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The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis

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  • James W. Kolari
  • Donald R. Fraser
  • Ali Anari

Abstract

Securitization of the residential mortgage market has completely transformed the process of financing home loans in the U.S. over the last two decades. We examine the effects of securitization on yield spreads in the primary mortgage market. Cointegration techniques are employed to test the relationship between the increasing volume of mortgage securities over time and the yield spread on mortgage loan rates. We find that a 10% increase in the level of mortgage securitization as a proportion of total mortgage originations decreases yield spreads on home loans by as much as 20 basis points. Other results indicate that, while prepayment speed has a significant effect on mortgage yield spreads, default risk does not. We conclude that securitization of the residential mortgage market plays an important role in decreasing the cost of home loans. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • James W. Kolari & Donald R. Fraser & Ali Anari, 1998. "The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(4), pages 677-693.
  • Handle: RePEc:bla:reesec:v:26:y:1998:i:4:p:677-693
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    Cited by:

    1. Allen Huang & Benjamin Liu, 2013. "The GST and mortgage costs: Australian evidence," Discussion Papers in Finance finance:201302, Griffith University, Department of Accounting, Finance and Economics.
    2. Xin Long & Mangal Goswami & Andreas Jobst, 2009. "An Investigation of Some Macro-Financial Linkages of Securitization," IMF Working Papers 09/26, International Monetary Fund.
    3. Cristina Peicuti, 2014. "The Great Depression and the Great Recession: A Comparative Analysis of their Analogies," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 11(1), pages 55-78, June.
    4. Arturo Estrella, 2002. "Securitization and the efficacy of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 243-255.
    5. repec:kap:jrefec:v:54:y:2017:i:3:d:10.1007_s11146-016-9572-1 is not listed on IDEAS
    6. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
    7. Liu, Benjamin & Skully, Michael, 2005. "The determinants of mortgage yield spread differentials: Securitization," Journal of Multinational Financial Management, Elsevier, vol. 15(4-5), pages 314-333, October.
    8. 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.
    9. Kleimeier, Stefanie & Sander, Harald, 2006. "Regional versus global integration of euro-zone retail banking markets: Understanding the recent evidence from price-based integration measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(3), pages 353-368, July.
    10. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April.
    11. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-017-9601-8 is not listed on IDEAS
    12. repec:ire:issued:v:20:n:03:2017:p:287-324 is not listed on IDEAS
    13. Loutskina, Elena, 2011. "The role of securitization in bank liquidity and funding management," Journal of Financial Economics, Elsevier, vol. 100(3), pages 663-684, June.
    14. Amelia Pais, 2008. "Securitization and Rate Setting in the UK Mortgage Market-super-," International Review of Finance, International Review of Finance Ltd., vol. 8(1-2), pages 57-80.
    15. Karen E. Dynan, 2009. "Changing Household Financial Opportunities and Economic Security," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 49-68, Fall.
    16. Karen E. Dynan & Donald L. Kohn, 2007. "The rise in U.S. household indebtedness: causes and consequences," Finance and Economics Discussion Series 2007-37, Board of Governors of the Federal Reserve System (U.S.).

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