Mortgage Markets with Lender Competition and Asymmetric Information

26 Pages Posted: 3 Mar 2015

See all articles by Ayeh Bandeh-Ahmadi

Ayeh Bandeh-Ahmadi

Government of the United States of America - Office of Financial Research; University of Maryland - Department of Economics

Date Written: August 5, 2013

Abstract

This analysis introduces a theoretical framework for assessing the empirical discussion of asymmetric information amongst mortgage lenders and adds the idea of lender competition into this framework. Despite this addition, the results are generally consistent with existing empirical findings that diversified lenders will act as uninformed investors, making poorer loans, selling most of their mortgages and making less profit off each mortgage while concentrated lenders do the opposite. When lenders are rational and face potential competition, they are able to use the bidding process as a means of generating additional information. However, information available on the market through increased numbers of informed lenders does not benefit decisions made by naive lenders, which is important given that resale and legal standards that may encourage naivete. In fact, by increasing the amount of soft information available to lenders, these information asymmetries could exacerbate incentives for naivete and therefore poor quality loans on the market.

Keywords: mortgages, banking, lender competition, information asymmetries

JEL Classification: G21, C72, D2, D4, D82, L1, L85

Suggested Citation

Bandeh-Ahmadi, Ayeh, Mortgage Markets with Lender Competition and Asymmetric Information (August 5, 2013). Available at SSRN: https://ssrn.com/abstract=2572556 or http://dx.doi.org/10.2139/ssrn.2572556

Ayeh Bandeh-Ahmadi (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

HOME PAGE: http://econweb.umd.edu/~bandeh-ahmadi

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