Mortgage Markets with Lender Competition and Asymmetric Information
26 Pages Posted: 3 Mar 2015
Date Written: August 5, 2013
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
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