Advantageous Selection with Intermediaries: A Study of GSE-Securitized Mortgage Loans

52 Pages Posted: 22 May 2020 Last revised: 5 Aug 2022

See all articles by Hsin-Tien Tsai

Hsin-Tien Tsai

National University of Singapore (NUS), Department of Economics

Date Written: April 12, 2020

Abstract

This paper studies the effects of mortgage subsidies and asymmetric information in the U.S. mortgage market. I exploit discontinuities in interest rates generated by pricing rules and find patterns consistent with advantageous selection. I estimate an industry model that highlights the relationship between mortgage subsidies, intermediary lenders' incentives, and borrowers' advantageous selection. The model shows that mortgage subsidies enable advantageous selection, creating a deadweight loss of 7.90 billion. The counterfactual analysis reveals that pricing borrowers' private information eliminates advantageous selection only if mortgages are not subsidized. Without the mortgage subsidy, pricing borrowers' private information further improves efficiency by 728.58 million.

Keywords: Advantageous selection, imperfect competition, financial intermediaries, vertical market, pricing, mortgage

JEL Classification: D82, G21, L11, L22

Suggested Citation

Tsai, Hsin-Tien, Advantageous Selection with Intermediaries: A Study of GSE-Securitized Mortgage Loans (April 12, 2020). Available at SSRN: https://ssrn.com/abstract=3574004 or http://dx.doi.org/10.2139/ssrn.3574004

Hsin-Tien Tsai (Contact Author)

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

HOME PAGE: http://https://sites.google.com/view/tsaihsintien/

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