Finance Seminar（2014-15）

Topic:Tug-of-War: Incentive Alignment in Securitization and Loan Performance

Speaker:Feng Zhao, the University of Texas at Dallas

Time:Thursday, 5 June, 10:00-11:30

Location:Room 217, Guanghua Building 2

Abstract：Using a large database of privately securitized loans originated from 2003 to 2007, we find that sponsor-underwriter affiliation increases loan delinquency. Estimation using propensity score matching and instrumental variable approach provides consistent results. Cross sectional analysis on loans with different origination channels shows that this finding is not due to adverse selection. Furthermore, we find no evidence that the riskier loans securitized by affiliated sponsor-underwriters are reflected in the credit enhancements or initial yields of mortgage deals composed of these loans. Our findings suggest that sponsor-underwriter affiliation encouraged the origination of riskier loans, which contributed to the subprime mortgage crisis.