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Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals
2012
Social Science Research Network
Using a representative sample of Residential Mortgage-Backed Securities (RMBS), we show that deal sponsors use the equity tranche as a signal of the unobserved quality of opaque pools. Deals with higher level of equity tranche have significantly lower foreclosure rates that cannot be explained away by observable credit risk or correlation structure of the loans in the underlying pool. Further, we analyze trade-offs that are unique to bundling and tranching of loans in securitization deals as
doi:10.2139/ssrn.2022380
fatcat:6yofmlrvknahfinhez3rgatdue