Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-25T08:03:17.222Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Securitization Weaken Screening Incentives?

Published online by Cambridge University Press:  02 December 2020

Dong Beom Choi Open the ORCID record for Dong Beom Choi [Opens in a new window]  and
Jung-Eun Kim
Dong Beom Choi*
Affiliation:
Seoul National University Business School
Jung-Eun Kim
Affiliation:
Federal Reserve Bank of [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We test whether lenders’ screening incentives weaken when faced with the possibility of loan sales. We adopt a new measure of lending standards, the processing time for mortgage applications at the loan level, and use the collapse of the nonagency mortgage-backed securities issuance market as a natural experiment. Secondary market liquidity for nonconforming loans decreased significantly at the end of 2007, but the market for securitizing conforming loans did not experience the same breakdown. Following this event, lenders spent significantly more time screening applications for loans larger than the conforming loan limits than for those below the limits. The processing-time gap widened more for banks with lower capital, greater involvement in the originate-to-distribute model, and larger assets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2934 - 2962
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Allen Berger, Hendrik Bessembinder (the editor), Nina Boyarchenko, W. Scott Frame, Paul Goldsmith-Pinkham, Itay Goldstein, Kevin Lansing, Igor Livshits, Elena Loutskina, Vladimir Kotomin, Haoyang Liu, Donald Morgan, Sun Young Park, George Pennacchi (the referee), Philip Strahan, Rob Vigfusson, and Ji Wu as well as audiences at the 2019 Chicago Financial Institutions Conference, 2019 Korean Securities Association Conference, 2019 Financial Intermediation Research Society (FIRS) Conference, 2019 Federal Reserve Research Scrum, 2019 Conference on Asia-Pacific Financial Markets (CAFM), and 2020 American Real Estate and Urban Economics Association (AREUEA)–Allied Social Science Associations (ASSA) for their helpful comments. The views expressed in this article are those of the authors and are not necessarily reflective of the views at the Federal Reserve Bank of Richmond or the Federal Reserve System.

