An Originate-to-Distribute (OTD) Model for Subprime Lending

M.A. Petersen, S. Thomas, M.C. Senosi, J. Mukuddem-Petersen, B. De Waal, and T. Bosch (S. Africa)


Subprime Residential Mortgage Loans (RMLs); Residen tial Mortgage-Backed Securities (RMBSs); Originator Val uation; Profit; Payout; Securitization; Subprime Mort gage Crisis (SMC); Special Purpose Vehicles (SPVs); Credit Ratings; Collateralized Debt Obligations (CDOs); Discrete-Time Modeling and Optimization.


The subprime mortgage crisis (SMC) has highlighted the shift from traditional originate-to-hold banking models to originate-to-distribute models involving loan retention and securitization, respectively. In this proceedings paper, we consider the process of subprime residential mortgage loan (RML) securitization that has been a root cause of this ongoing crisis. Our main objective is to optimize origi nator (OR) valuation under securitization by considering the discrete-time dynamics of RMLs, capital and OR profit when RML losses and credit ratings are explicitly consid ered. Here, we formulate OR’s optimal valuation problem subject to cash flow, RML demand, financing and balance sheet constraints involving choices of OR’s own RML rate and RML demand. This enables us to establish correspond ing optimal deposits, Treasuries and OR profits under secu ritization.

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