Abstract
Do lemon problems distort trade on secondary mortgage markets? In this paper, I present new evidence that they do. Using the geographic distance between lenders and borrowers as a proxy for the absence of private bank information, I document a systematic positive link between distance and the mortgage sale rate. Mortgage securitization encourages lending at a ten-foot pole's length, signaling that the originating lender has no private information about the borrower. I show that this effect is stronger for borrowers about whom the lender has greater incentives to acquire information, including low-income (versus high-income) borrowers and loans originated just above the conforming loan-limit (in the illiquid jumbo market where the GSEs are barred from purchasing mortgages). Moreover, I show that mortgage sale rates dropped following the removal of barriers to physical bank entry in the 1990s. The welfare implications are ambiguous: mortgage securitization facilitates credit supply in “unbanked” areas without a local, physical bank presence, but disincentivizes bank information production about loan applicants.
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