Are Lemons Sold First? Dynamic Signaling in the Mortgage Market
67 Pages Posted: 19 Jul 2016 Last revised: 30 Aug 2017
Date Written: 2016-07-01
A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relation between mortgage performance and time-to-sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market, where mortgages are often sold with incomplete hard information.
Keywords: securitization, mortgage default, adverse selection, signaling, asymmetric information
JEL Classification: G17, G21, G23
Suggested Citation: Suggested Citation