#07-43
Understanding the Securitization of Subprime Mortgage Credit
Adam B. Ashcraft and Til Schuermann, March 2008
Abstract: In this paper we provide an overview of the subprime mortgage
securitization process and the seven key informational frictions which
arise. We discuss how market participants work to minimize these
frictions and speculate on how this process broke down. We continue
with a complete picture of the subprime borrower and the subprime
loan, discussing both predatory borrowing and predatory lending. We
present the key structural features of a typical subprime securitization,
document how the rating agencies assign credit ratings to mortgagebacked
securities, and outline how the agencies monitor the
performance of mortgage pools over time. Throughout the paper, we
draw upon the example of a mortgage pool securitized by New Century
during 2006.
Keywords: subprime mortgage credit; securitization; rating agencies; principal agent, moral hazard
JEL classifications: G24, G28
