Putting the squeeze on a market for lemons: Government-sponsored mortgage securitization

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.The analysis and conclusions set forth are our own and do not indicate concurrence by members of the Federal Reserve Research stafls, by the Board of Governors, or by the Federal Reserve Banks. We wish to thank Mark Fisher for his Mathematica expertise. All errors are ours exclusively.