 "Cherry picking" in subprime mortgage securitizations: Which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007?Paul Calem, Christopher Henderson and Jonathan Liles Journal of Housing Economics, 2011, vol. 20, issue 2, 120-140 Abstract: Depository institutions may utilize securitization to "cherry pick," meaning to transfer risk to investors along dimensions that the investors tend to disregard or misperceive. Using Home Mortgage Disclosure Act data merged with data on subprime loan delinquency by ZIP code, this paper examines sale of "high cost" mortgages by depository institutions during the subprime lending boom of 2005 and 2006. We find that the likelihood of sale increases with risk along dimensions viewed as indicative of cherry picking; for instance, it is positively associated with future, subprime delinquency rates across neighborhoods. In contrast, along the dimension of mutually observed and priced risk as represented by APR spread, likelihood of sale decreases with risk. Thus, the paper reinforces the view, increasingly prevalent in the literature, that inattention to or misperception of risk by the securitization market played a significant role in the subprime lending boom and subsequent market collapse. Keywords: Subprime; mortgages; Securitization; Credit; risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jhouse:v:20:y:2011:i:2:p:120-140 Access Statistics for this article Journal of Housing Economics is currently edited by H. O. Pollakowski More articles in Journal of Housing Economics from Elsevier |
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