Advantageous Selection with Intermediaries: A Study of GSE-Securitized Mortgage Loans

This paper studies the effects of mortgage subsidies and imperfect competition in the U.S. mortgage market. I exploit discontinuities in interest rates generated by pricing rules and find evidence of advantageous selection. I estimate an industry model that highlights the relationship between mortgage subsidies, intermediary lenders' market power, and borrower's advantageous selection. The model shows that mortgage subsidies enable advantageous selection, creating a deadweight loss of 7.90 billion. Counterfactual analysis reveals that a 50% decrease in lender concentration reduces efficiency by 1.39 billion if mortgages are subsidized, and conversely, increases efficiency by 750.07 million if mortgages are not subsidized.