This study analyses whether discount points in fixed-rate mortgages can mitigate information asymmetry from private information on borrower`s intended holding period, when the initial package of mortgage terms can be transferred without renegotiation to a new borrower who purchase the associated collateralized house. The main departure from existing literature is the assumption that the mortgage is assumable by others without renegotiation. This situation is not rare in some countries like Korea.
Point-and-coupon combination is essentially a self-selection menu. It is well known that this approach can solve to some extent the information asymmetry between lenders and borrowers -- private information on the intended prepayment period here, when and if the morgages are not transferable. This study tries to establish similar results even when the morgages are transferable more specifically tries to derive the conditions on parameters like borrowers` discount rates that yield similar observations. In our case, it is observed that the level of discount point is higher than that without mortgage transfer option. It implies that lenders can share the rent from mortgage transfer if they can design the self-selection menu appropriately.
At the same time, it amounts to saying that there also exist ranges of parameter like borrowers` discount rates with which the self-selection menu does not mitigate the information asymmetry situation. So under this situation, lenders might not want to provide self-selection menu in the hope of resolving information asymmetry. We show this by numerical examples.
