Date of this Version
Journal of Financial Services Research
This paper studies the impact of transparency in the mortgage market on the underlying real estate market. We show that geographic transparency in the secondary mortgage market, which implies geographic risk based pricing in the primary market, can limit risk-sharing and make house prices more volatile. Ex ante, regions prefer opaque markets to enable insurance opportunities. We discuss the implications for risk based pricing and house price volatility more generally. In addition, we investigate the specific conditions under which competitive lenders would optimally choose to provide opaque lending, thus reducing volatility in the real estate market. We show that in general the opaque competitive equilibrium is not stable, and lenders have incentive to switch to transparent lending if one of the geographic regions has experienced a negative income shock. We propose market and regulatory mechanisms that make the opaque competitive equilibrium stable and insurance opportunities possible.
housing finance, mortgage, transparency, opacity, real estate, insurance, house price volatility
Pavlov, A., Wachter, S. M., & Zevelev, A. (2016). Transparency in the Mortgage Market. Journal of Financial Services Research, 49 (2), 265-280. http://dx.doi.org/10.1007/s10693-014-0211-9
Date Posted: 27 November 2017
This document has been peer reviewed.