The agency costs of tranching: Evidence from RMBS

Sanket Korgaonkar

Journal of Financial Intermediation, 2023, vol. 54, issue C

Abstract: This paper documents the agency costs resulting from the deeper tranching of subprime residential mortgage pools. Mortgage servicers are less likely to renegotiate delinquent loans collateralizing a greater number and variety of tranches. We find that an interquartile increase in tranching reduces mortgage servicers’ probability of loan renegotiation by 14% relative to the mean. This effect is concentrated in mortgages with greater ambiguity surrounding the loan value maximizing action. Overall, our results support the notion that tranching worsens agency frictions by increasing coordination costs among investors and impeding their monitoring of the agent.

Keywords: Capital structure; Securitization; Mortgages; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G21 G23 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:54:y:2023:i:c:s104295732300013x

DOI: 10.1016/j.jfi.2023.101030

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