Self-Reporting under SEC Reg AB and Transparency in Securitization: Evidence from Loan-Level Disclosure of Risk Factors in RMBS Deals

This paper is designed to illustrate the limitations and potential bias in using loan-level data on securitized residential mortgage for studying the risk of RMBS during and around the time of the financial crisis. Using trustee data on mortgage characteristics provided by BlackBox Logic (BBx), we examine the extent to which undisclosed mortgage characteristics distort the available data and impact risk analysis of RMBS collateral pools. Our findings illustrate that substantial amounts of loan characteristic data in crucial fields like Occupancy, Property Type, Loan Purpose, and FICO are missing from the trustee data. The frequency of missing values is staggering, ranging from just under 9% for Property Type to 29% for FICO, up to almost 85% for Originator Name, all variables used in recent studies. The omissions are correlated to some degree with the securitization sponsor and even more dramatically with the identity of the deal trustee. There are profound implications for both empirical research as well as policy decisions in the post-crisis era. First, any analysis of RMBS collateral should be built not upon the entirety of mortgage databases, but on stratified samples and should otherwise control for important sponsor and trustee fixed effects. Furthermore, the revisions for Regulation AB which require loan-level disclosure should be adopted in order to standardize mortgage disclosure.