Fresh data on finance are presented in a new report from the Federal Reserve Board. Research stated, “This paper analyzes a model of the mortgage market, allowing for scenarios with and without government-sponsored mortgage securitization.”
Key Findings
Researchers from the Federal Reserve Board offered the following assessment: “Conventional wisdom says that securitization, by fostering diversification and creating a ‘safe’ asset in the form of a mortgage-backed security (MBS), will reduce risk and enhance liquidity, thereby abating financial crises. Our contribution is to examine this claim by imbedding the mortgage market with a sequential strategic game played between the securitizer and banks. In this setting, adverse selection arises from the securitizer’s first-mover advantage rather than from informational asymmetries. In the model, the securitizer chooses the MBS contract terms, including the guaranteed rate and the criterion that qualifies a mortgage for securitization. Banks respond by selecting which qualifying mortgages to exchange for the MBS. Our analysis yields a central result: within this framework, government-sponsored securitization is, somewhat counterintuitively, more likely to exacerbate the severity and frequency of financial crises.”
The research concluded: “This outcome arises in particular when mortgage demand is sufficiently low that originators optimally choose not to retain any higher-risk mortgages on their balance sheets.”
Research Details
The full study is published as Does Government-Sponsored Mortgage Securitization Mitigate or Aggravate Financial Crises? in the International Journal of Financial Studies, 2026, 14(7):167, published by MDPI AG. A free version of the article is available at https://doi.org/10.3390/ijfs14070167.
The research was authored by Wayne Passmore and Roger W. Sparks of the Federal Reserve Board of Governors, Washington, DC 20551.
