On TARP and agency securitization

This paper focuses on the contract terms and performance of agency-securitized loans purchased by Fannie Mae from US banks under TARP protection. Our results suggest that TARP funds effectively increased the market power and cost competitiveness of the intervened banks, allowing them to offer more aggressive terms at the origination of mortgages that were later securitized. The mortgage loans acquired by the agency from TARP-protected banks exhibit lower interest rates and lower default rates when compared with those acquired from unprotected banks. Furthermore, TARP banks were able to offer increasingly better loan terms to the safest borrowers-in terms of their FICO scores and debt-to-income-which translated into significantly better loan performances. These last results contrast with the literature regarding TARP's effects on more traditional credit markets.