Financialregulationandsecuritization:Evidencefrom subprimeloans

Weexaminetheconsequencesofexistingregulationsonthequalityofmortgageloans originationsintheoriginate-to-distribute(OTD)market.Theinformationasymmetries in theOTDmarketcanleadtomoralhazardproblemsonthepartoflenders.Wefind, usingaplausiblyexogenoussourceofvariationintheeaseofsecuritization,thatthe qualityofloanoriginationvariesinverselywiththeamountofregulation:more regulated lendersoriginateloansofworsequality.Weinterpretthisresultasapossible evidencethatthefragilityoflightlyregulatedoriginators’capitalstructurecanmitigate moralhazard.Inaddition,wefindthatincentiveswhichrequiremortgagebrokersto have‘skininthegame’andstrongerriskmanagementdepartmentsinsidethebank partiallyalleviatethemoralhazardprobleminthissetting.Finally,havingmorelenders insideamortgagepoolisassociatedwithhigherqualityloans,suggestingthatsharper relativeperformanceevaluationmadepossiblebymorecompetitionamongcontribut- ing lenderscanalsomitigatethemoralhazardproblemtosomeextent.Overall,our evidencesuggeststhatmarketforcesratherthanregulationmayhavebeenmore effectiveinmitigatingmoralhazardintheOTDmarket.Thefindingscautionagainst policiesthatimposestricterlenderregulationswhichfailtoalignlenders’incentives with theinvestorsofmortgage-backedsecurities.