Going for Broke: Underwriter Reputation and the Performance of Mortgage-Backed Securities
2022-04-06 16:26:00
Do reputational concerns of financial intermediaries dampen credit booms and busts? Does this hold in the context of securitization? During a credit boom revolving around the securitization of West-Indian plantation-mortgages in the 1760s, high-reputation underwriters virtually stopped issuing new securities towards the end of the boom. Their securities retained 17.5 percent more of their value during the subsequent bust, which is largely explained by better mortgage characteristics at origination. However, this did little to dampen the boom. Investors failed to differentiate between high- and low-reputation underwriters and flocked into lower-quality securities that paid the same yield-at-origination.