Residential Mortgage-backed Security Research Articles

Collateral Misreporting in the Residential Mortgage-Backed Security Market

Securitized mortgage appraisals routinely target pre-specified valuations, 45% of purchase loan appraisals exactly equal purchase prices, and appraisals virtually never fall below purchase prices. As a result, appraisals exceed automated valuation model (AVM) valuations 60% of the time and are 5% higher than AVM valuations on average. High appraisals and indicators of appraisal targeting predict loan delinquency and residential mortgage-backed security (RMBS) losses and are priced at the loan level through higher interest rates, but have essentially no impact on RMBS pricing. Selection bias simulations and unfunded loan application appraisals indicate that high appraisals are intentional. The extent to which appraisals exceed AVM valuations varies across loan officers, mortgage brokers, and appraisers, and high appraisals are associated with more repeat business for appraisers, potentially incentivizing appraisers to inflate their appraisals. This paper was accepted by Tomasz Piskorski, finance.

Price Discovery in the Residential Mortgage-backed Security, Credit Default Swap, and ABX Markets

This paper analyzes price discovery among residential mortgage-backed securities (MBS), their credit default swaps (ABCDS), and the associated ABX contracts. VECM regressions show that the MBS and ABX markets lead price discovery over the ABCDS market. Neither the MBS nor the ABX market consistently dominate one another so that MBS and ABX markets respond to information simultaneously. Thus, while there is evidence that ABCDS were mispriced, there is no evidence for ABX market “overshooting” that was previously thought to have helped cause the recent mortgage market bubble and bust.

Simple is Simply not Enough – Features versus Labels of Complex Financial Securities

Based on a unique data set of European residential mortgage-backed security (RMBS) deals with 31 million quarterly loan observations, we examine how design features and labels of complex financial securities affect tranches’ spreads and loan performance. Exploiting the features required by the European Union’s Securitization Regulation and the STS (Simple, Transparent, Standardized) label, we find that the features of the security design and not the label are crucial for the loan performance. However, investors hardly consider the features but simply rely on the existence of the label.

Do labor markets discipline? Evidence from RMBS bankers

This paper examines whether employees involved in residential mortgage-backed security (RMBS) securitization experienced internal and external labor market consequences relative to similar non-RMBS employees in the same banks and why. Senior RMBS bankers experienced similar levels of job retention, promotion, and external job opportunities. Even signers of RMBS deals with high loss and misreporting rates or deals implicated in lawsuits experienced no adverse internal or external labor market outcomes. These findings are likely not explained by targeted or delayed employee discipline, small legal fines, or protection due to pending litigation but are consistent with implicit upper-management approval of RMBS activities.

UK regulation of term securitization following a hard Brexit

The myriad asset classes and structures comprising the modern term securitization market (as opposed to bank-sponsored asset-backed commercial paper conduits) are all more or less complex variations on one theme: overcollateralized bonds. The bonds are typically issued on the credit of a segregated pool of financial collateral, not the credit of an operating company. Even though securitization documentation is more complex than that found in a typical corporate bond issue, securitization transactions are simpler and, arguably, more ‘scientific’ credits. That is because the underlying credit analysis is based on the aggregation of many small, broadly homogeneous credits or pools of credits that lend themselves to a quantitative credit analysis. The bonds usually are issued in tranches of different priorities, with the most senior tranche typically assigned a top, or AAA/Aaa, credit rating. Thus, a top-rated residential mortgage-backed security, or RMBS, with a face value of, say, 80 might be collateralized by residential mortgages with a principal value of 100. The structuring exercise makes possible funding at rates and maturities not otherwise obtainable in the fixed income market. For convenience, the rubric ABS, or asset-backed securities will also be taken to include RMBS and commercial mortgage backed securities, or CMBS.1

A Direct Test of Agency Theories of Debt: Evidence from Residential Mortgage-Backed Securities

When a firm is facing default, equity holders have incentives to engage in asset substitution, underinvest, or directly transfer wealth. Few papers document investment distortions on account of debt-equity agency conflicts, only that the threat of distortions influence ex ante financing costs. A nonagency residential mortgage-backed security deal represents an entity that is highly leveraged where, ex ante, equity holders know they will face default. This provides an ideal laboratory for testing whether the threat of default creates any of the distortions predicted in theory. We estimate a lower bound on agency costs associated with direct wealth transfers to be in the range of $.018 per dollar. The Internet appendix is available at https://doi.org/10.1287/mnsc.2017.2853 . This paper was accepted by Amit Seru, finance.

Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

The main determinants of subprime securitization in the Spanish RMBS securities

This article is a model to identify the determinants of subprime securitizations. In several countries, there is no classification of the underlying assets. Consequently, investors have fewer tools to identify which securitizations are subprime. Using a sample of mortgage securitization transactions issued in Spain from 1998 until the first half of 2009, we analyse the effects of a great securitization expansion. According to previous literature, we identify main determinants of residential mortgage-backed security default rate and construct a prediction model of default rate. By means of different probit models, our results show the importance of loan to value and seasoning, among other determinants, as predictive indicators of default rates. The results obtained point to more relaxed lending standards due to higher securitization levels. Our findings help to gain a more accurate perspective of the true effects of the mortgage securitization process and reinforce the role of certain determinants as default predictors in a context without a classification of underlying assets.

Self-reporting under SEC Reg AB and transparency in securitization

Purpose – The purpose of this paper is to illustrate the limitations and potential bias in securitized residential mortgage data and examine the importance of such data issues for typical studies of residential mortgage-backed security (RMBS) market and the financial crisis. Design/methodology/approach – We use trustee data on mortgage characteristics provided by BlackBox Logic – the BBx data – to study the extent to which undisclosed mortgage characteristics distort the available data and impact risk analysis of RMBS collateral pools. Findings – We illustrate that substantial amounts of loan characteristic data in crucial fields like occupancy, property type, loan purpose and FICO are missing from the trustee data. The frequency of missing values is staggering, ranging from just under 9 per cent for property type to 29 per cent for FICO, up to almost 85 per cent for originator name, all variables used in recent studies. The omissions are correlated to some degree with the securitization sponsor and even more dramatically with the identity of the deal trustee. Research limitations/implications – Analysis of RMBS collateral should be built not on the entirety of mortgage databases, but on stratified samples and should otherwise control for important sponsor and trustee fixed effects. Practical implications – The revisions for Regulation AB which require loan-level disclosure should be adopted to standardize mortgage disclosure. Originality/value – This is the first paper that examines selection bias in loan characteristics relied upon for a wide variety of mortgage market research that has substantially affected policy decisions in the post-crisis era.

Asset correlation in residential mortgage-backed security reference portfolios

This paper contributes to the literature about estimating asset correlation in two ways. First, we compare the performance of different estimation approaches in a simulation study. By doing so, we provide knowledge about the behavior of the applied estimators, which is an important precondition for the interpretation and robustness of the estimation results. Second, we present a novel data set from which to estimate asset correlation: the loss data of residential mortgage backed security (RMBS) deals. Our data set is largely made up of the most toxic RMBS deals that sparked the subprime crisis. Contrary to the widely held view, our analysis reveals that asset correlation in the subprime market is surprisingly low (roughly 6%). By giving an intuitive and straightforward explanation for these low values, we provide valuable insight into the mechanism and evolution of the subprime crisis in general, and into the risk characteristics of a credit portfolio in particular.

A Comparative Analysis of Conventional and Shari’ah for Residential Mortgage-backed Securities

The underlying objective of the study is to testify that Shari’ah residential Mortgage Backed Security (MBS) performs better than conventional issued by Cagamas with the equal issuance year, rating grades and maturity period. As a preliminary case study of Cagamas, the comparative financial performance for both Shari’ah and conventional MBS is measured by key financial ratios in terms of profitability, capitalization and debt coverage for one year before, during the year and one year after its each issuance, and key performance indicators. Interestingly, the initiation of Shariah MBS has demonstrated cheaper financing costs to Cagamas as an originator and much better investment returns to investors. Therefore, the findings support past studies on benefits of conventional asset securitization and interestingly verifying that Shari’ah MBS performs better than its conventional MBS for equal originator, rating and tenure.

