Financial Regulation And Securitization: Evidence From Subprime Loans

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Executive Summary

The authors examine the consequences of existing regulations on the quality of mortgage loans originations in the originate to distribute (OTD) market. The information asymmetries in the OTD market can lead to moral hazard problems on the part of lenders. The authors find, using a plausibly exogenous source of variation in the ease of securitization that the quality of loan originations varies inversely with the amount of regulation: more regulated lenders originate loans of worse quality. The authors interpret this result as possible evidence that the fragility of lightly regulated originators capital structure can mitigate moral hazard. In addition, we find that incentives which require mortgage brokers to have 'Skin in the game.'

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