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

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  • Passmore, Wayne
  • Sparks, Roger

Abstract

Lenders either sell or obtain insurance for many of the mortgages they originate 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 otherwise be. Using a model that incorporates asymmetric information and adverse selection, we provide an example in which government-sponsored mortgage securitization raises the mortgage rate. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Passmore, Wayne & Sparks, Roger, 1996. "Putting the Squeeze on a Market for Lemons: Government-Sponsored Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 27-43, July.
  • Handle: RePEc:kap:jrefec:v:13:y:1996:i:1:p:27-43
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    References listed on IDEAS

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    1. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
    2. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    3. Nikolay Nenovsky & S. Statev, 2006. "Introduction," Post-Print halshs-00260898, HAL.
    4. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters,in: Regional Climate Change and Variability, chapter 1 Edward Elgar Publishing.
    5. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    6. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 427-463, September.
    2. Calem, Paul & Henderson, Christopher & Liles, Jonathan, 2011. ""Cherry picking" in subprime mortgage securitizations: Which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007?," Journal of Housing Economics, Elsevier, vol. 20(2), pages 120-140, June.
    3. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    4. Passmore, Wayne & Sparks, Roger & Ingpen, Jamie, 2002. "GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 215-242, Sept.-Dec.
    5. Patrick de Fontnouvelle & Victoria Garrity & Scott Chu & Eric S. Rosengren, 2005. "The potential impact of explicit Basel II operational risk capital charges on the competitive environment of processing banks in the United States," Basel II White Paper 4, Board of Governors of the Federal Reserve System (U.S.).
    6. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 113-133, October.
    7. Andrea Heuson & Wayne Passmore & Roger Sparks, 2000. "Credit scoring and mortgage securitization: do they lower mortgage rates?," Finance and Economics Discussion Series 2000-44, Board of Governors of the Federal Reserve System (U.S.).
    8. Edward Kane, 1999. "Housing Finance GSEs: Who Gets the Subsidy?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 15(3), pages 197-209, May.
    9. Wayne Passmore & Roger Sparks, 1997. "The effect of automated underwriting on the profitability of mortgage securitization," Finance and Economics Discussion Series 1997-19, Board of Governors of the Federal Reserve System (U.S.).

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