Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market

Using a screening model with asymmetric information, I evaluate the positive and normative effects of subsidized default insurance policy in U.S. mortgage market. The implies that subsidy raises interest rates for eligible mortgages, which is contrary to conventional wisdom but consistent empirical evidence Zhao (2019 Zhao, Y. (2019). Evidence government on rate default: Revisited. Journal Housing Research, 28(1), 23–49. https://doi.org/10.1080/10835547.2019.12092157[Taylor & Francis Online] , [Google Scholar]). Moreover, hurts borrowers it was intended help, as well aggregate rate. My article highlights adverse impact welfare financial stability, sheds light root cause global crisis. It also provides potentially useful reference other countries have (or are considering adopting) mechanism similar US.