Asymmetric Information and Subprime Mortgage Default

34 Pages Posted: 15 Nov 2015

See all articles by Xudong An

Xudong An

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

A. Quang Do

San Diego State University

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: November 13, 2015

Abstract

Using a novel data set, we study the soft information in subprime mortgages that is not verifiable by a third party, and its relationship with mortgage default. We find that lender effort to collect soft information is intertwined with borrower self-selection into subprime mortgages. We employ various sample stratification strategies to distinguish between two explanations, where one is more evident in some subsamples than is the other. Our results support that soft information is more evident in low-competition markets and among borrowers with low credit score, while adverse selection is more applicable to liquidity-constrained borrowers and loans originated by brokers. Both explanations are reflected in low-documentation loans, since lenders must expend greater effort collecting soft information, and borrowers have more private information to adversely select. The development and expansion of securitization has diminished soft information while increasing borrower adverse selection opportunities.

Keywords: excess premium, soft information, adverse selection, subprime mortgage

JEL Classification: D01; D12; G01; G21; R30

Suggested Citation

An, Xudong and Do, Andrew Quang and Riddiough, Timothy J. and Yao, Vincent, Asymmetric Information and Subprime Mortgage Default (November 13, 2015). Available at SSRN: https://ssrn.com/abstract=2690044 or http://dx.doi.org/10.2139/ssrn.2690044

Xudong An (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Andrew Quang Do

San Diego State University ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States
619-594-5324 (Phone)
619-594-1573 (Fax)

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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