The author examines this issue by using a loan-level data set from LPS Analytics, covering approximately two-thirds of the mortgages originated in 2005 and 2006, and including both securitized and nonsecuritized loans. The author finds evidence that privately securitized loans do indeed perform worse than observably similar, nonsecuritized loans. Moreover, this effect is strongest in prime mortgage markets, which have not been studied in the previous literature. For example, a typical prime loan becomes delinquent at a 20 percent higher rate if it is privately securitized, ceteris paribus. This is consistent with the existence of adverse selection; that is, that lenders used information not available to investors to securitize loans that were riskier than they otherwise appeared. By contrast, for subprime mortgages, the impact of private securitization is concentrated in low or no-documentation loans; this latter result is consistent with previous work such as Keys et al. (2009).