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Mortgage Securitization and Information Frictions in General Equilibrium

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  • Salomon Garcia-Villegas

    (CUNEF Universidad)

Abstract

We develop a quantitative general equilibrium model of the U.S. mortgage market where securitization, as a technology, links the credit and asset-backed security markets. Heterogeneous lenders trade in a securitization market subject to adverse selection: originators are privately informed about loan quality, while buyers anticipate a higher share of low-quality loans when household defaults rise. This friction generates an information-friction multiplier: a feedback loop where surges in household defaults drive down security prices, reduce lender liquidity, and contract mortgage credit supply. Applied to the Global Financial Crisis (GFC), the model reproduces two-thirds of the observed contraction in mortgage credit and the collapse of mortgage-backed security issuance, with information frictions amplifying the credit contraction by a factor of roughly 1.2. We use the framework to evaluate post-GFC credit guarantee policies. Post-GFC pricing stabilizes credit but generates a fiscal deficit. Pricing guarantees to reflect the amplification effects of information frictions eliminates the deficit and delivers welfare gains for both borrowers and lenders. (Copyright: Elsevier)

Suggested Citation

  • Salomon Garcia-Villegas, 2026. "Mortgage Securitization and Information Frictions in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 61, August.
    • Handle: RePEc:red:issued:23-251
    DOI: 10.1016/j.red.2026.101342
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    2. Garcia-Villegas, Salomon, 2023. "The amplification effects of adverse selection in mortgage credit supply," Journal of Housing Economics, Elsevier, vol. 62(C).

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    More about this item

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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