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The amplification effects of adverse selection in mortgage credit suply

Author

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  • Salomón García

    (Banco de España)

Abstract

This paper studies how information frictions in the securitization market amplify the response of mortgage credit supply to house price shocks. We model securitization as an optimal contracting problem between investors and banks. Banks are better informed than investors about the quality of the mortgages they originate, leading to an adverse selection problem. Investors use the quantity sold as a screening device to induce banks to reveal truthful information. We find that adverse selection amplifies the response of a bank’s mortgage originations to house price shocks. The degree of amplification is also a function of the technological differences in managing portfolios between banks and investors. The model has implications for the design of policy interventions aimed at stabilizing liquidity in the securitization market and credit provision to households in the credit market.

Suggested Citation

  • Salomón García, 2023. "The amplification effects of adverse selection in mortgage credit suply," Working Papers 2316, Banco de España.
    • Handle: RePEc:bde:wpaper:2316
    DOI: https://doi.org/10.53479/30138
    as

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    File URL: https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/23/Files/dt2316e.pdf
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    References listed on IDEAS

    as
    1. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
    2. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 1-26.
    3. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 27-41.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    securitization; screening; banking; information frictions; liquidity;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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