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The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

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Author Info
Wayne Passmore
Shane M. Sherlund
Gillian Burgess
Abstract

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates. Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tightens as the mortgage market becomes more liquid and realizes economies of scale. Using Mortgage Interest Rate Survey data for April 1997 through May 2003, we estimate that the government-sponsored enterprise funding advantage accounts for about 7 basis points of the 15-18 basis point jumbo-conforming spread. Copyright 2005 by the American Real Estate and Urban Economics Association

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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 33 (2005)
Issue (Month): 3 (09)
Pages: 427-463
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Handle: RePEc:bla:reesec:v:33:y:2005:i:3:p:427-463

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  1. Shane M. Sherlund, 2008. "The jumbo-conforming spread: a semiparametric approach," Finance and Economics Discussion Series 2008-01, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2006. "An analysis of the systemic risks posed by Fannie Mae and Freddie Mac and an evaluation of the policy options for reducing those risks," Working Paper 2006-02, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  3. Philip Strahan, 2008. "Liquidity Production in 21st Century Banking," NBER Working Papers 13798, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2009. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Working Paper 2009-04, Federal Reserve Bank of Atlanta. [Downloadable!]
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  5. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310. [Downloadable!]
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  6. William Poole, 2007. "The GSEs: where do we stand?," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-152. [Downloadable!]
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  7. Dwight M. Jaffee & John M. Quigley, 1975. "Housing Policy, Mortgage Policy, and the Federal Housing Administration," NBER Chapters, in: Measuring and Managing Federal Financial Risk National Bureau of Economic Research, Inc. [Downloadable!]
  8. Elena Loutskina & Philip E. Strahan, 2006. "Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Acceptance Rates," NBER Working Papers 11983, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series 2006-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Michael Davies & Jacob Gyntelberg & Eric Chan, 2007. "Housing finance agencies in Asia," BIS Working Papers 241, Bank for International Settlements. [Downloadable!]
  11. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper 2009-13, Federal Reserve Bank of Atlanta. [Downloadable!]
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