ASF 2012 Conference Report

This article provides the author’s overview of the securitization market as of the time of ASF 2012, the American Securitization Forum9s annual conference held in Las Vegas from January 22 to January 25. The author summarizes the welcoming address by Ralph Daloisio, managing director, Natixis, and Tom Deutsch, executive director, American Securitization Forum; featured and keynote addresses by Congressman Ed Royce, Congressman David Schweikert, and Comptroller of the Currency John Walsh; presentations and panel summaries on securitization and its role in the financial markets, methods of residential mortgage-backed security (RMBS) deal performance analysis, securitization pricing and valuation tools, consumer credit metrics and evaluation, an outlook for the securitization market, the implications of the European sovereign debt crisis on securitization, global securitization policy reforms, the future of U.S. mortgage finance, mortgage underwriting, and the impact of the proposed qualified mortgage (QM) definition, prospects for a restart of the RMBS market, a review of the collateralized loan obligation (CLO) sector, an overview of the consumer economy, a review of the global securitization market, the future of the capital markets for secured financing, and alternatives to credit ratings for risk-based capital, credit rating agency reforms; reviews of the emerging asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) sectors; and traders and researchers roundtables on consumer ABS and residential mortgage-backed securities (RMBS). <b>TOPICS:</b>CLOs, CDOs, and other structured credit, asset-backed securities (ABS)

Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

A mark-to-model approach to the valuation of Residential Mortgage Backed Securities

In this article we demonstrate the fair value determination of a Residential Mortgage Backed Security (RMBS). First, International Financial Reporting Standards rules regarding (level 3) income-based fair value are described. Subsequently, we determine this income-based fair value for an example RMBS. Special attention is paid to the modelling of the decision to call the security. This embedded option is exercised by the issuer starting from a pre-determined date if the loan can be refinanced more efficiently elsewhere.

Legal and Regulatory Factors that Impede and Facilitate the Residential Mortgage-Backed Securities Market in Australia

Abstract In a residential mortgage-backed security (RMBS) program, a bank or other financial institution sells its rights in a pool of home loans to a vehicle (SPV), which pays for the asset pool by issuing fixed or floating rate bonds in the financial markets to institutional investors. The SPV finances the interest and principal payments under these bonds from the pooled home loan repayments. The SPV is a special purpose vehicle in the sense that it is established especially, and solely, for the of acquiring the asset pool and issuing bonds against it. This paper outlines the findings and contributions of the author's PhD thesis entitled, Residential Mortgage Securitisation in Australia: Suggestions for the Reform of Commercial Law and Practice. The thesis analysed the features of the existing law and regulation that facilitate and hinder the market by using a public benefit test framework, which involves an assessment of the economic, financial and social benefits and costs associated with the current legislation and regulatory reform options. A summary of the analysis and assessment of the current law and regulation that facilitate and hinder the development of the market for RMBSs in Australia and the main findings of the thesis are outlined in the paper.

Cure Provisions under the Truth-in-Lending Act

The Federal Truth-in-Lending Act (“TILA”) requires that creditors provide borrowers with certain disclosures. The failure to accurately provide borrowers with the required disclosures can subject creditors and assignees to significant liability under TILA. TILA contains several cure provisions that both creditors and assignees of mortgage loans can utilize to avoid liability if certain procedures are followed. This article analyzes the the “self-corrective” and “bona fide error” cure provisions found in Sections 130(b) and 130(c) of TILA, and explains how both creditors and assignees can take advantage of these cures to avoid various types of civil, administrative, and criminal penalties. The use of these cure provisions can enhance the profitability of the origination platforms of mortgage lenders, and capital market groups that transact in mortgage-backed securities. Primary and secondary market participants, including underwriters of residential mortgage-backed security mortgage pools and investors in the secondary market, will find this article extremely relevant to their businesses. <b>TOPICS:</b>Information providers/credit ratings, MBS and residential mortgage loans