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Research Seminars & Workshops @ IRES

Professor James Shilling
Horne Endowed Chair, DePaul University

Moral Hazard and Adverse Selection for Subprime
Lending and Securitization – Priced or not Priced?


25 March 2009


3.00 pm - 4.30 pm


IRES Seminar Room, SDE1 #04-24


The purpose of this paper is to ask whether moral hazard and adverse selection have led to a tiering pricing process in subprime lending and securitization. The paper’s method of testing is to use high loan denial rates to identify subprime lenders with good underwriting practices, and use low loan denial rates to identify lenders with less stringent underwriting practices.

The paper then matches this data to a dataset containing the initial yields on subprime ABSs issued over the period 2004-2007 and to the CDS spreads of home equity issuers over this same time period. The initial ABS yields provide us with investors’ assessment of the credit risk associated with the ABS notes. The CDS spreads of the home equity issuers provide us with investors’ assessment of the credit risk associated with their loan portfolios – the value of which will typically include first-loss pieces. We then use these spreads to test whether there is tiering between issuers.

About The Speaker

DePaul has named James D. Shilling, one of the nation's foremost experts in real estate economics, finance and investment as its Michael J. Horne Chair in Real Estate Studies. The new research and teaching position is funded by a $4 million endowment underwritten by the Michael J. Horne Education & Healthcare Assistance Foundation. Shilling will join the Finance Department's faculty in January to spearhead research for the Real Estate Center, teach in the MBA program and foster educational and research connections to Chicago's real estate community. He comes to DePaul from the University of Wisconsin-Madison, where he is the James A. Graaskamp Chair of Real Estate and Urban Land Economics.

“Jim Shilling's appointment through this generous gift brings one of the country's top real estate authorities to DePaul and advances the Real Estate Center's mission to become a world-class center for real estate study, research and outreach,” says Susanne Cannon, the Douglas and Cynthia Crocker Endowed director of the center. Shilling says he looks forward to sharing his knowledge with the working professionals in DePaul's evening MBA program and forging links to Chicago's robust real estate industry. “What most attracted me to DePaul's real estate program is its strong connections to the Chicago business community,” he says. “I am excited about partnering with one of the best real estate communities in the country to produce relevant research and immerse DePaul's business students in real-world real estate practice.”

The Michael J. Horne Education & Healthcare Assistance Foundation was formed by family and friends of the late Michael J. Horne, a Los Angeles real estate professional, after his death in 1985. The foundation has previously donated scholarship funds and helped finance housing facilities for DePaul students. “The foundation is deeply gratified that it is able to help DePaul University advance its educational mission,” says Ben Noble, a representative of the foundation. The Horne endowment is the third, seven-figure gift that the Real Estate Center has attracted in the past 14 months. Alumnus George L. Ruff, founder and senior principal of New York-based Trinity Hotel Investors LLC, donated $1.5 million in September. Last year Douglas Crocker II, retired CEO of Equity Residential Properties Trust, and his wife, Cynthia, donated $2 million.

For full paper, download here

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