Securitization and Loan Performance: A Contrast of Ex Ante and Ex Post Relations in the Mortgage Market

49 Pages Posted: 21 Mar 2011 Last revised: 7 Feb 2012

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Ashlyn Aiko Nelson

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Edward Vytlacil

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 31, 2010

Abstract

This study presents an intriguing contrast of the ex ante and ex post relations between mortgage securitization and loan performance using a comprehensive dataset from a major national mortgage lender. While the paper supports that the bank applies lower screening efforts on loans that have higher ex ante probability of being securitized, it further shows that loans remaining on the bank’s balance sheet are, ex post, of worse quality than sold loans. Most of the delinquency difference can be explained by secondary market investors’ information advantage over the originating bank acquired over the time lag between loan origination and loan sale. While many blame the presence of the secondary market for creating demand for low-quality loans, we find that ironically these loans hurt the originating bank more than they did the secondary market.

Keywords: securitization, loan performance, mortage market

JEL Classification: D82, G21

Suggested Citation

Jiang, Wei and Nelson, Ashlyn Aiko and Vytlacil, Edward J., Securitization and Loan Performance: A Contrast of Ex Ante and Ex Post Relations in the Mortgage Market (September 31, 2010). Indiana University-Bloomington School of Public & Environmental Affairs Research Paper No. 2011-03-05, AFA 2012 Chicago Meetings Paper, Columbia Business School Research Paper No. 12-1, Available at SSRN: https://ssrn.com/abstract=1787119 or http://dx.doi.org/10.2139/ssrn.1787119

Wei Jiang (Contact Author)

Columbia Business School - Finance and Economics ( email )

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NBER ( email )

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Ashlyn Aiko Nelson

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
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Edward J. Vytlacil

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8281
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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