Credit securitization decisions

Sarmiento, Camilo | 2012

Government Sponsor Enterprises (GSEs) purchase mor tgage loans from approved lenders, either for cash or in exchange for a mortgage-backed security that comprises thoseloans.TheGSEs guarantee timelypayment ofinter est and principal. The mortgage seller may then hold that security or sell it. A fundamental component of loan securitization decisions is the economic environment. To balance capital requirements and manage credit risk, lenders slice and dice mortgages for securitization versus holding unsecured loans for investment in their portfolios. This article estimates factors that explain credit securitization decisions with GSEs. Using secur itization data from 2005 to 2009, we show the impact that House Price (HP) trends have on decisions of banks to securitize new originations with GSEs. For the analysis, we also measure the preferences of banks to securitize certain loan products as well as the role of note rate spreads on credit securitization decisions.