Credit Ratings and the Evolution of the Mortgage-Backed Securities Market
American Economic Review Papers and Proceedings, Vol. 101, pp. 131-135, 2011
11 Pages Posted: 13 Jan 2012
Date Written: January 1, 2011
Abstract
We compare the structure and performance of private (non-GSE) mortgage-backed securities sold by large issuers vs. those sold by small issuers over the period 2000-2006. Securities sold by large issuers have less subordination — a greater fraction of the deal receiving AAA rating — than those sold by small issuers. Prices for AAA-rated and non-AAA rated tranches sold by large issuers fell more when the market turned down than those sold by small issuers, and this difference was concentrated among tranches issued between 2004 and 2006. These results suggest that rating agencies grant favorable ratings to large issuers, especially during market booms.
Keywords: Credit ratings, mortgage-backed securities, conflict of interest, tranche, subordination
JEL Classification: G2, G1, L1
Suggested Citation: Suggested Citation
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