Government Loan Guarantees, Market Liquidity, and Lending Standards

Toni Ahnert and Martin Kuncl

No 14458, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study third-party loan guarantees in a model in which lenders can screen and sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity, reduce lending standards, and can have a positive overall welfare effect. Guarantees improve the average quality of non-guaranteed loans traded and thus the market liquidity of these loans due to selection. This positive pecuniary externality provides a rationale for guarantee subsidies. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac, suggesting that the excessively high subsidies to these guarantees should be reduced but not completely eliminated.

Keywords: Mortgage guarantees; Adverse selection; Market liquidity; Pecuniary externality; Pigouvian subsidy; Government sponsored enterprises (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ban and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Government Loan Guarantees, Market Liquidity, and Lending Standards (2024)
Working Paper: Government loan guarantees, market liquidity, and lending standards (2022)
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