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Measurement of the Spreads Between Yields on Various Mortgage Contracts and Treasury Securities

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  • Patric H. Hendershott
  • James D. Shilling
  • Kevin E. Villani

Abstract

Spreads between yields on different mortgage instruments and comparable maturity portfolios of Treasury securities have been computed and compared with quoted yields over the 1974-82 period for three different mortgage instruments: GNMA pass-throughs, FHLMC participation certificates, and conventional mortgage commitments. The methodology explicitly accounts for the expected timing of the payments on the mortgages and thus avoids the cash-flow timing problems noted in the literature.Between late 1978 and 1981, the computed spreads rose by 30 to 40 basis points relative to those customarily quoted (the internal rate of return on a mortgage, assuming a twelve-year life, less the yield on near-par ten-year Treasuries). This increase can be attributed to the rise in the level of interest rates (the compounding error in quoted mortgage yields is larger at higher levels of rates) and the change in the slope of the yield curve from flat to downward sloping (the twelve-year prepayment date assumed in the computation of quoted GNMA and FHLMC PC yields seems to be too long). Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Patric H. Hendershott & James D. Shilling & Kevin E. Villani, 1983. "Measurement of the Spreads Between Yields on Various Mortgage Contracts and Treasury Securities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 11(4), pages 476-490.
  • Handle: RePEc:bla:reesec:v:11:y:1983:i:4:p:476-490
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    Cited by:

    1. C. Sirmans & Stanley Smith & G. Sirmans, 2015. "Determinants of Mortgage Interest Rates: Treasuries versus Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 34-51, January.
    2. James D. Shilling & C. F. Sirmans, 1987. "Pricing Fast-Pay Mortgages: Some Simulation Results," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(1), pages 25-32, March.
    3. Donald R. Haurin & Patric H. Hendershott, 1985. "Affordability and the Value of Seller Financing," NBER Working Papers 1695, National Bureau of Economic Research, Inc.
    4. Patric H. Hendershott, 1997. "Uses of equilibrium models in real estate research," Journal of Property Research, Taylor & Francis Journals, vol. 14(1), pages 1-13, January.
    5. Ambrose, Brent W. & Buttimer, Richard Jr., 2005. "GSE impact on rural mortgage markets," Regional Science and Urban Economics, Elsevier, vol. 35(4), pages 417-443, July.
    6. Stephen F. Thode & Richard J. Kish, 1994. "The Zero-Coupon/Interest-Only Fixed-Rate Mortgage: An Alternative for Funding Low-to-Moderate Income Housing," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 263-276.

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