We test whether lenders’ screening incentives weaken when faced with the possibility of loan sales. We adopt a new measure of lending standards, mortgage application processing time at the loan level, and use the collapse of the non-agency mortgage-backed
securities issuance market as a natural experiment. The event significantly reduced liquidity for non-conforming loans, but had little impact on conforming loans. Following the collapse, lenders spent significantly more time screening applications for loans larger
than the conforming loan limits than those below. The processing time gap widened more for banks with lower capital, greater involvement in the originate-to-distribute model, and larger assets. 

Keywords: incentive misalignment, lending standard, loan sale, securitization, information production​