Securitization and Screening Incentives: Evidence from Mortgage Processing Time
Abstract"We test if lenders' screening incentives weaken when facing the possibility of eventual loan sales. We adopt a new measure of lending standards, application processing time
for mortgages at the loan level, and use the collapse of the non-agency MBS issuance market as a natural experiment. The market collapse significantly reduced secondary
market liquidity for non-conforming loans, but had little impact on conforming loans. Following the collapse, lenders spent discretely more time screening and processing applications for loans larger than the conforming loan limits than those below the limits. The processing time gap widened more for banks with lower capital, greater involvement in the OTD model, and greater assets."