Distance, Asymmetric Information, and Mortgage Securitization

64 Pages Posted: 17 Jul 2015

Date Written: June 15, 2015

Abstract

Do lemon problems distort trade on secondary mortgage markets? In this paper, I present new evidence that they do. Using the geographic distance between lenders and borrowers as a proxy for the absence of private bank information, I document a systematic positive link between distance and the mortgage sale rate. Mortgage securitization encourages lending at a ten-foot pole's length, signaling that the originating lender has no private information about the borrower. I show that this effect is stronger for borrowers about whom the lender has greater incentives to acquire information, including low-income (versus high-income) borrowers and loans originated just above the conforming loan-limit (in the illiquid jumbo market where the GSEs are barred from purchasing mortgages). Moreover, I show that mortgage sale rates dropped following the removal of barriers to physical bank entry in the 1990s. The welfare implications are ambiguous: mortgage securitization facilitates credit supply in “unbanked” areas without a local, physical bank presence, but disincentivizes bank information production about loan applicants.

Keywords: Asymmetric Information, Banks, Distance, Information Acquisition, Lemons Problem, Mortgage, Mortgage Market, Securitization

JEL Classification: D82, G14, G21

Suggested Citation

Botsch, Matthew J., Distance, Asymmetric Information, and Mortgage Securitization (June 15, 2015). Available at SSRN: https://ssrn.com/abstract=2631148 or http://dx.doi.org/10.2139/ssrn.2631148

Matthew J. Botsch (Contact Author)

Bowdoin College ( email )

Brunswick, ME 04011
United States

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