Banks Hurt More By Liar Loans Than Secondary Market Investors

Here’s a surprising bit of research coming out of study by some Columbia University professors: Banks lowered their standards on underwriting because they assumed they’d push the risk and iffy loans off to investors. They were wrong. Instead, banks ended up carrying the worst of those loans on the books because investors were smart enough to “cherry pick” the best of the bunch for their own portfolio.

Wei Jiang, associate professor in finance and economics says the study is the first to analyze the details of "liar’s loans" based on large-sample micro data. The data include all loans issued by an unnamed but "major" national mortgage bank from 2004 to 2008 and their performance until 2009.