Private information in the mortgage market: evidence and a theory of crises
The securitization boom in the United States mortgage market from 2000 to 2005 was enormous (figure 1). According to the Securities Industry and Financial Markets Association (SIFMA) new issuance of securities backed by mortgages that were not insured by the U.S. government rose by a factor of twelve during that five year period from $58 billion in 2000 to $726 billion in 2005. Issuance of securities backed by home equity loans also soared from $75 billion to $460 billion over the same five year span. The subsequent collapse was even faster. By 2008 issuance of these two types of securities had fallen to $36 billion further declining to $8 billion by 2012. In contrast the market for securities backed by insured mortgages has boomed since 2005 nearly doubling from $983 billion to $1.731 trillion by 2012 in the face of declining interest rates. This paper summarizes existing empirical evidence that private information was important in the uninsured mortgage market and then describes recent theoretical models that explain how the emergence of private information can lead to a decline in trade in these securities.