Agency Conflicts in Residential Mortgage Securitization: What Does the Empirical Literature Tell Us?

W. Scott Frame

Working Paper 2017-1
March 2017

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The agency conflicts inherent in securitization are viewed by many as having been a key contributor to the recent financial crisis, despite the presence of various legal and economic constructs to mitigate them. A review of recent empirical research for the U.S. home mortgage market suggests that securitization itself may not have been a problem, 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. Securitized low-documentation mortgages performed better when included in deals where security issuers were affiliated with lenders or had significant reputational capital at stake and investors priced the risk of low-documentation loans via larger required equity tranches and/or higher security yields.

JEL classification: G01, G21, G23, G28

Key words: mortgages, banks, securitization, financial crisis

The author was affiliated with the University of North Carolina at Charlotte and the Federal Reserve Bank of Richmond while some of this was written. He thanks Brent Ambrose, James Conklin, Edward DeMarco, Ronel Elul, Kristopher Gerardi, Joseph Tracy, Larry Wall, and Lawrence White for helpful comments on an earlier draft, as well as seminar participants at the 2014 FUNCAS meeting in Madrid and 2014 Financial Management Association meetings in Nashville. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.
Please address questions regarding content to W. Scott Frame, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8783,
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