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The Effects of Purchases of Mortgages and Securitization By Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility

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  • Naranjo, Andy
  • Toevs, Alden

Abstract

In this paper, we investigate the effects of GSE (government sponsored enterprise) activities on mortgage yield spreads and volatility. Using various regression procedures (i.e., vector error correction (VEC) and GARCH models) and controlling for default and prepayment risk, we find that securitizations and purchases of mortgages by GSEs reduce mortgage yield spreads and volatility. In particular, we find that the yield spread between conforming and 10-year constant maturity treasury (CMT) rates decreases by 8.0 bp per $1 billion increase in the level of GSE securitizations. Similarly, if GSEs increase mortgage purchases, the yield spread decreases 10.5 bp per $1 billion increase of purchases. In addition, we hypothesize and find that GSE activities have a spillover effect to the non-conforming mortgage market; via investor substitutions, GSE purchases and securitizations of conforming loans reduce non-conforming loan rates. Thus, the measured influence of GSE activities is biased downward when measured using the spread of non-conforming loans over conforming loan rates. We also find that purchases of mortgages by GSEs significantly reduce mortgage yield volatility. In sum, our findings show that GSE activities reduce and stabilize mortgage market rates. Copyright 2002 by Kluwer Academic Publishers

Suggested Citation

  • Naranjo, Andy & Toevs, Alden, 2002. "The Effects of Purchases of Mortgages and Securitization By Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 173-195, Sept.-Dec.
    • Handle: RePEc:kap:jrefec:v:25:y:2002:i:2-3:p:173-95
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    Cited by:

    1. Gordian Rättich & Kim Clark & Evi Hartmann, 2011. "Performance measurement and antecedents of early internationalizing firms: A systematic assessment," Working Papers 0031, College of Business, University of Texas at San Antonio.
    2. Andrew Fieldhouse & Karel Mertens & Morten O. Ravn, 2017. "The Macroeconomic Effects of Government Asset Purchases: Evidence from Postwar US Housing Credit Policy," Discussion Papers 1707, Centre for Macroeconomics (CFM).
    3. Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 427-463, September.
    4. Alex Kaufman, 2014. "The Influence of Fannie and Freddie on Mortgage Loan Terms," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 472-496, June.
    5. Meniago, Christelle & Mukuddem-Petersen, Janine & Petersen, Mark A. & Mongale, Itumeleng P., 2013. "What causes household debt to increase in South Africa?," Economic Modelling, Elsevier, vol. 33(C), pages 482-492.
    6. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310.
    7. Karan Bhanot & Donald Lien & Margot Quijano, 2008. "Will Pulling Out the Rug Help? Uncertainty about Fannie and Freddie’s Federal Guarantee and the Cost of the Subsidy," Working Papers 0035, College of Business, University of Texas at San Antonio.
    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, vol. 36(2), pages 207-231, February.
    9. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    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. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
    12. Zhao, