The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages
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The Dodd-Frank Act requires securitization sponsors to retain not less than a 5% share of the aggregate credit risk of the assets they securitize. This paper examines how the implementation of risk-retention requirements affected the market for securitized mortgage loans. Using a difference-in-difference empirical framework, I find that risk retention implementation is associated with mortgages being issued with markedly higher interest rates, yet notably lower loan-to-value ratios and higher income to debt-service ratios. In addition, after controlling for observable loan characteristics, loans subject to risk retention requirements appear to be less likely to become troubled. These findings suggest that the risk retention rules have made securitized loans safer in both observable and unobservable dimensions, yet are more expensive to borrowers. Further evidence suggests that the risk-retention rules are binding, with the amount of risk being retained following implementation roughly three times that of before, while lenders also seemed to accelerate the securitization of originated loans during the months immediately before the rules took effect.
KeywordsDodd-Frank Securitization Risk retention Mortgages CMBS
JEL ClassificationG14 G21 G23
The author would like to thank Anthony DeFusco, Mike Fishman, David Matsa, Mitchell Petersen, Barney Hartman-Glaser and seminar participants at the Kellogg School of Management, Freddie Mac, the 2018 Summer Real Estate Symposium, and the 2018 FDIC Bank Research Conference for their helpful comments. The author appreciates the financial support received from the Guthrie Center for Real Estate Research.
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