The Impact of the Originate-to-Distribute Model on Banks Before and During the Financial Crisis

The growth of securitization made it easier for banks to sell home mortgage loans that they originated. I explore how mortgage sales affected banks in the years leading up to the financial crisis that began in 2007 and how banks pre-crisis mortgage sales affected them during the crisis. Loan sales are important because most banks sell mortgages as part of the securitization process, but few actually do the securitization. I find that some banks scale up lending during refinancing booms, possibly explaining why stock returns increase when banks sell more mortgages used for refis. This flexibility is both a plus and a potential minus of a liquid mortgage sale market, since banks and borrowers benefited from the scaling up during refi booms but borrowers during refi booms were riskier than at other times, possibly adding risk to the financial system. I also find that losses during the financial crisis were related to pre-crisis mortgage sales, with the losses being roughly of the same magnitude as the gains due to mortgage sales from 2001-2006