Putting the Squeeze on a Market for Lemons: Government- Sponsored Mortgage Securitization

Abstract

Lenders either sell or obtain insurance for many of the mortgages they originate in order to reduce credit risk and enhance liquidity. An overwhelming majority of the mortgages sold are purchased by government-sponsored enterprises. The prevailing view is that government-sponsorship of mortgage securitization causes mortgage rates to be lower than they would be otherwise. Using a model that incorporates asymmetric information and adverse selection, we provide an example in which government-sponsored mortgage securitization raises the mortgage rate.

JEL Classification: R38