The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities
Manuel Adelino, W. Scott Frame, and Kristopher S. Gerardi
Working Paper 2014-4a
Revised March 2017
The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—the dominant investors in subprime mortgage-backed securities before the 2008 crisis—substantively affected collateral composition in this market. Mortgages included in securities designed for the GSEs performed better than those backing other securities in the same deals, holding observable risk constant. Consistent with the transmission of private information, these effects are concentrated in low-documentation loans and for issuers that were highly dependent on the GSEs and were corporate affiliates of the mortgage originators. Additional analysis of yield spreads shows that these performance differences were not reflected in prices.
JEL classification: G17, G21, G23
Key words: mortgage default, GSEs, securitization, private information