AGENCY CONFLICTS IN RESIDENTIAL MORTGAGE SECURITIZATION: WHAT DOES THE EMPIRICAL LITERATURE TELL US?

We investigate the securitization of subprime residential mortgage loans into structured products such as subprime residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time framework as they are related to RMBSs and RMBS CDOs. In this regard, profit is known to be an important indicator of financial health. With regard to risk, we discuss credit (including counterparty and default), market (including interest rate, price, and liquidity), operational (including house appraisal, valuation, and compensation), tranching (including maturity mismatch and synthetic) and systemic (including maturity transformation) risks. Also, we consider certain aspects of Basel regulation when securitization is taken into account. The main hypothesis of this paper is that the SMC was mainly caused by the intricacy and design of subprime mortgage securitization that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verified in a theoretical- and numerical-quantitative context and is illustrated via several examples.

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Investors Beware: Flaws in the Residential Mortgage Securitization Process

The Journal of Structured Finance ◽

10.3905/jsf.2010.16.3.088 ◽

2010 ◽

Vol 16 (3) ◽

pp. 88-98

Author(s):

Laurie S. Goodman ◽

Roger Ashworth ◽

Brian Landy ◽

Lidan Yang

Keyword(s):

Residential Mortgage ◽

Mortgage Securitization

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Does securitization escalate banks’ sensitivity to systemic risk?

The Journal of Risk Finance ◽

10.1108/jrf-12-2018-0184 ◽

2020 ◽

Vol 21 (1) ◽

pp. 1-22 ◽

Cited By ~ 1

Author(s):

Katerina Ivanov ◽

Julia Jiang

Keyword(s):

Systemic Risk ◽

Value At Risk ◽

Supply And Demand ◽

Conditional Value At Risk ◽

Empirical Literature ◽

Content Type ◽

Holding Companies ◽

Residential Mortgage ◽

The Us ◽

The Impact

Purpose The purpose of this paper is to test empirically the impact of asset securitization and sale activities as well as the holdings of sub-prime related securitized products on the US bank holding companies’ (BHC) exposure to systemic risk. Design/methodology/approach This paper adopts a robust econometric method to estimate the conditional value-at-risk as a measure of BHCs' institutional sensitivity to market crushes. Using the data over the period of 2004-2016, the study also uses OLS with robust standard errors and panel estimation with random effects as two alternative estimation techniques to assess the impact of securitization activities on the sensitivity of BHCs to systemic risk. Findings Residential mortgage and other forms of securitization activities are positively related to an increase in the US BHCs' sensitivity to systemic distress. The significant cross effects of both securitized loans and holdings of securitized products play a crucial role in determining risks in financial sector. Originality/value This study contributes to the empirical literature on the effects of securitization on BHCs' risk exposures in several ways. First, the paper considers the complexity of the bank's risk profile; it focuses on BHCs' individual sensitivity to systemic distress and its dependence on the size of securitization and assets sold activities considering both supply and demand sides of securitization. Second, the time horizon under investigation sheds a light on the relationship between securitization and banks' risk exposures including the pre-crisis, crisis and post-crisis periods.

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