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Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market

Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market Abstract Using a screening model with asymmetric information, I evaluate the positive and normative effects of the subsidized default insurance policy in the U.S. mortgage market. The model implies that the subsidy raises interest rates for eligible mortgages, which is contrary to conventional wisdom but is consistent with the empirical evidence in Zhao (2019). Moreover, the model implies that the subsidy hurts borrowers it was intended to help, as well as raises the aggregate mortgage default rate. My article highlights the adverse impact of the subsidy on welfare and financial stability, and sheds light on the root cause of the global financial crisis. It also provides potentially useful reference to other countries that have (or are considering adopting) a mortgage subsidy mechanism similar to that in the US. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Real Estate Literature Taylor & Francis

Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market

Zhao, Yunhui
Journal of Real Estate Literature , Volume 29 (2): 34 – Mar 14, 2022
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Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market

Abstract

Abstract Using a screening model with asymmetric information, I evaluate the positive and normative effects of the subsidized default insurance policy in the U.S. mortgage market. The model implies that the subsidy raises interest rates for eligible mortgages, which is contrary to conventional wisdom but is consistent with the empirical evidence in Zhao (2019). Moreover, the model implies that the subsidy hurts borrowers it was intended to help, as well as raises the aggregate mortgage...
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Publisher
Taylor & Francis
Copyright
© 2022 American Real Estate Society
ISSN
1573-8809
DOI
10.1080/09277544.2021.2009620
Publisher site
See Article on Publisher Site

Abstract

Abstract Using a screening model with asymmetric information, I evaluate the positive and normative effects of the subsidized default insurance policy in the U.S. mortgage market. The model implies that the subsidy raises interest rates for eligible mortgages, which is contrary to conventional wisdom but is consistent with the empirical evidence in Zhao (2019). Moreover, the model implies that the subsidy hurts borrowers it was intended to help, as well as raises the aggregate mortgage default rate. My article highlights the adverse impact of the subsidy on welfare and financial stability, and sheds light on the root cause of the global financial crisis. It also provides potentially useful reference to other countries that have (or are considering adopting) a mortgage subsidy mechanism similar to that in the US.

Journal

Journal of Real Estate Literature – Taylor & Francis

Published: Mar 14, 2022

Keywords: Mortgage subsidy; government-sponsored enterprises; interest rate; default; asymmetric information; financial stability

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