Investors Beware: Flaws in the Residential Mortgage Securitization          Process

Derek W. Johnson

doi:10.2469/dig.v41.n1.21

Investors Beware: Flaws in the Residential Mortgage Securitization Process

CFA Digest ◽

10.2469/dig.v41.n1.21 ◽

2011 ◽

Vol 41 (1) ◽

pp. 42-43

Author(s):

Derek W. Johnson

Keyword(s):

Residential Mortgage ◽

Mortgage Securitization

Profit and Risk under Subprime Mortgage Securitization

Discrete Dynamics in Nature and Society ◽

10.1155/2011/849342 ◽

2011 ◽

Vol 2011 ◽

pp. 1-64 ◽

Cited By ~ 1

Author(s):

M. A. Petersen ◽

J. Mukuddem-Petersen ◽

B. De Waal ◽

M. C. Senosi ◽

S. Thomas

Keyword(s):

Risk Mitigation ◽

Collateralized Debt Obligations ◽

Mortgage Loans ◽

Main Hypothesis ◽

Subprime Mortgage ◽

Important Indicator ◽

Residential Mortgage ◽

Maturity Mismatch ◽

Mortgage Securitization ◽

Collateralized Debt

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.

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

The Journal of Financial Research ◽

10.1111/jfir.12145 ◽

2018 ◽

Vol 41 (2) ◽

pp. 237-251 ◽

Cited By ~ 1

Author(s):

W. Scott Frame

Keyword(s):

Empirical Literature ◽

Agency Conflicts ◽

Residential Mortgage ◽

Mortgage Securitization