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Does Securitization Weaken Screening Incentives?

Published online by Cambridge University Press:  02 December 2020

Dong Beom Choi Open the ORCID record for Dong Beom Choi [Opens in a new window]  and
Jung-Eun Kim
Dong Beom Choi*
Affiliation:
Seoul National University Business School
Jung-Eun Kim
Affiliation:
Federal Reserve Bank of [email protected]
*
[email protected] (corresponding author)
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Abstract

We test whether lenders’ screening incentives weaken when faced with the possibility of loan sales. We adopt a new measure of lending standards, the processing time for mortgage applications at the loan level, and use the collapse of the nonagency mortgage-backed securities issuance market as a natural experiment. Secondary market liquidity for nonconforming loans decreased significantly at the end of 2007, but the market for securitizing conforming loans did not experience the same breakdown. Following this event, lenders spent significantly more time screening applications for loans larger than the conforming loan limits than for those below the limits. The processing-time gap widened more for banks with lower capital, greater involvement in the originate-to-distribute model, and larger assets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2934 - 2962
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Allen Berger, Hendrik Bessembinder (the editor), Nina Boyarchenko, W. Scott Frame, Paul Goldsmith-Pinkham, Itay Goldstein, Kevin Lansing, Igor Livshits, Elena Loutskina, Vladimir Kotomin, Haoyang Liu, Donald Morgan, Sun Young Park, George Pennacchi (the referee), Philip Strahan, Rob Vigfusson, and Ji Wu as well as audiences at the 2019 Chicago Financial Institutions Conference, 2019 Korean Securities Association Conference, 2019 Financial Intermediation Research Society (FIRS) Conference, 2019 Federal Reserve Research Scrum, 2019 Conference on Asia-Pacific Financial Markets (CAFM), and 2020 American Real Estate and Urban Economics Association (AREUEA)–Allied Social Science Associations (ASSA) for their helpful comments. The views expressed in this article are those of the authors and are not necessarily reflective of the views at the Federal Reserve Bank of Richmond or the Federal Reserve System.

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