Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-15T17:57:06.500Z Has data issue: false hasContentIssue false
  • English
  • Français

To Securitize or to Price Credit Risk?

Published online by Cambridge University Press:  11 July 2022

Danny McGowan Open the ORCID record for Danny McGowan [Opens in a new window]  and
Huyen Nguyen
Danny McGowan*
Affiliation:
University of Birmingham
Huyen Nguyen
Affiliation:
Halle Institute for Economic Research (IWH) and Friedrich Schiller University Jena huyen.nguyen@iwh-halle.de
*
d.mcgowan@bham.ac.uk (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along U.S. state borders, we find that lenders securitize mortgages that are eligible for sale to the government-sponsored enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs’ buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs’ debt holdings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 289 - 323
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Toni Ahnert, Adolfo Barajas, Christa Bouwman, Ralph Chami, Piotr Danisewicz, Hans Degryse, Bob DeYoung, Ronel Elul, Mara Faccio (the editor), Larissa Fuchs, Martin Götz, Reint Gropp, Iftekhar Hasan, Dasol Kim, Michael Koetter, Jonathan Lee, Xiang Li, Elena Loutskina, Mike Mariathasan, William Megginson, Klaas Mulier, Trang Nguyen, Enrico Onali, Fotios Pasiouras, George Pennacchi, Amiyatosh Purnanandam, Klaus Schaeck, Glenn Schepens, Koen Schoors, Amit Seru, Christophe Spaenjers, Philip Strahan, Armine Tarazi, Jerome Vandenbussche, and seminar and conference participants at Bangor, Birmingham, Durham, the EFI Research Network, the Financial Intermediation Research Society, the 2018 FINEST Spring Workshop, FMA Europe, FSU Jena, the IMF, IWH-Halle, Leeds, Limoges, Loughborough, Nottingham, and the Western Economic Association for helpful comments and suggestions.

