Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

Adelino, Manuel; Gerardi, Kristopher; Hartman-Glaser, Barney

Working Paper

Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

Abstract: 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.

Keywords: mortgage markets; asymmetric information; signaling;

JEL Classification: G17; G21; G23;