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Manuel AdelinoPhD Candidate in Financial Economics |
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Do Investors Rely Only on Ratings? The Case of Mortgage-Backed Securities (Job Market Paper) This paper presents evidence that the prices at origination of residential mortgage backed securities (RMBS) contain information on the quality of the underlying asset pools above what is reflected in the ratings. Yield spreads at issuance predict both future downgrades and defaults even after the information contained in ratings is taken into account. This is true for all rating classes except triple-A. This suggests that investors in triple-A securities were less informed about the quality of the securitized assets than investors in riskier, more information sensitive securities. Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization (joint with Kris Gerardi and Paul Willen) Featured in The Economist, New York Times, Washington Post, The Boston Globe, The New Yorker, Bloomberg, BusinessWeek.com and others. We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors. |
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