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Causes of Subprime Credit Crisis Sanjai Bhagat leeds.colorado/faculty/bhagat

Causes of Subprime Credit Crisis Sanjai Bhagat http://leeds.colorado.edu/faculty/bhagat. Fraction of Mortgages Sold to Non-Mortgage Agency Institutions. Source: Mian and Sufi (2008). Default Rates for Mortgage and non-Mortgage Debt, Indexed to 1996. Source: Mian and Sufi (2008).

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Causes of Subprime Credit Crisis Sanjai Bhagat leeds.colorado/faculty/bhagat

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  1. Causes of Subprime Credit Crisis Sanjai Bhagat http://leeds.colorado.edu/faculty/bhagat

  2. Fraction of Mortgages Sold to Non-Mortgage Agency Institutions. Source: Mian and Sufi (2008)

  3. Default Rates for Mortgage and non-Mortgage Debt, Indexed to 1996. Source: Mian and Sufi (2008)

  4. Policy Recommendations Credit rating agencies should provide greater transparency of their valuation models and the process by which they arrive at the ratings of mortgage-backed bonds. To the extent their models and ratings have not been validated by extensive empirical data, they should note this prominently for the bond investors. If ratings are not comparable across asset classes (mortgage-backed, corporate), then alternative ratings should be considered. The compensation they receive from the issuer should be prominently noted, along with comparative data for corporate bonds.

  5. Policy Recommendations Greater equity participation by all key players: MBS sponsors should hold a portion of all bonds they issue. Mortgage originator/lenders should be required to have greater equity capitalization such that they incur economic costs if their R&W guarantees are not valid. Finally, going back to the tradition of requiring the ten percent down from home-buyers would permit greater alignment of the home-buyers’ interest with that of mortgage-backed bond investors.

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