Understanding the Securitization of Subprime Mortgage Credit
Foundations and Trends® in
Finance
Volume 2 Issue 3
DOI: 10.1561/0500000024
Understanding the Securitization of Subprime Mortgage Credit
Adam B. Ashcraft
Research Officer, Financial Intermediation, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, adam.ashcraft@ny.frb.org
Til Schuermann
Vice-President, Financial Intermediation, Federal Reserve Bank of New York and Wharton Financial Institutions Center, 33 Liberty Street, New York, NY 10045, til.schuermann@ny.frb.org
SUGGESTED CITATION:
Adam B.
Ashcraft
and
Til
Schuermann
(2008)
"Understanding the Securitization of Subprime Mortgage Credit",
Foundations and Trends® in Finance: Vol. 2: No 3, pp 191-309.
http:/dx.doi.org/10.1561/0500000024
Abstract
In this survey we provide an overview of the subprime mortgage securitization process and the seven key informational frictions
which arise. We discuss how market participants work to minimize these frictions and speculate on how this process broke down.
We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and
predatory lending. We present the key structural features of a typical subprime securitization, document how the rating agencies
assign credit ratings to mortgage-backed securities, and outline how the agencies monitor the performance of mortgage pools
over time. Throughout the survey, we draw upon the example of a mortgage pool securitized by New Century during 2006.
Keywords:
| Subprime mortgage credit; securitization; rating agencies; principal agent; moral hazard. |
JEL codes: