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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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    Web page: http://www.springerlink.com/link.asp?id=102945

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    Cited by:
    1. 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 06-6, Federal Reserve Bank of Boston.
    2. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    3. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, vol. 6(4), pages 189-202, December.
    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..

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