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Originate-to-distribute model and the subprime mortgage crisis

An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period orig... Full description

Journal Title: The review of financial studies 2011, Vol.24(6), pp. 1881-1915
Main Author: Purnanandam, Amiyatosh
Format: Electronic Article Electronic Article
Language: English
Subjects:
Usa
ID: ISSN: 0893-9454
Link: http://gso.gbv.de/DB=2.1/PPNSET?PPN=663169739
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recordid: gbv663169739
title: Originate-to-distribute model and the subprime mortgage crisis
format: Article
creator:
  • Purnanandam, Amiyatosh
subjects:
  • Subprime-Krise
  • Finanzkrise
  • Kreditsicherung
  • Kreditwürdigkeit
  • Usa
  • 2006-2008
ispartof: The review of financial studies, 2011, Vol.24(6), pp. 1881-1915
description: An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively poor-quality mortgages. This result is not explained away by differences in observable borrower quality, geographical location of the property, or the cost of capital of high- and low-OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital-constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage-induced risk-taking behavior significantly contributed to the current subprime mortgage crisis. [PUBLICATION ] Reprinted by permission of Oxford University Press
language: eng
source:
identifier: ISSN: 0893-9454
fulltext: fulltext
issn:
  • 08939454
  • 0893-9454
url: Link


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descriptionAn originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively poor-quality mortgages. This result is not explained away by differences in observable borrower quality, geographical location of the property, or the cost of capital of high- and low-OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital-constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage-induced risk-taking behavior significantly contributed to the current subprime mortgage crisis. [PUBLICATION ] Reprinted by permission of Oxford University Press
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