Asymmetric information in the wholesale market for mortgages: The case of Ginnie Mae loans

This paper tests for the presence of asymmetric information in the originate-to-distribute mortgage supply chain. In this supply chain, a mortgage specialist originates a loan that she sells to a bank which securitizes the loan into a mortgage-backed security(MBS) that he sells to investors. Using a novel data set on auctions through which mortgage specialists sell loans to banks, we show that the mortgage specialists have private information about loan quality. Using data on mortgage securitization, we show that banks have more information about loan quality than the MBS investors and that the banks use this to their advantage. The presence of asymmetric information should put downward pressure on the resale price of mortgages in the supply chain, and thus raise the costs to consumers seeking mortgages.