Advantageous Selection with Intermediaries: A Study of GSE-Securitized Mortgage Loans
52 Pages Posted: 22 May 2020
Date Written: April 12, 2020
This paper studies inefficiencies arising from advantageous selection in the US mortgage market. I estimate an industry model, which exploits the GSE pricing rule on guarantee fees that creates exogenous variation in interest rates. I find that the GSEs’ mortgage subsidy leads to a deadweight loss of $8.38 billion relative to a benchmark without a mortgage subsidy. My counterfactual analysis studies how these inefficiencies interact with competition among intermediaries and information asymmetry. Under the mortgage subsidy condition, more competition among lenders (i.e., a 50% decrease in market concentration among lenders) and symmetric information reduce efficiency by $1.42 billion and $3.67 hundred million respectively. On the other hand, without the mortgage subsidy, the same increase in competition among lenders and symmetric information improve efficiency by $3.94 hundred million and $1.77 billion respectively.
Keywords: Advantageous selection, financial intermediates, vertical market structure, pricing, mortgage
JEL Classification: D82, G21, L11, L22
Suggested Citation: Suggested Citation