Advantageous selection with intermediaries: a study of GSE‐securitized mortgage loans

Hsin‐Tien Tsai

RAND Journal of Economics, 2023, vol. 54, issue 4, 668-694

Abstract: This research studies the effects of mortgage subsidies and asymmetric information in the US 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 improves efficiency by $728.58 million.

Date: 2023
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https://doi.org/10.1111/1756-2171.12454

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