Going for broke: New Century Financial Corporation, 2004-2006

Landier, Augustin, Sraer, David and Thesmar, David (2010) Going for broke: New Century Financial Corporation, 2004-2006. TSE Working Paper, n. 10-199

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Official URL: http://tse-fr.eu/pub/23478

Abstract

Using loan level data, we investigate the lending behavior of a large subprime mortgage issuer prior to its bankruptcy in the beginning of 2007. In 2004, this firm suddenly started to massively issue new loans contracts that featured deferred amortization ("interestonly
loans") to high income and high FICO households. We document that these loans were not only riskier, but also that their returns were more sensitive to real estate prices than standard contracts. Implicitly, this lender dramatically increased its exposure to its own legacy asset, which is what a standard model of portfolio selection in distress would predict. We provide additional evidence on New Century’s lending behavior, which are consistent with a risk shifting strategy. Finally, we are able to tie this sudden change in behavior to the sharp monetary policy tightening implemented by the Fed in the spring of 2004. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2010
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 18 Jan 2012 06:03
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:23478
URI: http://publications.ut-capitole.fr/id/eprint/3474

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