Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market

By
Tomasz Piskorski, James Witkin, Amit Seru
Journal of Finance. December
2015, Vol. 70, Issue 6, Pages 2635-2678

We document that contractual disclosures by intermediaries during the sale of mortgages contained false information about the borrower’s housing equity in 7–14% of loans. The rate of misrepresented loan default was 70% higher than for similar loans. These misrepresentations likely occurred late in the intermediation and exist among securities sold by all reputable intermediaries. Investors—including large institutions—holding securities with misrepresented collateral suffered severe losses due to loan defaults, price declines, and ratings downgrades. Pools with misrepresentations were not issued at a discount. Misrepresentation on another easy-to-quantify dimension shows that these effects are a conservative lower bound.