Advantageous Selection with Intermediaries: A Study of GSE-Securitized Mortgage Loans
70 Pages Posted: 22 May 2020 Last revised: 7 Jun 2021
Date Written: April 12, 2020
This paper studies the effects of mortgage subsidies and imperfect competition in the U.S. mortgage market. I exploit discontinuities in interest rates generated by pricing rules and find evidence of advantageous selection. I estimate an industry model that highlights the relationship between mortgage subsidies, intermediary lenders' market power, and borrower's advantageous selection. The model shows that mortgage subsidies enable advantageous selection, creating a deadweight loss of 7.90 billion. Counterfactual analysis reveals that a 50% decrease in lender concentration reduces efficiency by 1.39 billion if mortgages are subsidized, and conversely, increases efficiency by 750.07 million if mortgages are not subsidized.
Keywords: Advantageous selection, imperfect competition, financial intermediaries, vertical market, pricing, mortgage
JEL Classification: D82, G21, L11, L22
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