Adverse Selection, Reputation and Sudden Collapses in Secondary Loan Markets

Abstract

Loan originators often securitize some loans in secondary loan markets and hold on to others. New issuances in such secondary markets collapse abruptly on occasion, typically when collateral values used to secure the underlying loans fall and these collapses are viewed by policymakers as inefficient. We develop a dynamic adverse selection model in which small eductions in that a variety of policies intended to remedy market inefficiencies do not do so.