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Agency Conflicts In Residential Mortgage Securitization: What Does The Empirical Literature Tell Us?

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  • W. Scott Frame
Abstract
Agency conflicts inherent in securitization are viewed as having been a key contributor to the recent financial crisis. A review of empirical research for the U.S. home mortgage market suggests that the problem may not have been securitization itself, 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. Low†documentation mortgages performed better when included in deals where issuers were affiliated with lenders or had reputational capital at stake. Investors priced low†documentation loan risk via higher required equity tranches and security yields.

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  • W. Scott Frame, 2018. "Agency Conflicts In Residential Mortgage Securitization: What Does The Empirical Literature Tell Us?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 41(2), pages 237-251, June.
    • Handle: RePEc:bla:jfnres:v:41:y:2018:i:2:p:237-251
    DOI: 10.1111/jfir.12145
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    References listed on IDEAS

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    1. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2011. "The role of securitization in mortgage renegotiation," Journal of Financial Economics, Elsevier, vol. 102(3), pages 559-578.
    2. repec:bla:jfinan:v:43:y:1988:i:2:p:375-96 is not listed on IDEAS
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    13. Adelino, Manuel & Scott Frame, W. & Gerardi, Kristopher, 2017. "The effect of large investors on asset quality: Evidence from subprime mortgage securities," Journal of Monetary Economics, Elsevier, vol. 87(C), pages 34-51.
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    Cited by:

    1. W. Scott Frame & Larry D. Wall & Lawrence J. White, 2018. "Technological Change and Financial Innovation in Banking: Some Implications for Fintech," FRB Atlanta Working Paper 2018-11, Federal Reserve Bank of Atlanta.
    2. Sumit Agarwal & Brent W. Ambrose & Yildiray Yildirim & Jian Zhang, 2024. "Risk Retention Rules and the Issuance of Commercial Mortgage Backed Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 68(4), pages 684-714, May.
    3. Deku, Solomon Y. & Kara, Alper & Zhou, Yifan, 2019. "Securitization, bank behaviour and financial stability: A systematic review of the recent empirical literature," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 245-254.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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