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Securitization and the fixed-rate mortgage

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  • Andreas Fuster
  • James Vickery

Abstract

Fixed-rate mortgages (FRMs) dominate the U.S. mortgage market, with important consequences for household risk management, monetary policy, and systemic risk. In this paper, we show that securitization is a key driver of FRM supply. Our analysis compares the agency and nonagency mortgage-backed-securities (MBS) markets, exploiting the freeze in nonagency MBS liquidity in the third quarter of 2007. Using exogenous variation in access to the agency MBS market, we find that when both market segments are liquid they perform similarly in terms of supporting FRM supply. However, after the nonagency market freezes, the share of FRMs is sharply higher among mortgages eligible to be securitized through the still-liquid agency MBS market. Our interpretation is that securitization is particularly important for FRMs because of the prepayment and interest rate risk embedded in these loans. We highlight policy implications for ongoing reform of the U.S. mortgage finance system.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 594.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:594

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Related research

Keywords: Mortgages ; Mortgage-backed securities ; Liquidity (Economics) ; Risk management;

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References

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  1. Christopher Foote & Kristopher Gerardi & Lorenz Goette & Paul Willen, 2010. "Reducing Foreclosures: No Easy Answers," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 89-138 National Bureau of Economic Research, Inc.
  2. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc.
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  7. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June.
  8. Douglas Almond & Joseph J. Doyle, Jr. & Amanda E. Kowalski & Heidi Williams, 2010. "Estimating Marginal Returns to Medical Care: Evidence from At-Risk Newborns," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 591-634, May.
  9. Tirole, Jean, 2009. "Illiquidity and All Its Friends," TSE Working Papers 09-083, Toulouse School of Economics (TSE), revised Feb 2010.
  10. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," Center for Financial Institutions Working Papers 96-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  11. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  12. Jun Liu & Francis A. Longstaff & Ravit E. Mandell, 2006. "The Market Price of Risk in Interest Rate Swaps: The Roles of Default and Liquidity Risks," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2337-2360, September.
  13. Ronel Elul, 2011. "Securitization and mortgage default," Working Papers 09-21, Federal Reserve Bank of Philadelphia.
  14. Toni Dechario & Patricia Mosser & Joseph Tracy & James Vickery & Joshua Wright, 2010. "A private lender cooperative model for residential mortgage finance," Staff Reports 466, Federal Reserve Bank of New York.
  15. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  16. James Vickery & Joshua Wright, 2013. "TBA trading and liquidity in the agency MBS market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 1-18.
  17. Paul Calem & Francisco Covas & Jason Wu, 2013. "The Impact of the 2007 Liquidity Shock on Bank Jumbo Mortgage Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45, pages 59-91, 08.
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Cited by:
  1. James Vickery & Joshua Wright, 2010. "TBA trading and liquidity in the agency MBS market," Staff Reports 468, Federal Reserve Bank of New York.

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