Adverse Selection, Licensing and the Role of Securitization in Financial Market Evolution, Structure and Pricing

24 Pages Posted: 17 Aug 2001

See all articles by Amy Crews Cutts

Amy Crews Cutts

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research; Equifax, Inc.

Robert Van Order

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research

Peter M. Zorn

Freddie Mac

Date Written: July 2001

Abstract

This paper models the structure of a financial market that is composed of two types of institutions, banks and securities or secondary markets. The model analyzes the development of the securities market as a way of trading off its lower cost of securitization with adverse selection due to asymmetric information possessed by banks, using a simple adverse selection model in the tradition of Akerlof (1970). Successive modifications, including licensing contracts similar to those of Leland (1979) and Chan and Leland (1982) solve some of the adverse selection problems by "licensing"loan sellers in an effort to provide minimum quality standards.

Keywords: Secondary Market, Banks, Adverse Selection, Licensing

JEL Classification: C1, C2

Suggested Citation

Crews Cutts, Amy D. and Van Order, Robert and Zorn, Peter M., Adverse Selection, Licensing and the Role of Securitization in Financial Market Evolution, Structure and Pricing (July 2001). Available at SSRN: https://ssrn.com/abstract=280388 or http://dx.doi.org/10.2139/ssrn.280388

Amy D. Crews Cutts (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research ( email )

Mailstop 484
8200 Jones Branch Drive
McLean, VA 22102
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(703) 903-2321 (Phone)
(703) 903-4045 (Fax)

Equifax, Inc. ( email )

McLean, VA 22102
United States

Robert Van Order

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research ( email )

Mailstop 484
8200 Jones Branch Drive
McLean, VA 22102
United States
703-903-2390 (Phone)
703-903-2445 (Fax)

Peter M. Zorn

Freddie Mac ( email )

1551 Park Run Drive
MS D3F
McLean, VA 22102
United States
(571) 382-3220 (Phone)
(571) 382-5074 (Fax)

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