Adverse Selection Without a Housing Boom: Evidence from Fannie Mae's Credit Risk Transfers
51 Pages Posted: 10 Jun 2022
Date Written: May 30, 2022
Abstract
Have post-crisis reforms purged mortgage markets of adverse selection? I show that loans synthetically sold by Fannie Mae through Credit Risk Transfers are ex post riskier, controlling for observable quality, than those they keep on balance. Transfers that go unreported on public data are riskier than those that are reported, which suggests cherry-picking affects disclosure as well. In equilibrium, the lemons problem gives rise to delayed sales, a form of signaling that has instead become obsolete in nonagency markets. Such markets appear to internalize agency frictions via a lemons spread rather than via signaling.
Keywords: Agency reform, credit risk transfers, adverse selection, bond prices, derivatives
JEL Classification: G23, G38, D42, D82, D53
Suggested Citation: Suggested Citation