Are Lemons Sold First? Dynamic Signaling in the Mortgage Market
A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relationship between mortgage performance and time to sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the ”Alt-A” segment of the market, where mortgages are often sold with incomplete hard information, and in cases where the originator and the issuer of mortgage-backed securities are not affiliated.
We thank the editor Toni Whited, the anonymous referee, Darren Aiello, Brendan Daley, Stuart Gabriel, Brett Green, Joseph Mason, Christopher Palmer, Anthony Pennington-Cross, Tim Riddiough, Hongfei Tang, Nancy Wallace, Paul Willen, Basil Williams, James Vickery, conference participants at the AFA, AREUEA National Conference, Annual CEPR Symposium, CHUM, FIRS, and NBER Corporate Finance, and seminar participants at Columbia, Duke, MIT (Sloan), Minnesota (Carlson), Northwestern (Kellogg), Pittsburgh (Katz), Virginia (McIntire), University of Colorado at Boulder, UNC Charlotte, and Wharton for their helpful comments and discussions. We thank Valeria Vargas-Sejas for her outstanding research assistance. This paper was previously circulated under the title “A Test of Dynamic Signaling Models: Evidence from Mortgage Securitization.” The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Manuel Adelino & Kristopher Gerardi & Barney Hartman-Glaser, 2018. "Are Lemons Sold First? Dynamic Signaling in the Mortgage Market," Journal of Financial Economics, .