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Title:Understanding the securitization of subprime mortgage credit PDF Logo
Authors:Ashcraft, Adam B.
Schuermann, Til
Issue Date:2008
Series/Report no.:Staff Report, Federal Reserve Bank of New York 318
Abstract:In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, we draw upon the example of a mortgage pool securitized by New Century Financial during 2006.
Subjects:Subprime mortgage credit
securitization
rating agencies
principal agent
moral hazard
JEL:G24
G28
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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