The effect of mortgage securitization on asset liquidation decisions

We study the effect of securitization on servicers' asset liquidation decisions. Conditional on liquidation, we find securitized loan servicers are more likely to liquidate distressed houses via real estate owned (REO) transactions than portfolio loan servicers. We exploit this fundamental relationship in an instrumental variables specification to show each house liquidated via an REO instead of a short sale results in an additional 0.19 homeowner defaults within a 0.10-mile radius. Our findings provide new evidence of agency costs introduced by securitization while highlighting their second-order effects on nearby default behavior and the real economy