Question

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?'

Answer 1

Role of information asymmetries in the home mortgage bubble crisis (2007-2009) :
(A) Asymmetric information between lenders who are in a competetive market is a key factor for financing new homes and various lenders had huge margins of differences about collateral values of houses.
(B) Another way to look at the issue is the charasteristics of a borrower, or how he/she/they tried to repay back the loan. There were massive gaps in information regarding this aspect.
(C) Since, there was improper collateral values in the market, the actual value of a property was difficult to be estimated.
(D) Potential buyers had less information about properties and current holders of the same property knew more. Hence, estimates were obscured.
(E) Issues related to moral hazard and adverse selection contributed dearly as a direct consequence of information being hidden as consumers were confused about future market performance
(F) Large banks, did not want to lend money to each other, owing to the fact that the actual financial positions of the borrowers were unknown.