Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269117 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2710
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study third-party loan guarantees in a model in which lenders can screen, learn loan quality over time and can sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity and reduce lending standards, with a positive overall welfare effect. Guarantees improve the average quality of non-guaranteed loans traded and thus the market liquidity of these loans due to both selection and commitment. Because of this positive pecuniary externality, guarantees are insufficient and should be subsidized. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac.
Subjects: 
Mortgage guarantees
adverse selection
market liquidity
pecuniaryexternality
Pigouvian subsidy
Government Sponsored Enterprises
JEL: 
G01
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5295-8
Document Type: 
Working Paper

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