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GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization

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  • Passmore, Wayne
  • Sparks, Roger
  • Ingpen, Jamie
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    Abstract

    Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private firms, with an emphasis on how each type of mortgage securitization affects mortgage rates. We build a model illustrating that market structure, government sponsorship, and the characteristics of the mortgages securitized are all important determinants of mortgage rates. We find that GSEs generally--but not always--lower mortgage rates, particularly when the GSEs behave competitively, because the GSEs' implicit government backing allows them to sell securities without the credit enhancements needed in the private sector. Using our simulation model, we demonstrate that when mortgages eligible for purchase by the GSEs have characteristics similar to other mortgages, the GSEs' implicit government-backing generates differences in mortgage rates similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs are less costly to originate and securitize, and if the GSEs behave competitively, then the simulated spread in mortgage rates can be much larger than that observed in the data. 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: 215-42

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    Handle: RePEc:kap:jrefec:v:25:y:2002:i:2-3:p:215-42

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    Cited by:
    1. Quigley, John M., 2006. "Federal Credit and Insurance Programs: Housing," Berkeley Program on Housing and Urban Policy, Working Paper Series, Berkeley Program on Housing and Urban Policy qt41d5k3bd, Berkeley Program on Housing and Urban Policy.
    2. Kristopher Gerardi & Harvey S. Rosen & Paul Willen, 2006. "Do households benefit from financial deregulation and innovation?: the case of the mortgage market," Public Policy Discussion Paper, Federal Reserve Bank of Boston 06-6, Federal Reserve Bank of Boston.
    3. Wayne Passmore, 2005. "The GSE implicit subsidy and the value of government ambiguity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-05, Board of Governors of the Federal Reserve System (U.S.).
    4. Kristopher Gerardi & Harvey S. Rosen & Paul Willen, 2007. "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market," Working Papers 61, Princeton University, Department of Economics, Center for Economic Policy Studies..
    5. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
    6. Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 427-463, 09.
    7. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, Elsevier, vol. 6(4), pages 189-202, December.
    8. 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, Federal Reserve Bank of Atlanta 2006-02, Federal Reserve Bank of Atlanta.
    9. W. Scott Frame, 2009. "The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac," Working Paper, Federal Reserve Bank of Atlanta 2009-13, Federal Reserve Bank of Atlanta.
    10. 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.
    11. 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.

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