Research

Coordination and Subprime Lending

Authors

• Dasol Kim

Abstract

Coordination across the securitization chain can exacerbate frictions in the private securitization process, affecting bank risk incentives through originate-to-distribute lending policies. Safeguards related to arranger screening, such as time to securitization and reserve capital holdings for loan putbacks, are designed to mitigate these frictions, and increases costs of securitizing lower quality loans that are not readily diversifiable. However, coordination can lower effectiveness of arranger screening, decreasing responsiveness of subprime loan supply to cost of funding shocks due to lower securitization costs. Exploiting unexpected, branch-level deposit inflows due to regulatory enforcement on nearby, competing banks, we examine its impact on branch-level mortgage loan origination volume, and document evidence consistent with these dynamics: deposit inflows increase loan volume, and the magnitudes increase in loan quality. Poorer coordination increases responsiveness of subprime lending to deposit inflows, while it has little impact on that of portfolio loans.