Competition, Product differentiation and Crises: Evidence from 18 million securitized loans

Peter Haslag, Kandarp Srinivasan and Anjan V. Thakor

Journal of Financial Economics, 2024, vol. 162, issue C

Abstract: RMBS sponsors contributed to the rise of new product features in securitized mortgages prior to the 2008 financial crisis. Using a regulatory shock to sponsor competition , we show securitization influences the design of mortgage contracts, empirically demonstrating a unique, feedback loop of product differentiation from the derived security (MBS) to the underlying asset (loans). Product differentiation in Prime MBS collateral rises faster than that of non-prime in the early boom period (2000–2004), a strategic choice by MBS sponsors in the face of increasing competition. At very high levels of competition, product differentiation targets non-prime (marginal) borrowers. We develop a theoretical framework for sponsor-induced product differentiation that explains these empirical findings.

Keywords: Securitization; Competition; Product differentiation; Mortgage; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G2 K2 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001703

DOI: 10.1016/j.jfineco.2024.103947

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