Topic: Sponsor-Underwriter Affiliation and the Performance of Non-Agency Mortgage-Backed Securities
Speaker: Peng Liu, Associate Professor of Real Estate, School of Hotel Administration, Cornell University
Date: October 29th, 2014 (Wed.)
Time: 1:30-3:00pm
Location: Building 4, Room 101
Language: English
Abstract:
Securitization of mortgage loans involves multiple financial intermediaries. Among them, loan originators, deal sponsors, and security underwriters are the key economic players. Using data on non-agency mortgage-backed securities (MBS), we find that i) deals in which underwriters and sponsors are affiliated have higher delinquency rates than those in which they are unaffiliated, and ii) the poorer performance of MBS sponsor-underwriter affiliation is true both when investment banks act as sponsors and when sponsors/lenders act as underwriters. The effect is robust to controlling for security level characteristics, suggesting that the poorer performance is beyond what is observable or priced in the deal. The results are also robust to the inclusion of underwriter or sponsor fixed effect, suggesting it is the incentive effect that drives the result. In addition, the results are robust to the inclusion of the relation between sponsors and originators. These pieces of evidence is inconsistent with the information advantage associated with vertical integration and points to poorer incentives for affiliated sponsors and underwriters. While the literature documents that securitization weakens lenders' screening incentives, our findings suggest that an important factor affecting the performance of mortgage-backed securities is the moral hazard on the part of sponsors and underwriters.
About the speaker:
Peng Liu is an associate professor of real estate and finance at the Cornell University School of Hotel Administration. Liu’s research focuses on the interaction between financial innovations and real economy, with a specific interest in real estate finance and investment, securitization, commodity pricing, and market analysis and operational research in retail, airline, hospitality, and recreational industries. He chaired the 2014 Cornell Retail Real Estate Roundtable and has published extensively in top-tier journals, including Review of Financial Studies, Management Science, Journal of Banking and Finance, Journal of Empirical Finance, etc. Liu earned a PhD in finance and real estate and an MS in finance from the Haas School of Business at the University of California, Berkeley. Before coming to Cornell, Liu was a Fisher Center of Real Estate and Finance Research Fellow at the University of California, Berkeley, and an instructor at U.C. Berkeley’s Haas Business School, Tsinghua University, Shanghai Jiaotong University, and Renmin University.
