How Important is Having Skin in the Game? Originator-Sponsor Affiliation and Losses on Mortgage-Backed Securities

This paper examines the relationship between mortgage originator loss exposure (i.e., risk retention) and the ex post performance and initial structure and pricing of mortgage-backed securities (MBS). We argue that originator risk retention varies positively with originator-sponsor and originator-servicer affiliation. Overall, we find that ex post loss and foreclosure rates are significantly higher for MBS in which originators are not affiliated with the sponsor or servicer. The relationship between ex post performance and affiliation is confined to low documentation mortgages in which originator screening based on “soft” information is likely to be most important in determining the creditworthiness of borrowers. Consistent with investors expecting ex post performance to vary with affiliation, we find that initial MBS yields are lower and the percentage of AAA-rated securities issued against the mortgage pool is higher for affiliated deals