Bankers who made billions of dollars packaging home loans into bonds during the prime years of the housing boom provided false information to investors about the quality of those bonds, a comprehensive study by economists at Columbia University and the University of Chicago has found.
The study, which took an in-depth look at data for over 1.5 million mortgages made between 2005 and 2007, found bankers packaged many loans with risky features — such as having been taken out by a speculator or being subordinated to another loan — into bonds that they claimed contained no such risky mortgages.
The study also found there were many cases where data available to the bond underwriters clearly showed that loans being boxed into so-called mortgage backed-securities had these risky features. Contrary to the conventional wisdom in the banking industry, neither the borrower who took out the mortgage nor the mortgage broker who originally handled the transaction had lied as to the riskiness of the loan, the study found.
“The results in our paper indicate the presence of sizeable asset misrepresentations even among the most reputable underwriters,” economists Tomasz Piskorski, Amit Seru and James Witkin wrote in the paper. Concerns about reputation or incentives did not seem to deter bankers from bad behavior, the researchers said.