Securitized Mortgage Defaults

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Cornerstone Research has worked with academic experts to analyze the factors driving defaults on securitized mortgages.

In the wave of cases arising from the credit crisis related to residential mortgage-backed securities (RMBS), Cornerstone Research staff have worked with academic experts to analyze the factors driving mortgage defaults.

In these cases, allegations center on claims that RMBS issuers, sponsors, and underwriters failed to disclose or misrepresented information regarding the quality and characteristics of the securitized mortgages. Plaintiffs claimed that, as a result, they incurred losses on their RMBS investments when mortgage borrowers defaulted.

In conjunction with academic experts, Cornerstone Research has applied sophisticated econometric models, known as hazard rate models, to determine the primary factors driving mortgage defaults, and the extent to which these factors relate to the allegedly inaccurate information. Known in the academic literature as “hazard rate models,” these statistical models measure the incremental impact of multiple variables, such as loan characteristics, borrower characteristics, and home price changes, on the probability that a mortgage will default.

In most cases, we established that there was no statistical evidence of a link between the alleged misrepresentations identified by plaintiffs and higher rates of default. Thus, there was no evidence that the alleged misrepresentations caused plaintiffs’ losses. In certain cases, these analyses allowed us to measure the effect of factors unrelated to the alleged misrepresentations and provide reliable estimates of losses attributable solely to the alleged misrepresentations.