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The Effects of Purchases of Mortgages and Securitization By Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility

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  • Naranjo, Andy
  • Toevs, Alden
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    Abstract

    In this paper, we investigate the effects of GSE (government sponsored enterprise) activities on mortgage yield spreads and volatility. Using various regression procedures (i.e., vector error correction (VEC) and GARCH models) and controlling for default and prepayment risk, we find that securitizations and purchases of mortgages by GSEs reduce mortgage yield spreads and volatility. In particular, we find that the yield spread between conforming and 10-year constant maturity treasury (CMT) rates decreases by 8.0 bp per $1 billion increase in the level of GSE securitizations. Similarly, if GSEs increase mortgage purchases, the yield spread decreases 10.5 bp per $1 billion increase of purchases. In addition, we hypothesize and find that GSE activities have a spillover effect to the non-conforming mortgage market; via investor substitutions, GSE purchases and securitizations of conforming loans reduce non-conforming loan rates. Thus, the measured influence of GSE activities is biased downward when measured using the spread of non-conforming loans over conforming loan rates. We also find that purchases of mortgages by GSEs significantly reduce mortgage yield volatility. In sum, our findings show that GSE activities reduce and stabilize mortgage market rates. Copyright 2002 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

    Volume (Year): 25 (2002)
    Issue (Month): 2-3 (Sept.-Dec.)
    Pages: 173-95

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    Handle: RePEc:kap:jrefec:v:25:y:2002:i:2-3:p:173-95

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    Cited by:
    1. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April.
    2. W. Scott Frame & Lawrence J. White, 2004. "Fussing and fuming over Fannie and Freddie: how much smoke, how much fire?," Working Paper 2004-26, Federal Reserve Bank of Atlanta.
    3. Xudong An & Raphael W. Bostic, 2006. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals," Working Paper 8573, USC Lusk Center for Real Estate.
    4. Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The effect of housing government-sponsored enterprises on mortgage rates," Finance and Economics Discussion Series 2005-06, Board of Governors of the Federal Reserve System (U.S.).
    5. Xudong An & Raphael W. Bostic, 2006. "Have the Affordable Housing Goals been a Shield against Subprime? Regulatory Incentives and the Extension of Mortgage Credit," Working Paper 8572, USC Lusk Center for Real Estate.
    6. Meniago, Christelle & Mukuddem-Petersen, Janine & Petersen, Mark A. & Mongale, Itumeleng P., 2013. "What causes household debt to increase in South Africa?," Economic Modelling, Elsevier, vol. 33(C), pages 482-492.
    7. TINA M. Mukta Kulkarni & Mark L. Lengnick-Hall, . "Obstacles To Success In The Workplace For People With Disabilities: A Review And Research Agenda," Working Papers 0031, College of Business, University of Texas at San Antonio.
    8. 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.).
    9. Xudong An & Raphael Bostic, 2008. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 207-231, February.
    10. Lucas, Deborah & McDonald, Robert L., 2006. "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 155-176, January.
    11. Quigley, John M., 2006. "Federal Credit and Insurance Programs: Housing," Berkeley Program on Housing and Urban Policy, Working Paper Series qt41d5k3bd, Berkeley Program on Housing and Urban Policy.
    12. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).

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