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Did the Federal Reserve's MBS purchase program lower mortgage rates?

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  • Hancock, Diana
  • Passmore, Wayne
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    Abstract

    On November 25, 2008, the Federal Reserve announced it would purchase mortgage-backed securities (MBS). This program affected mortgage rates through three channels: (1) improved market functioning in both primary and secondary mortgage markets, (2) clearer government backing for Fannie Mae and Freddie Mac, and (3) anticipation of portfolio rebalancing effects. We use empirical pricing models for MBS yields and for mortgage rates to measure relative importance of channels: The first two were important during the height of the financial crisis, but the effects of the third depended on market conditions. Overall, the program put significant downward pressure on mortgage rates.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 58 (2011)
    Issue (Month): 5 ()
    Pages: 498-514

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    Handle: RePEc:eee:moneco:v:58:y:2011:i:5:p:498-514

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    Web page: http://www.elsevier.com/locate/inca/505566

    Related research

    Keywords: MBS; Federal Reserve; GSEs; Mortgage;

    References

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    1. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-63, November.
    2. Diana Hancock & Wayne Passmore, 2010. "An analysis of government guarantees and the functioning of asset-backed securities markets," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-46, Board of Governors of the Federal Reserve System (U.S.).
    3. Roberto Perli & Brian Sack, 2003. "Does mortgage hedging amplify movements in long-term interest rates?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-49, Board of Governors of the Federal Reserve System (U.S.).
    4. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 41-59.
    5. Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.
    6. Jefferson Duarte, 2008. "The Causal Effect of Mortgage Refinancing on Interest Rate Volatility: Empirical Evidence and Theoretical Implications," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1689-1731, July.
    7. Diana Hancock & Wayne Passmore, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-01, Board of Governors of the Federal Reserve System (U.S.).
    8. AfDB AfDB, . "AfDB Group Annual Report 2008," Annual Report, African Development Bank, African Development Bank, number 64 edited by Koua Louis Kouakou, 9.
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    1. The Federal Reserve: Looking Back, Looking Forward
      by Guest Author in The Big Picture on 2014-01-04 10:00:00
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