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The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields

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  • Patric H. Hendershott
  • James D. Shilling

Abstract

Between the early 1980s and 1986, the share of new conforming (under $153,000 in 1986) conventional fixed-rate mortgages (FRMs) that went into Fannie Mae and Freddie Mac mortgage pools increased from under 5 percent to over 50 percent. The impact of these agencies moving from negligible participants to dominant players in this market is investigated in this study by an analysis of yields on 4,900 loans closed in California during May-June 1978 and 1,800 closed in 'May-June 1986. Our analysis indicates that the loan rate depends on the loan-to-value ratio, the loan size, and, in 1986, whether the loan is far above, just above, or below the conforming loan limit. Rates on loans far above the conforming loan limit exceed those on otherwise comparable loans below the limit by 30 basis points and those on loans destined to exceed the limit within a year by 15 basis points. That is, the expanded agency securitization of conforming FRMs has significantly lowered the rates on both conforming loans and loans somewhat above the conforming limit (27 percent of nonconforming loans in 1986) relative to what they would otherwise have been. The effects of a 30 basis point lower FRM rate are many: households are more likely to choose FRMs than ARMs, to decide to own rather than rent, and to own larger houses. Moreover, traditional mortgage portfolio lenders will have fewer ARMs to purchase and will earn lower returns on FRM investments. A few sample calculations are provided to illustrate the possible magnitudes of these effects

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2646.

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Date of creation: Jul 1988
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Publication status: published as Journal of Real Estate Finance and Economics, Vol. 2, pp. 101-115, (1989).
Handle: RePEc:nbr:nberwo:2646

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Cited by:
  1. W. Scott Frame & Lawrence J. White, 2004. "Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac," Working Paper, Federal Reserve Bank of Atlanta 2004-4, Federal Reserve Bank of Atlanta.
  2. Michael Davies & Jacob Gyntelberg & Eric Chan, 2007. "Housing finance agencies in Asia," BIS Working Papers 241, Bank for International Settlements.
  3. Robert DeYoung & William C. Hunter & Gregory F. Udell, 2003. "The past, present, and probable future for community banks," Working Paper Series, Federal Reserve Bank of Chicago WP-03-14, Federal Reserve Bank of Chicago.
  4. Allen Huang & Benjamin Liu, 2009. "The Goods and Services Tax (GST) and Non-Bank Lender Mortgage Costs: Empirical Evidence," Discussion Papers in Finance finance:200915, Griffith University, Department of Accounting, Finance and Economics.
  5. Xudong An & Yongheng Deng & Stuart Gabriel, 2009. "Value Creation through Securitization: Evidence from the CMBS Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 38(3), pages 302-326, April.
  6. Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2005. "GSEs, mortgage rates, and secondary market activities," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-07, Board of Governors of the Federal Reserve System (U.S.).
  7. Liu, Benjamin & Skully, Michael, 2005. "The determinants of mortgage yield spread differentials: Securitization," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 15(4-5), pages 314-333, October.
  8. Xudong An & Raphael Bostic, 2008. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 36(2), pages 207-231, February.
  9. Xudong An & Raphael W. Bostic, 2006. "Have the Affordable Housing Goals been a Shield against Subprime? Regulatory Incentives and the Extension of Mortgage Credit," Working Paper, USC Lusk Center for Real Estate 8572, USC Lusk Center for Real Estate.
  10. Quigley, John M., 2006. "Federal Credit and Insurance Programs: Housing," Berkeley Program on Housing and Urban Policy, Working Paper Series, Berkeley Program on Housing and Urban Policy qt41d5k3bd, Berkeley Program on Housing and Urban Policy.
  11. Shane M. Sherlund, 2008. "The jumbo-conforming spread: a semiparametric approach," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-01, Board of Governors of the Federal Reserve System (U.S.).
  12. Edward Kane, 1999. "Housing Finance GSEs: Who Gets the Subsidy?," Journal of Financial Services Research, Springer, Springer, vol. 15(3), pages 197-209, May.
  13. Kerry D. Vandell, 1997. "Improving secondary markets in rural America," Proceedings – Rural and Agricultural Conferences, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Apr, pages 85-120.
  14. Wayne Passmore & Roger Sparks, 1997. "The effect of automated underwriting on the profitability of mortgage securitization," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-19, Board of Governors of the Federal Reserve System (U.S.).
  15. Ambrose, Brent W. & Buttimer, Richard Jr., 2005. "GSE impact on rural mortgage markets," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 35(4), pages 417-443, July.
  16. Nothaft, Frank E. & Perry, Vanessa G., 2002. "Do mortgage rates vary by neighborhood? Implications for loan pricing and redlining," Journal of Housing Economics, Elsevier, Elsevier, vol. 11(3), pages 244-265, September.
  17. Xudong An & Raphael W. Bostic, 2006. "GSE Activity, FHA Feedback, and Implications for the Efficacy of the Affordable Housing Goals," Working Paper, USC Lusk Center for Real Estate 8573, USC Lusk Center for Real Estate.
  18. Allen Huang & Benjamin Liu, 2009. "The Goods and Services Tax (GST) and Bank Mortgage Costs: Empirical Evidence," Discussion Papers in Finance finance:200914, Griffith University, Department of Accounting, Finance and Economics.

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