Agency Conflicts In Residential Mortgage Securitization: What Does The Empirical Literature Tell Us?

Agency conflicts inherent in securitization are viewed as having been a key contributor to the recent financial crisis. A review of empirical research for the U.S. home mortgage market suggests that the problem may not have been securitization itself, 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. Low†documentation mortgages performed better when included in deals where issuers were affiliated with lenders or had reputational capital at stake. Investors priced low†documentation loan risk via higher required equity tranches and security yields.