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

Echeverry, David, Adverse Selection Without a Housing Boom: Evidence from Fannie Mae's Credit Risk Transfers (May 30, 2022). Available at SSRN: https://ssrn.com/abstract=4127332 or http://dx.doi.org/10.2139/ssrn.4127332

David Echeverry (Contact Author)

University of Navarra ( email )

Calle Universidad 1
Pamplona, Navarra 31180
Spain
682544576 (Phone)
31180 (Fax)

HOME PAGE: http://https://decheverry.github.io

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