Private mortgage securitization and loss given default

Eric Higgins, Abdullah Yavas and Shuang Zhu

Real Estate Economics, 2022, vol. 50, issue 5, 1334-1359

Abstract: Loan performance varies by default probability and loss given default (LGD). While the relationship between securitization and default probability has been studied intensively, the effect of securitization on LGD remains unexplored. Using a unique data set containing over 40,000 mortgage liquidations, this article studies the effect of private securitization on LGD. We document that securitized loans incur higher LGD than observably similar portfolio loans. The results indicate that the effect comes mainly from the difference in loan quality between securitized and portfolio loans. Securitized opaque mortgages incur more than 18% (in relative terms) higher loan losses than observably similar portfolio loans. In addition, a difference‐in‐difference analysis provides evidence that precrisis securitization standards contributed to higher loan losses.

Date: 2022
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