Optimal Securitization With Moral Hazard
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| Author | : Barney Hartman-Glaser |
| Publisher | : |
| Total Pages | : 46 |
| Release | : 2011 |
| Genre | : |
| ISBN | : |
This paper considers the optimal design of mortgage backed securities (MBS) in a dynamic setting with moral hazard. A mortgage underwriter with limited liability can engage in costly effort to screen for low risk borrowers and can sell loans to a secondary market. Secondary market investors cannot observe the effort of the mortgage underwriter, but they can make their payments to the underwriter conditional on the mortgage defaults. We find the optimal contract between the underwriter and the investors involves a single payment to the underwriter after a waiting period. The dynamic setting of our model admits three new findings. First, unlike static models that focus on underwriter retention as a means of providing incentives, our model shows that the timing of payments to the underwriter is the key incentive mechanism. Second, the maturity of the optimal contract can be short even though the mortgages are long-lived. Third, selling pooled mortgages is more efficient than selling mortgages individually because pooling allows investors to learn about the underwriter's effort more quickly, an information enhancement effect. Our model also allows an evaluation of standard contracts and shows that the ldquo;first loss piecerdquo; is a very close approximation to the optimal contract.
| Author | : Sara Malekan |
| Publisher | : |
| Total Pages | : 122 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
| Author | : Sara Malekan |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2012 |
| Genre | : Combinatorial optimization |
| ISBN | : |
| Author | : Georges Dionne |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
| Author | : Semyon Malamud |
| Publisher | : |
| Total Pages | : |
| Release | : 2011 |
| Genre | : |
| ISBN | : |
We study optimal securitization of defaultable assets in a continuous time setting. A financial intermediary can create a portfolio of defaultable assets and then sell it to outside investors. The default risk of the assets in the portfolio is determined by the unobservable costly effort exerted by the intermediary. We explicitly calculate the optimal contract for any given level of effort and show that the contract may have surprising properties - for example, payment by the investor for default cascades, whereby the investor makes the largest payments to the intermediary after a prescribed number of defaults occurs, one immediately after another. In stark contrast to the conventional wisdom, we show that, even when intermediaries have all the bargaining power, securitization improves the intermediary's screening incentives and increases the equilibrium effort level of the intermediary. Furthermore, the equilibrium effort level and the surplus converge to their first best levels when the number of securitized assets is sufficiently large. securitization, mortgage-backed securities, moral hazard, default risk
| Author | : Michel A. Robe |
| Publisher | : |
| Total Pages | : |
| Release | : 2009 |
| Genre | : |
| ISBN | : |
We provide an explanation of the widespread use of traditional securities by well-established firms. Standard moral hazard models predict that equity, debt and warrants are almost never optimal financing instruments. We show that issuing these securities is, nevertheless, nearly optimal: the issuer would gain very little by using non-traditional securities instead. Combined with equity, one debt issue (without multiple layers of seniority) and one warrant issue (without multiple exercise prices) suffice to achieve near-optimality. The near-optimality of traditional financing depends crucially on the issuer's ability to use warrants in addition to debt and equity.
| Author | : Charles M. Kahn |
| Publisher | : |
| Total Pages | : 43 |
| Release | : 2001 |
| Genre | : |
| ISBN | : |
Because many financial institutions rely heavily on debt finance and have great flexibility in their choice of investments, they may be tempted to exploit debt holders by taking on inefficient but risky investments. Consider a two-subsidiary (quot;bipartitequot;) structure in which one subsidiary is supposed to hold low-risk assets and the other is supposed to hold high-risk assets. By quot;insulatingquot; low-risk assets from high-risk assets, this bipartite structure reduces incentives to engage in risk-shifting in the safer subsidiary. Nevertheless, the risky subsidiary may engage in limited risk-shifting, and the institution may engage in quot;cherry-picking,quot; putting the most profitable high-risk assets in the safer subsidiary and replacing them with inefficient high-risk assets. A bipartite structure is most likely to dominate a unitary structure when risk differs greatly across assets. Our analysis also suggests that institutions may opt for multiple subsidiaries even though this does not appear to take full advantage of gains from diversification. These results help motivate a number of institutional arrangements, including the use of separate commercial bank and finance company subsidiaries, quot;good bank/bad bankquot; structures, securitization, and quot;swapsquot; subsidiaries.
| Author | : Gang Zhi Fan |
| Publisher | : |
| Total Pages | : |
| Release | : 2006 |
| Genre | : |
| ISBN | : |
One interesting explanation for asset securitization is the managerial agency theory - where securitization of cash flows that are relatively insensitive to managerial effort reduces the noise for cash flows that are sensitive to managerial effort (Iacobucci and Winter, 2005). This paper extends this concept in several ways. First, we differentiate the effects of noise and effort sensitivity on managerial effort and compensation, underscoring the importance of a less noisy environment. We also carefully delineate the conditions under which asset securitization would improve the welfare of managers and shareholders of the originating company. Second, we relax the assumptions regarding the expected income-producing function and the income variance, and further take into consideration the change of the marginal production of income with respect to effort before and after securitization. Third, under a multitask principal-agent model framework, we explore how the relationship between managerial activities on different assets affects the incentive compensation for the manager of the originating company and the joint surplus for shareholder and manager. This is particularly relevant when entire buildings are securitized as opposed to pools of income-generating assets. Finally, we examine the role of the third-party servicer.
| Author | : Ryan Bubb |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 2009 |
| Genre | : Debt relief |
| ISBN | : |
| Author | : Allen N. Berger |
| Publisher | : Oxford University Press, USA |
| Total Pages | : 1309 |
| Release | : 2019-10 |
| Genre | : Business & Economics |
| ISBN | : 0198824637 |
The Oxford Handbook of Banking provides an overview and analysis of state-of-the-art research in banking written by leading researchers in the field. This Handbook will appeal to graduate students of economics, banking and finance, academics, practitioners and policy makers. Consequently, the book strikes a balance between abstract theory, empirical analysis, and practitioner and policy-related material. The handbook is split into five parts. Part I, The Theory of Banking, examines the role of banks in the wider financial system, why banks exist, how they function, and their legal and governance structures. Part II entitled Regulatory and Policy Perspectives discusses monetary policy, prudential regulation and supervision, and antitrust policy. Part III of the book deals with bank performance. A number of issues are assessed including efficiency, financial innovation and technological change, globalization and ability to deliver small business, consumer, and mortgage lending services. Part IV of the book provides an overview of macroeconomic perspectives in banking. This part of the book includes a discussion of the determinants of bank failures and crises, and the impact on financial stability, institutional development, and economic growth. Part V examines International Differences In Banking Structures And Environments. This part of the handbook examines banking systems in the United States, Western Europe, Transition countries, Latin America, Japan and the Developing nations of Asia.
