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GSEs, mortgage rates, and the long-run effects of mortgage securitization

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  • Wayne Passmore
  • Roger Sparks
  • Jamie Ingpen
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    Abstract

    Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private markets, 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, then implicit government backing generates differences in mortgage rates that are similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs differ substantially from other mortgages and the GSEs behave competitively, the simulated spread in mortgage rates can be much larger than that observed in the data.

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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 2001-26.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedgfe:2001-26

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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. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-37, July.
    2. Glaeser, Edward L. & Kallal, Hedi D., 1997. "Thin Markets, Asymmetric Information, and Mortgage-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 64-86, January.
    3. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    4. John L. Goodman, Jr. & S. Wayne Passmore, 1992. "Market power and the pricing of mortgage securitization," Finance and Economics Discussion Series 187, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.
    6. Ambrose, Brent W & Buttimer, Richard & Thibodeau, Thomas, 2001. "A New Spin on the Jumbo/Conforming Loan Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 309-35, November.
    7. Andrea Heuson & Wayne Passmore & Roger Sparks, 2000. "Credit scoring and mortgage securitization: do they lower mortgage rates?," Finance and Economics Discussion Series 2000-44, Board of Governors of the Federal Reserve System (U.S.).
    8. Glenn B. Canner & Wayne Passmore & Brian J. Surette, 1996. "Distribution of credit risk among providers of mortgages to lower- income and minority homebuyers," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1077-1102.
    9. 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.
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