MBS Ratings and the Mortgage Credit Boom

A. Ashcraft, P. Goldsmith-Pinkham, J. Vickery

Research output: Working paperDiscussion paperOther research output

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Abstract

We study credit ratings on subprime and Alt-A mortgage-backed securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly-rated securities in each deal is decreasing in mortgage credit risk (measured either ex-ante or ex-post), suggesting ratings contain useful information for investors. However, we also find evidence of significant time-variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses, and large rating downgrades) amongst deals with observably higher-risk mortgages based on a simple ex-ante model, and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages59
Volume2010-89S
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-89S

Fingerprint

Rating
Credit booms
Mortgage-backed securities
Mortgages
Credit rating
Time variation
Loans
Subprime crisis
Securities market
Underperformance
Investors
Cohort
Mortgage default
Documentation
Subprime
Credit risk

Keywords

  • Credit Rating Agencies
  • Subprime Crisis
  • Mortgage-Backed Securities

Cite this

Ashcraft, A., Goldsmith-Pinkham, P., & Vickery, J. (2010). MBS Ratings and the Mortgage Credit Boom. (CentER Discussion Paper; Vol. 2010-89S). Tilburg: Finance.
Ashcraft, A. ; Goldsmith-Pinkham, P. ; Vickery, J. / MBS Ratings and the Mortgage Credit Boom. Tilburg : Finance, 2010. (CentER Discussion Paper).
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Ashcraft, A, Goldsmith-Pinkham, P & Vickery, J 2010 'MBS Ratings and the Mortgage Credit Boom' CentER Discussion Paper, vol. 2010-89S, Finance, Tilburg.

MBS Ratings and the Mortgage Credit Boom. / Ashcraft, A.; Goldsmith-Pinkham, P.; Vickery, J.

Tilburg : Finance, 2010. (CentER Discussion Paper; Vol. 2010-89S).

Research output: Working paperDiscussion paperOther research output

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AB - We study credit ratings on subprime and Alt-A mortgage-backed securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly-rated securities in each deal is decreasing in mortgage credit risk (measured either ex-ante or ex-post), suggesting ratings contain useful information for investors. However, we also find evidence of significant time-variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses, and large rating downgrades) amongst deals with observably higher-risk mortgages based on a simple ex-ante model, and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.

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Ashcraft A, Goldsmith-Pinkham P, Vickery J. MBS Ratings and the Mortgage Credit Boom. Tilburg: Finance. 2010. (CentER Discussion Paper).