The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors.

The recent rise in subprime foreclosures has prompted restrictions at the federal, state, and municipal levels against a range of loan features loosely termed “predatory. ” The effectiveness of federal regulation depends on the consistency of those features ’ impacts on foreclosures in markets

of mortgage deals consisting of origi-nation stakes just below the disclosure threshold (low stake) after Reg AB. These deals have significantly larger losses than those without low stake when issued after Reg AB. Further, our analysis on loan level data provides evidence that securitized loans show higher

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and seminar participants at Duke (Fuqua School of Business) and London Business School for useful discussions. The opinions expressed in the paper are those of the authors and do not reflect the views of Sorin Capital Management. All remaining errors are our responsibility.

The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to Federal Reserve Bank of St. Louis Working Papers (other than an acknowledgment that the writer has had access to unpublished material) should be

Utilizing loan-level data, we analyze the quality of subprime loans by adjusting their per-formance for differences in borrower characteristics, loan characteristics, and economic cir-cumstances. We find that during the explosive growth of the subprime market in 2001–2006 the quality of loans

for a unique sample of subprime mortgages that were seriously delinquent on September 30, 2001. Eight months later, possible states for the delinquent loans, in order, are 1) to remain delinquent without deteriorating further, 2) foreclosure, 3) worsen, i.e., become more months delinquent, 4) bankruptcy

that accounting discretion allowed banks and investors to declare earnings early, while shielding their balance sheets from related risks by utilizing off-balance sheet vehicles. This characteristic fueled the demand for more securitizations, and provided the incentives to grant further subprime loans. The result

, and that the earnings shortfall was confined to U.S. operations-- in particular, faster-than-expected defaults on the 2006 vintage of high-cost “subprime ” loans made to borrowers with low incomes and blemished credit histories. HSBC is Europe’s largest bank, but several years earlier it had also become the second