Securitization and moral hazard: Evidence from credit score cutoff rules

A growing literature exploits credit score cutoff rules as a natural experiment to estimate the moral hazard effect of securitization on lender screening. However, these cutoff rules can be traced to underwriting guidelines for originators, not for securitizers. Moreover, loan-level data reveal that lenders change their screening at credit score cutoffs in the absence of changes in the probability of securitization. Credit score cutoff rules thus cannot be used to learn about the moral hazard effect of securitization on underwriting. By showing that this evidence has been misinterpreted, our analysis should move beliefs away from the conclusion that securitization led to lax screening. •We investigate the hypothesis that mortgage securitization led to moral hazard.•Previous work misinterpreted evidence from credit score cutoff rules.•Data shows cutoff rules were used by lenders, not securitizers.•Jumps in default at credit score cutoffs do not demonstrate moral hazard.