Forensic Finance
Structured Finance
Structured Finance, which involves debt that is collected into pools, tranched, and securitized, is generally perceived to be at the heart of the 2008–2009 financial crisis. Academic research into the space did not detect the problems as they were occurring but did substantially help to understand the full extent of the conflicts of interest and misreporting in the space in the aftermath of the crisis. Academic research after the crisis also frequently assesses the impact of post-crisis regulatory fixes.
Overview
Structured Finance Fraud: Key Insights​​​
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Asset Misrepresentation:​
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Piskorski, Seru, and Witkin (2015) documented widespread fraud in 2005–2007 non-agency mortgage-backed securities (MBS).
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Key Findings:
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MBS prospectuses understated risky factors such as second liens and non-owner-occupied loans.
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Impact: 9% of loans were misrepresented, leading to higher default rates, but pricing did not reflect this, indicating investor unawareness.
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Loan-to-Value Misreporting:​
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Griffin and Maturana (2016) confirmed misrepresentation of second liens, owner occupancy, and inflated appraisals.
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Extent of Fraud: Nearly 48% of securitized loans from 2003–2007 had at least one form of misreporting.​​​​​​
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Accountability and Consequences:​
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Misreported borrower income, assets, and inflated transaction prices contributed to over $137 billion in fines and legal settlements for mortgage originators and underwriters.
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These findings challenge claims of politically motivated DOJ investigations and underscore the need for rigorous scrutiny of MBS sponsors.
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Structured Finance Post-Crisis: Persistent Issues
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Conflicts in Credit Ratings:
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Commercial Mortgage-Backed Securities (CMBS):
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Baghai and Becker (2020) revealed inflated S&P ratings aimed at regaining market share.
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Flynn and Ghent (2018) noted that new CMBS market entrants engaged in rating catering.​​​​​​​​
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Municipal Bonds:
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Cornaggia, Cornaggia, and Israelsen (2022) identified inflated ratings linked to higher fees.​
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Rating Agencies' Practices:
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Griffin and Nickerson (2017, 2022) found that agencies continue to model assets too aggressively and apply inconsistent standards across rating classes.​
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Despite Dodd-Frank regulations, conflicts of interest and income projection inflation remain prevalent.
Relevant Papers
Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market
Piskorski Et Al.
(2015)
Who Facilitated Misreporting in Securitized Loans?
Griffin and Maturana (2016)
Reputations and Credit Ratings: Evidence from Commercial Mortgage-Backed Securities
Baghai and Becker (2020)
Are CLO Collateral and Tranche Ratings Disconnected?
Griffin and Nickerson (2020)