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

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  • Hsin‐Tien Tsai

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.

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  • Hsin‐Tien Tsai, 2023. "Advantageous selection with intermediaries: a study of GSE‐securitized mortgage loans," RAND Journal of Economics, RAND Corporation, vol. 54(4), pages 668-694, December.
    • Handle: RePEc:bla:randje:v:54:y:2023:i:4:p:668-694
    DOI: 10.1111/1756-2171.12454
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