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

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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


For helpful comments and discussions, the authors thank Sumit Agarwal, Brent Ambrose, Edward Coulson, Andra Ghent, Robert Hansen, Peter Niculescu, Kiat Ying Seah, Shane Sherlund, Larry Wall, Paul Willen, and Vincent Yao as well as seminar participants at AEA, AREUEA, Bangor University, University of Cambridge, Cornell University, Georgia State University, Kellogg Junior Finance Conference, New York University, NUS-IRES Symposium, Southern Finance Association, Syracuse University, University of Juan Carlos III, and the University of Kansas. They also thank Neil Desai for outstanding research assistance. Frame also thanks the University of North Carolina at Charlotte and the Federal Reserve Bank of Richmond for financial support. This paper was previously circulated under the title “The Role of Blockholders in Debt Markets: Fannie Mae, Freddie Mac and Subprime MBS.” The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Manuel Adelino, Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, 919-660-7981, manuel.adelino@duke.edu; Scott Frame, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8783, scott.frame@atl.frb.org; or Kristopher Gerardi, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8561, kristopher.gerardi@atl.frb.org.
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