Optimal securitization with moral hazard

Barney Hartman-Glaser, Tomasz Piskorski, Alexei Tchistyi

Research output: Contribution to journalArticle

Abstract

We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the "first loss piece.".

Original languageEnglish (US)
Pages (from-to)186-202
Number of pages17
JournalJournal of Financial Economics
Volume104
Issue number1
DOIs
StatePublished - Apr 1 2012

Keywords

  • Moral hazard
  • Mortgage backed securities
  • Security design

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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