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

52 Pages Posted: 22 May 2020

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 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

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/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
5
Abstract Views
97
PlumX Metrics