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2020 | OriginalPaper | Buchkapitel

5. Problems with Securitization

verfasst von : Laurent Gauthier

Erschienen in: Securitization Economics

Verlag: Springer International Publishing

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Abstract

In this chapter, we look into some of the problems that it raises from an economic standpoint. We begin by characterizing some of the problems with securitization using the loan-level performance data on agency mortgages. In particular, we show the massive jump in delinquencies on loans that were thought to be of the best quality. Then, we walk through theoretical and empirical models that explain how securitization would have favored a decline in the quality of the loans that were originated. Finally, we explain how securitization may have been used as a regulatory arbitrage tool and examine some empirical research on the subject.

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Vorheriges Kapitel Incentives and the Economics of Securitization

Nächstes Kapitel Structuring Securitized Bonds

This will be extensively discussed in Chaps. 6 and 8.

In other words, spreads on subprime RMBS reached historical lows.

This, more specifically from the late 2007s.

Time during which they would incur the loans’ credit risk.

Recall that the FICO score is intended as a measure of the risk of a credit event within 2 years.

Interestingly, the authors mentioned they used only first-lien loans in this case.

Recall the shape of the delinquency curves from Chap. 3.

See the introductory description in Chap. 2.

Note also that this model resembles that of DeMarzo (2007) which is discussed in Chap. 7.

Or in other words, prepayment speeds relative to the refinancing incentives.

As it would require running OASs on a large universe.

Recall the discussion in Chap. 2, for example, NY pools or LLBs.

Assets that were not originated by the bank itself are considered direct credit substitutes, and subject to a lower requirement than if they were originated, or ever owned, by the bank, in which case the retained risk is considered as recourse.

See the discussion of security design models in Chap.4.

The right approach, although difficult in practice, would have been to consider OASs instead of straight spreads.

Implicitly assuming that the bank’s cost of funding would be the spread reference, that is, Libor. This makes sense, of course, given what the acronym stands for.

Testing with a probit model yields the same qualitative results and a better R-square.

Naturally, a high degree of delinquencies does not translate into worse cash flows or price performance, if it is within the expectation reflected in the structuring of the bonds.

Ambrose, B., LaCour-Little, M., & Sanders, A. (2005). Does regulatory capital arbitrage, reputation, or asymmetric information drive securitization? Journal of Financial Services Research, 28(1), 113-01-33.

Banerjee, S., Gauthier, L., Tan, W., & Zhu, D. (2000). A study of RASC subprime loan prepayments, delinquencies, and losses. The Journal of Fixed Income, 10(3), 47–67.CrossRef

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Dang, T. V., Gorton, G., & Holmström, B. (2015). The Information sensitivity of a security. Working Paper. Columbia University.

DeMarzo, P., & Duffie, D. (1999). A liquidity-based model of security design. Econometrica, 67(1), 65–100.CrossRef

Downing, C., Jaffee, D., & Wallace, N. (2009). Is the market for mortgage-backed securities a market for lemons? The Review of Financial Studies, 22(7), 2457–2494.

Efing, M. (2016). Arbitraging the basel securitization framework: Evidence from German ABS investment. ESRB Report 22. European Systemic Risk Board.

Efing, M. (2019). Reaching for yield in the ABS market: Evidence from German bank investments. Review of Finance, August.

Frame, W. S. (2017). Agency conflicts in residential mortgage securitization: What does the empirical literature tell us? FRB Atlanta Working Paper 2017-1. Federal Reserve Bank of Atlanta.

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Titel: Problems with Securitization
verfasst von: Laurent Gauthier
Verlag: Springer International Publishing
Buch: Securitization Economics
Print ISBN: 978-3-030-50325-3

Electronic ISBN: 978-3-030-50326-0

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-3-030-50326-0_5