Asymmetric information in securitization: An empirical assessment

Asymmetric information in securitization deals is analyzed based on a unique dataset comprising a million mortgages, both securitized and not, and using a methodology, previously applied to insurance data, that looks at the correlation between risk transfer and default probability. The main finding is that, for given observable characteristics, securitized mortgages have a lower default probability than non-securitized ones. We show that this finding is consistent with banks caring about their reputation for not selling lemons. •Many studies indicate that credit risk transfer activities may have perverse effects.•We test the presence of asymmetric information problems in the securitization market.•Banks can partially offset the negative effects of asymmetric information.•This is done mainly by selling loans that are less opaque or risky.•We also find evidence that banks build up a reputation for not selling lemons.