"Optimal Securitization with Moral Hazard"

Barney Hartman-Glaser, Tomasz Piskorski, Alexei Tchistyi

© Journal of Financial Economics, April 2012
Volume: 104 | Issue: 1 | Pages: 186-202

Publication type: Journal article

Research Archive Topic: Capital Markets and Investments, Corporate Finance, Real Estate

Abstract

We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the "first loss piece".

View research

 

Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.

Each topic is linked to an index of publications on that topic.

Contract

Add a new
Add a new