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Research Seminars & Workshops @ IRES

Professor Abdullah Yavaş
University of Wisconsin - Madison

Adverse Selection in Mortgage Securitization


3 March 2010 (Wed)


2.00 pm - 3.30 pm


RMI Executive Seminar Room
21 Heng Mui Keng Terrace, Level 4


We investigate the lenders' choice of loans to securitize and examine whether the loans they sell into the secondary mortgage market are riskier than the loans they retain in their portfolios. Using the LPS Applied Analytics dataset of mortgage loans originated between 2003 and 2006, we find strong evidence that banks sold low default risk loans into the secondary market and retained higher default risk loans on their portfolios. The result holds for subprime as well as prime loans, although the difference is smaller for subprime loans. In addition to default risk, we also compare the performance of securitized loans and portfolio loans with respect to prepayment risk. We find support for adverse selection with respect to prepayment risk; securitized loans had a higher prepayment risk than portfolio loans. It appears that in return for selling loans with lower default risk, lenders retain loans with lower prepayment risk. Our results also identify differences in the performance of the loans purchased by GSEs versus private issuers. Loans sold to private issuers have lower prepayment rates while relative default rates show variations across years.

About The Speaker

Prof. Abdullah Yavaş is the Distinguished Professor of Real Estate at the University of Wisconsin-Madison. He obtained his BS degree in Business from Boğaziçi University, Turkey in 1985. Prof Yavaş earned a PhD in Economics from the University of Iowa in 1991. After holding a postdoctoral research position for one year at the University of Illinois, he joined Penn State University. He was a visiting faculty member at the University of Michigan, University of Hong Kong and Bogazici University. He also served as the research director at the Institute for Real Estate Studies at Penn State University between 1999 and 2009. Prof. Yavaş joined the University of Wisconsin in 2009.

Prof. Yavaş have more than 50 articles published in Economics, Finance and Real Estate journals, including the Journal of Economic Theory, Journal of Financial Economics, Journal of Financial Intermediation, Journal of Economic Behavior and Organization, Journal of Real Estate Finance and Economics, Games and Economic Behavior and Real Estate Economics. Prof. Yavaş, who serves as an editorial board member of some prominent academic journals in the field of real estate economics and real estate finance, was honored with the best lecturer award by Penn State University and the University of Iowa.

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