References

Adelino, M.; Gerardi, K.; and Hartman-Glaser, B.. “Are Lemons Sold First? Dynamic Signaling in the Mortgage Market.” Journal of Financial Economics, 132 (2019), 1–25.CrossRefGoogle Scholar
Adelino, M.; Schoar, A.; and Severino, F.. “Credit Supply and House Prices: Evidence from Mortgage Market Segmentation.” Working Paper, Duke University (2014).Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “The Role of Securitization in Mortgage Renegotiation.” Journal of Financial Economics, 102 (2011), 559–578.CrossRefGoogle Scholar
Agarwal, S., and Hauswald, R.. “Distance and Private Information in Lending.” Review of Financial Studies, 23 (2010), 2757–2788.CrossRefGoogle Scholar
Agarwal, S., and Ho, C. T.. “Comparing the Prime and Subprime Mortgage Markets.” Chicago Fed Letter, (2007).Google Scholar
Ahnert, T., and Kuncl, M.. “Loan Insurance, Market Liquidity, and Lending Standards.” Working Paper, Bank of Canada (2019).Google Scholar
Aiello, D. “Information Exploitation? A Pre-Crisis RMBS Issuer’s Private Information.” Working Paper, UCLA Ziman Center for Real Estate (2017).CrossRefGoogle Scholar
Begley, T. A., and Purnanandam, A.. “Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals.” Review of Financial Studies, 30 (2016), 120–161.CrossRefGoogle Scholar
Berger, A. N.; Miller, N. H.; Petersen, M. A.; Rajan, R. G.; and Stein, J. C.. “Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks.” Journal of Financial Economics, 76 (2005), 237–269.CrossRefGoogle Scholar
Berger, A. N., and Udell, G. F.. “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure.” Economic Journal, 112 (2002), F32–53.CrossRefGoogle Scholar
Campello, M. “Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy.” Journal of Finance, 57 (2002), 2773–2805.CrossRefGoogle Scholar
Choi, D. B.; Choi, H.-S.; and Kim, J.-E.. “Clogged Intermediation: Were Home Buyers Crowded Out?” Working Paper, Seoul National University (2017).CrossRefGoogle Scholar
Dagher, J., and Kazimov, K.. “Banks’ Liability Structure and Mortgage Lending During the Financial Crisis.” Journal of Financial Economics, 116 (2015), 565–582.CrossRefGoogle Scholar
DeFusco, A. A., and Paciorek, A.. “The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit.” American Economic Journal: Economic Policy, 9 (2017), 210–240.Google Scholar
Dell’Ariccia, G.; Igan, D.; and Laeven, L. U.. “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market.” Journal of Money, Credit and Banking, 44 (2012), 367–384.CrossRefGoogle Scholar
Fuster, A.; Lo, S. H.; and Willen, P.. “The Time-Varying Price of Financial Intermediation in the Mortgage Market.” NBER Working Paper 23706 (2017).CrossRefGoogle Scholar
Fuster, A.; Plosser, M.; Schnabl, P.; and Vickery, J.. “The Role of Technology in Mortgage Lending.” Review of Financial Studies, 32 (2019), 1854–1899.CrossRefGoogle Scholar
Fuster, A., and Vickery, J.. “Securitization and the Fixed-Rate Mortgage.” Review of Financial Studies, 28 (2014), 176–211.CrossRefGoogle Scholar
Gorton, G. B., and Pennacchi, G. G.. “Banks and Loan Sales Marketing Nonmarketable Assets.” Journal of Monetary Economics, 35 (1995), 389–411.CrossRefGoogle Scholar
Hu, Y. “A Dynamic Theory of Bank Lending, Firm Entry, and Investment Fluctuations.” Working Paper, University of North Carolina (2018).Google Scholar
Jiang, W.; Nelson, A. A.; and Vytlacil, E.. “Securitization and Loan Performance: Ex Ante and Ex Post Relations in the Mortgage Market.” Review of Financial Studies, 27 (2014), 454–483.CrossRefGoogle Scholar
Kaufman, A. “The Influence of Fannie and Freddie on Mortgage Loan Terms.” Real Estate Economics, 42 (2014), 472–496.CrossRefGoogle Scholar
Keys, B. J.; Mukherjee, T.; Seru, A.; and Vig, V.. “Financial Regulation and Securitization: Evidence from Subprime Mortgage Loans.” Journal of Monetary Economics, 56 (2009), 700–720.CrossRefGoogle Scholar
Keys, B. J.; Mukherjee, T.; Seru, A.; and Vig, V.. “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans.” Quarterly Journal of Economics, 125 (2010), 307–362.CrossRefGoogle Scholar
Keys, B. J.; Seru, A.; and Vig, V.. “Lender Screening and the Role of Securitization: Evidence from Prime and Subprime Mortgage Markets.” Review of Financial Studies, 25 (2012), 2071–2108.CrossRefGoogle Scholar
Loutskina, E. “The Role of Securitization in Bank Liquidity and Funding Management.” Journal of Financial Economics, 100 (2011), 663–684.CrossRefGoogle Scholar
Loutskina, E., and Strahan, P. E.. “Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations.” Journal of Finance, 64 (2009), 861–889.CrossRefGoogle Scholar
Loutskina, E., and Strahan, P. E.. “Informed and Uninformed Investment in Housing: The Downside of Diversification.” Review of Financial Studies, 24 (2011), 1447–1480.CrossRefGoogle Scholar
Mayer, C.; Pence, K.; and Sherlund, S. M.. “The Rise in Mortgage Defaults.” Journal of Economic Perspectives, 23 (2009), 27–50.CrossRefGoogle Scholar
Mian, A., and Sufi, A.. “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis.” Quarterly Journal of Economics, 124 (2009), 1449–1496.CrossRefGoogle Scholar
Nadauld, T. D., and Sherlund, S. M.. “The Impact of Securitization on the Expansion of Subprime Credit.” Journal of Financial Economics, 107 (2013), 454–476.CrossRefGoogle Scholar
Ouazad, A., and Kahn, M. E.. “Mortgage Finance in the Face of Rising Climate Risk.” NBER Working Paper 26322 (2019).Google Scholar
Parlour, C. A., and Plantin, G.. “Loan Sales and Relationship Banking.” Journal of Finance, 63 (2008), 1291–1314.CrossRefGoogle Scholar
Pennacchi, G. G. “Loan Sales and the Cost of Bank Capital.” Journal of Finance, 43 (1988), 375–396.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Piskorski, T.; Seru, A.; and Vig, V.. “Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis.” Journal of Financial Economics, 97 (2010), 369–397.CrossRefGoogle Scholar
Purnanandam, A. “Originate-to-Distribute Model and the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2010), 1881–1915.CrossRefGoogle Scholar
Rajan, U.; Seru, A.; and Vig, V.. “Statistical Default Models and Incentives.” American Economic Review, 100 (2010), 506–510.CrossRefGoogle Scholar
Rajan, U.; Seru, A.; and Vig, V.. “The Failure of Models that Predict Failure: Distance, Incentives, and Defaults.” Journal of Financial Economics, 115 (2015), 237–260.CrossRefGoogle Scholar
Stein, J. C. “Information Production and Capital Allocation: Decentralized Versus Hierarchical Firms.” Journal of Finance, 57 (2002), 1891–1921.CrossRefGoogle Scholar