Working Paper

Agency Conflicts in Residential Mortgage Securitization: What Does the Empirical Literature Tell Us?

Abstract: The agency conflicts inherent in securitization are viewed by many as having been a key contributor to the recent financial crisis, despite the presence of various legal and economic constructs to mitigate them. A review of recent empirical research for the U.S. home mortgage market suggests that securitization itself may not have been a problem, but rather the origination and distribution of observably riskier loans. Low-documentation mortgages, for which asymmetric information problems are acute, performed especially poorly during the crisis. Securitized low-documentation mortgages performed better when included in deals where security issuers were affiliated with lenders or had significant reputational capital at stake and investors priced the risk of low-documentation loans via larger required equity tranches and/or higher security yields.

Keywords: mortgages; banks; securitization; financial crisis;

JEL Classification: G01; G21; G23; G28;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2017-03-01

Number: 2017-1

Pages: 24 pages