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Credit scoring and mortgage securitization: do they lower mortgage rates?

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  • Andrea Heuson
  • Wayne Passmore
  • Roger Sparks
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    Abstract

    This paper develops a model of the interactions between borrowers, originators, and a securitizer in primary and secondary mortgage markets. In the secondary market, the securitizer adds liquidity and plays a strategic game with mortgage originators. The securitizer sets the price at which it will purchase mortgages and the credit score standard that qualifies a mortgage for purchase. We investigate two potential links between securitization and mortgage rates. First, we analyze whether a portion of the liquidity premium gets passed on to borrowers in the form of a lower mortgage rate. Somewhat surpringly, we find plausible conditions under which securization fails to lower the mortgage rate. Secondly, and consistent with recent empirical results, we derive an inverse correlation between the volume of securitization and mortgage rates. However, the causation is reversed from the standard rendering. In our model, a decline in the mortgage rate causes increased securitization rather than the other way around.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-44.

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    Date of creation: 2000
    Date of revision:
    Handle: RePEc:fip:fedgfe:2000-44

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    Related research

    Keywords: Mortgage loans ; Interest rates ; Mortgages ; Asset-backed financing;

    This paper has been announced in the following NEP Reports:

    References

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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Pennacchi, George G, 1988. " Loan Sales and the Cost of Bank Capital," Journal of Finance, American Finance Association, vol. 43(2), pages 375-96, June.
    3. Arnoud W A Boot & Anjan V Thakor, 1992. "Security Design," CEPR Financial Markets Paper 0020, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Kaufman, Herbert M, 1988. "FNMA's Role in Deregulated Markets: Implications from Past Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 673-83, November.
    7. Greenbaum, Stuart I. & Thakor, Anjan V., 1987. "Bank funding modes : Securitization versus deposits," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 379-401, September.
    8. Passmore, Wayne & Sparks, Roger, 1996. "Putting the Squeeze on a Market for Lemons: Government-Sponsored Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 27-43, July.
    9. Calomiris, Charles W & Kahn, Charles M & Longhofer, Stanley D, 1994. "Housing-Finance Intervention and Private Incentives: Helping Minorities and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 634-74, August.
    10. Black, Deborah G & Garbade, Kenneth D & Silber, William L, 1981. "The Impact of the GNMA Pass-through Program on FHA Mortgage Costs," Journal of Finance, American Finance Association, vol. 36(2), pages 457-69, May.
    11. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    12. Wayne Passmore & Roger W. Sparks, 2000. "Automated Underwriting and the Profitability of Mortgage Securitization," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(2), pages 285-305.
    13. Oliver Jones, 1962. "The Development Of An Effective Secondary Mortgage Market," Journal of Finance, American Finance Association, vol. 17(2), pages 358-370, 05.
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    Cited by:
    1. Ben Craig & James Thomson, 2003. "Federal Home Loan Bank Lending to Community Banks: Are Targeted Subsidies Desirable?," Journal of Financial Services Research, Springer, vol. 23(1), pages 5-28, February.
    2. Wayne Passmore & Roger Sparks & Jamie Ingpen, 2001. "GSEs, mortgage rates, and the long-run effects of mortgage securitization," Finance and Economics Discussion Series 2001-26, Board of Governors of the Federal Reserve System (U.S.).
    3. Ben R. Craig & James B. Thomson, 2001. "Federal Home Loan Bank lending to community banks: are targeted subsidies necessary?," Working Paper 0112, Federal Reserve Bank of Cleveland.

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