Salomón García, University of Minnesota (Job Market Seminar)

“Regulation and Financial Intermediation in the Mortgage Market”

Abstract

I study the impact of policy interventions in the secondary mortgage market. I develop a quantitative general equilibrium model of financial intermediation that features adverse selection in the secondary market, and calibrate it to match key moments on the cross-section of the US mortgage origination market. With income and default rate shocks as observed in the data, the model accounts for two-thirds of the collapse of the mortgage market during the Great Recession. Policy interventions that compensate investors for losses from default and adverse selection are effective in stabilizing the mortgage market by reducing the volatility of prices and quantities. Borrower households benefit from stabilization through lower and less volatile mortgage rates but must pay higher taxes to finance the policy.

Contact person: Peter Norman Sørensen