Asymmetric Information About Collateral Values
New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
I empirically analyze credit market outcomes when competing lenders are differentially informed about the expected return from making a loan. I study the residential mortgage market where property developers often cooperate with vertically integrated mortgage lenders to offer financing to buyers of new homes. I show that these integrated lenders have superior information about the construction quality of individual homes and exploit this information to lend against higher-quality collateral, decreasing foreclosures by up to 40%. To compensate for this adverse selection on collateral values, non-integrated lenders charge higher interest rates when competing against a better-informed integrated lender.
Number of Pages in PDF File: 64
Keywords: Asymmetric Information, Mortgage Lending, Collateral, Banking Competition
Date posted: March 8, 2012 ; Last revised: November 11, 2014