Optimal securitization with moral hazard

Barney Hartman-Glaser, Tomasz Piskorski and Alexei Tchistyi

Journal of Financial Economics, 2012, vol. 104, issue 1, 186-202

Abstract: We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the “first loss piece.”

Keywords: Security design; Mortgage backed securities; Moral hazard (search for similar items in EconPapers)
JEL-codes: D86 G21 G24 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:104:y:2012:i:1:p:186-202

DOI: 10.1016/j.jfineco.2011.12.007

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