Transparency in the Mortgage Market

Abstract

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. AbstractThis paper studies the impact of transparency in the mortgage market on the underlying real estate markets. 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 markets. We show that in general the opaque competitive equilibrium is not stable, and lenders have incentives 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.

Enhancing Prudential Standards in Financial Regulations

“…Susan Wachter 40 presented her research, which examines the connection between transparency in the mortgage market and price volatility in the housing market, focusing on transparency related to geographic risk. Pavlov, Wachter, and Zevelev (2014) to better align public and private incentives. The pricing structure is designed so that the government owns the tail risk but only the tail risk.…”

Debt Representation in UTXO Blockchains

“…For this reason, regulatory agencies have recommended increasing transparency in debt markets, such as mortgage markets, in order to prevent build-up of excessive leverage [5]. Nevertheless, it is understood that complete transparency also leads to adverse outcomes like increased price volatility [6].…”