GSEs, mortgage rates, and the long-run effects of mortgage securitization
AbstractOur 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 InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-26.
Date of creation: 2001
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-08-15 (All new papers)
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