Description:

Speaker Brandon Zborowski

Title  “Delay Your Rivals: Vertical Integration in Securitization and Lending Competition” (joint with JD Salas)

Abstract: 
We study the effects of vertical integration in the securitization chain on lending competition in the commercial mortgage backed securities (CMBS) market. We show that lenders that are vertically integrated (VI) with the investment bank structuring the CMBS originate loans that have rate spreads that are 9bps lower and have a 7% shorter time from origination to securitization, conditional on observables. VI lenders also have larger market shares, consistent with their relatively lower spreads.  To shed light on one mechanism, we show evidence of vertical foreclosure through the prioritization of VI loans over non-VI loans when constructing loan pools, which leads to shorter time from origination to securitization. This difference in time to securitization raises costs, which get passed through to higher rates, and we estimate that this explains about 15% of the difference in spreads. The spread and time to securitization results are stronger in quarters with low loan origination, which is exactly when we would expect this prioritization result to have stronger effect. Additionally, we show that prioritization impacts credit allocation and that the profitability of securitization is higher when the share of loans originated by non-VI lenders is higher, due to greater diversification of the loan pool. Finally, we construct a model of vertical integration in securitization and lending competition that highlights the problem the securitizer faces. The VI lender balances the benefit of including their rivals' loans when constructing the CMBS pool, which increases pool diversification and securitization profitability, with the benefit of prioritizing their own loans, which raises their rivals’ costs and softens future lending competition.