We examine whether securitization impacts renegotiation decisions of loan servicers, focusing on their decision to foreclose a delinquent loan. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with bank-held loans when compared to similar securitized loans: across various specifications and origination vintages, the foreclosure rate of delinquent bank-held loans is 3% to 7% lower in absolute terms (13% to 32% in relative terms). There is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers. A quasi-experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results.

The paper explores how legal change affects lending behavior of banks in twelve transition economies of Central and Eastern Europe. In contrast to previous studies, we use bank level rather than aggregate data, which allows us to control for country level heterogeneity and analyze the effect of legal change on different types of lenders. Using a differences-in-differences methodology to analyze the within country variation of changes in creditor rights protection, we find that the credit supplied by banks increases subsequent to legal change. Further, we show that collateral law matters more for credit market development than bankruptcy law. We also show that entrants respond more strongly to legal change than incumbents. In particular, foreign-owned banks extend their lending volume substantially more than do domestic banks, be they private or state owned. The same holds when we use foreign greenfield banks as proxies for new entrants. These results are robust after controlling for a wide variety of possibilities.

[The paper investigates the effect of legal change on the lending behavior of banks in twelve transition economies. First, we find that banks increase the supply of credit subsequent to legal change. Second, changes in collateral law matter more for increases in bank lending than do changes in bankruptcy law. We attribute this finding to the different functions of collateral and bankruptcy law. While the former enhances the likelihood that individual creditors can realize their claims against a debtor, the latter ensures an orderly process for resolving multiple, and often conflicting, claims after a debtor has become insolvent. Finally, we find that foreign-owned banks respond more strongly to legal change than incumbents.]

A central question surrounding the current subprime crisis is whether the securitization process reduced the incentives of financial intermediaries to carefully screen borrowers. We examine this issue empirically using data on securitized subprime mortgage loan contracts in the United States. We exploit a specific rule of thumb in the lending market to generate exogenous variation in the ease of securitization and compare the composition and performance of lenders' portfolios around the ad hoc threshold. Conditional on being securitized, the portfolio with greater ease of securitization defaults by around 10%–25% more than a similar risk profile group with a lesser ease of securitization. We conduct additional analyses to rule out differential selection by market participants around the threshold and lenders employing an optimal screening cutoff unrelated to securitization as alternative explanations. The results are confined to loans where intermediaries' screening effort may be relevant and soft information about borrowers determines their creditworthiness. Our findings suggest that existing securitization practices did adversely affect the screening incentives of subprime lenders.

The likelihood that a bank loan will default is of interest to both regulators and investors. Under the Basel II regulatory guidelines, a bank must hold capital in proportion to the riskiness of its assets. The probability of default is a pri mary determinant of the riskiness of a loan. Investors, in turn, price a loan in the secondary market based on its expected cash flow, which again depends on the default probability. How should market participants assess the default probability on a pool of bank loans? It is natural to consider historical data on loan condi tions and default rates, and to estimate a statisti cal model that can be used to predict defaults going forward. Such statistical models have been widely used across the financial markets, to enhance market liquidity and impose capital requirements on financial institutions. The accuracy of predictions from statistical models was especially poor in the subprime mortgage market in the period from August 2007 onwards.1 We argue that one cause for this failure was that these models relied entirely on hard information variables and ignored changes in the incentives of lenders to collect soft infor