Time to call off the subprime securitization witch hunt.
A latest Federal Reserve working paper concludes that securitized subprime loans performed no worse than the unsecuritized variety.
Federal Reserve of Philadelphia: “We find evidence that for prime mortgages, private securitized loans indeed perform worse than portfolio loans; for instance, for loans originated in 2006, the two-year default rate is at least 15 per cent higher, on average. Given the large number of prime loans that were originated over this period, this difference in default rates is economically significant. By contrast, securitized subprime loans do not appear to have defaulted at higher rates than similar non-securitized loans.“
Why the difference between subprime and prime?
They suspect that subprime loans actually received more scrutiny from investors since they appeared more risky by name, and that since most subprime loans didn’t have portions kept in the portfolio of lenders, these lenders had less incentive to cherry-pick better assets before securitizing the rest.
One potential criticism of the results, admitted by the piece, may be that their subprime data was less broad than that for prime loans, especially when it came to non-securitized subprime.
Still, any opponent of securitization, ie. the general consensus, needs to confront the results of this paper before continuing to demonize any and all securitization blindly.
This paper might help come to terms with the fact that perhaps the financial meltdown was in the end simply due to, well, falling housing prices after a huge bubble bid up by Americans at large. No matter how difficult a conclusion this is to politically swallow. It’s surely far easier to pin the blame on a narrow subset of society rather than society itself.
The full paper is below.