Abstract
A mortgage that runs into default is more likely to enter foreclosure rather than renegotiation if it has been securitized in the private nonagency market, according to previous research. I study whether this foreclosure-propensity affects lenders’ decision to securitize ex ante. Due to the higher foreclosure probability, the value of a mortgage should be more sensitiv eto foreclosure costs if it is securitized. Comparing loans made in the same metropolitan area but under different foreclosure laws, I find that lenders are less likely to securitize mortgages in states with higher foreclosure costs, as proxied by laws requiring judicial foreclosure proceedings. Consistent with differences in loss given default driving the results, the effect of judicial requirements increases for loans with higher expected default rates. Borrowers in states without judicial requirements also get riskier loans, with higher average loan to income ratios and more loans lacking income documentation.