References

Agarwal, S.; Amromin, G.; Ben-David, C.; Chomsisengphet, S.; and Evanoff, D.. “The Role of Securitization in Mortgage Renegotiation.” Journal of Financial Economics, 102 (2011), 559–578.CrossRefGoogle Scholar
Agarwal, S.; Chang, Y.; and Yavas, A.. “Adverse Selection in Mortgage Securitization.” Journal of Financial Economics, 105 (2012), 640–660.Google Scholar
Ahnert, T., and Kuncl, M.. “Loan Insurance, Market Liquidity, and Lending Standards.” CEPR Discussion Paper No. 14458 (2020).Google Scholar
Antoniades, A. “Liquidity Risk and the Credit Crunch of 2007–2008: Evidence from Micro-Level Data on Mortgage Loan Applications.” Journal of Financial and Quantitative Analysis, 51 (2016), 1795–1822.Google Scholar
Bayer, P.; Ferreira, F.; and Ross, S.. “What Drives Racial and Ethnic Differences in High-Cost Mortgages? The Role of High-Risk Lenders.” Review of Financial Studies, 31 (2018), 175–205.CrossRefGoogle Scholar
Bhutta, N. “The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods.” Journal of Law and Economics, 54 (2011), 953–983.CrossRefGoogle Scholar
Bhutta, N., and Keys, B.. “Eyes Wide Shut? The Moral Hazard of Mortgage Insurance During the Housing Boom.” NBER Working Paper No. 24844 (2018).Google Scholar
Buchak, G.; Matvos, G.; Piskorski, T.; and Seru, A.. “The Limits of Shadow Banks.” NBER Working Paper No. 25149 (2018).Google Scholar
Calder, V. “Zoning, Land-Use Planning, and Housing Affordability.” CATO Institute Policy Analysis No. 823 (2017).Google Scholar
Chan, S.; Haughwout, A.; and Tracy, J.. “How Mortgage Finance Affects the Urban Landscape.” Federal Reserve Bank of New York Staff Report No. 713 (2015).CrossRefGoogle Scholar
Clauretie, T., and Herzog, T.. “The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Industry.” Journal of Money, Credit and Banking, 22 (1990), 221–233.Google Scholar
Corradin, S.; Gropp, R.; Huizinga, H.; and Laeven, L.. “The Effect of Personal Bankruptcy Exemptions on Investment in Home Equity.” Journal of Financial Intermediation, 25 (2016), 77–98.Google Scholar
Dagher, J., and Sun, Y.. “Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws.” Journal of Financial Economics, 121 (2016), 195–209.Google Scholar
Demiroglu, C.; Dudley, E.; and James, C. M.. “State Foreclosure Laws and the Incidence of Mortgage Default.” Journal of Law and Economics, 57 (2014), 225–280.Google Scholar
Demyanyk, Y., and Loutskina, E.. “Mortgage Companies and Regulatory Arbitrage.” Journal of Financial Economics, 122 (2016), 328–351.Google Scholar
Elenev, V.; Landvoigt, T.; and Van Nieuwerburgh, S.. “Phasing Out the GSEs.” Journal of Monetary Economics, 81 (2016), 111–132.CrossRefGoogle Scholar
Ferreira, F., and Gyourko, J.. “A New Look at the US Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012.” NBER Working Paper No. 21261 (2015).CrossRefGoogle Scholar
Gerardi, K.; Lambie-Hanson, L.; and Willen, P.. “Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process.” Journal of Urban Economics, 73 (2013), 1–17.CrossRefGoogle Scholar
Gete, P., and Zecchetto, F.. “Distributional Implications of Government Guarantees in Mortgage Markets.” Review of Financial Studies, 31 (2018), 1064–1097.CrossRefGoogle Scholar
Ghent, A. C. “How Do Case Law and Statute Differ? Lessons from the Evolution of Mortgage Law.” Journal of Law and Economics, 57 (2014), 1085–1122.CrossRefGoogle Scholar
Ghent, A., and Kudlyak, M.. “Recourse and Residential Mortgage Default: Evidence from US States.” Review of Financial Studies, 124 (2011), 3139–3186.CrossRefGoogle Scholar
Gokmen, S.; McGowan, D.; and Zhao, T. “NIMBYs and Credit Supply.” Mimeo (2021).Google Scholar
Gorton, G., and Pennacchi, G.. “Banks and Loan Sales Marketing Nonmarketable Assets.” Journal of Monetary Economics, 35 (1995), 389–411.CrossRefGoogle Scholar
Gyourko, J.; Hartley, J.; and Krimmel, K.. “The Local Residential Land Use Regulatory Environment Across US Housing Markets: Evidence from a New Wharton Index.” NBER Working Paper No. 26573 (2019).CrossRefGoogle Scholar
Han, J.; Park, K.; and Pennacchi, G.. “Corporate Taxes and Securitization.” Journal of Finance, 70 (2015), 1287–1321.CrossRefGoogle Scholar
Hurst, E.; Keys, B.; Seru, A.; and Vavra, J.. “Regional Redistribution through the US Mortgage Market.” American Economic Review, 106 (2016), 2989–3028.CrossRefGoogle Scholar
Kahn, J., and Kay, B.. “The Impact of Credit Risk Mispricing on Mortgage Lending During the Subprime Boom.” BIS Working Paper No. 875 (2020).CrossRefGoogle Scholar
Keys, B.; 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.; 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
Krainer, J., and Laderman, E.. “Mortgage Loan Securitization and Relative Loan Performance.” Journal of Financial Services Research, 45 (2014), 39–66.CrossRefGoogle Scholar
Lee, D. S. “Randomized Experiments from Non-Random Selection in US House Elections.” Journal of Econometrics, 142 (2008), 675–697.CrossRefGoogle Scholar
Lee, D. S., and Lemieux, T.. “Regression Discontinuity Designs in Economics.” Journal of Economic Literature, 48 (2010), 281–355.CrossRefGoogle Scholar
Levitin, A. “The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title.” Duke Law Journal, 63 (2013), 637–734.Google Scholar
Lin, E. Y., and White, M.. “Bankruptcy and the Market for Mortgage and Home Improvement Loans.” Journal of Urban Economics, 50 (2001), 138–162.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.. “Securitization and the Declining Impact of Bank Financial Condition on Loan Supply: Evidence from Mortgage Originations.” Journal of Finance, 64 (2009), 861–922.CrossRefGoogle Scholar
McCrary, J. “Manipulation of the Running Variable in the Regression Discontinuity Design: A Density Test.” Journal of Econometrics, 142 (2008), 698–714.CrossRefGoogle Scholar
McGowan, D., and Nguyen, H.. “Deposit Competition and the Securitization Boom.” IWH Discussion Papers 6 (2021).CrossRefGoogle Scholar
Melzer, B. T. “Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default.” Journal of Finance, 72 (2017), 575–612.CrossRefGoogle Scholar
Mian, A.; Sufi, A.; and Trebbi, F.. “Foreclosures, House Prices, and the Real Economy.” Journal of Finance, 70 (2015), 2587–2634.CrossRefGoogle Scholar
Ongena, S.; Popov, A.; and Udell, G.. “When the Cat’s Away the Mice Will Play: Does Regulation at Home Affect Bank Risk-Taking Abroad?”. Journal of Financial Economics, 108 (2013), 727–750.CrossRefGoogle Scholar
Parlour, C., and Winton, A.. “Laying off Credit Risk: Loan Sales Versus Credit Default Swaps.” Journal of Financial Economics, 107 (2013), 25–45.CrossRefGoogle Scholar
Pence, K. M. “Foreclosing on Opportunity: State Laws and Mortgage Credit.” Review of Economics and Statistics, 88 (2006), 177–182.CrossRefGoogle Scholar
Pennacchi, G. “Loan Sales and the Cost of Bank Capital.” Journal of Finance, 43 (1988), 375–396.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
Schill, M. “An Economic Analysis of Mortgagor Protection Laws.” Virginia Law Review, 77 (1991), 489–538.CrossRefGoogle Scholar
Seiler, M.; Seiler, V.; Lane, M.; and Harrison, D.. “Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default.” Real Estate Economics, 40 (2012), 199–233.CrossRefGoogle Scholar
Supplementary material: PDF

McGowan and Nguyen supplementary material

Online Appendix

Download McGowan and Nguyen supplementary material(PDF)
PDF 639.4 KB