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| New research suggests mortgages perform better when originators are better capitalized and when they keep some skin in the game.
The study was conducted by Professor Amiyatosh Purnanandam at the University of Michigan’s Ross School of Business. The findings were based on an analysis of quarterly data from banks insured by the Federal Deposit Insurance Corporation. The report found that a direct relationship exists between the degree to which a bank participated in the originate-to-distribute model and the subsequent level of charge-offs and defaults. “When the market for mortgage loans collapsed, these banks were forced to carry the troubled mortgages on their balance sheets,” the university wrote. “The research also shows higher foreclosure rates for originate-to-distribute mortgages than those mortgages kept by the originators.” Purnanandam called the findings an “incentive problem.” “The basic premise is that there was this perverse incentive,” he stated. “We find a systematic pattern in that the banks that were originating and selling their mortgages are suffering disproportionately more.”Another finding was that banks with lower capitalization and institutions that relied less on demand deposits and more on the financial markets were more likely to originate low-quality loans. Purnanandam recommends that regulators require banks to maintain an ownership interest in loans they originate. A regulatory overhaul plan unveiled yesterday by President Barack Obama also called for originators to maintain in interest in loans that are securitized. “And we will require the originator of a loan to retain an economic interest in that loan, so that the lender — and not just the holder of a security, for example — has an interest in ensuring that a loan is paid back,” the president stated. The University also suggested that investors consider the capital structure of the bank that originates loans they invest in “since the quality of mortgage loans depends on those factors in a predictable way.” |
