“Understanding the Securitization of Subprime Mortgage Credit,” by Adam B. Ashcraft and Til Schuermann
The authors provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. Ashcraft and Schuermann discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. They continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. The authors present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, Ashcraft and Schuermann draw upon the example of a mortgage pool securitized by New Century Financial during 2006.
Read the full report: http://www.newyorkfed.org/research/staff_reports/sr318.html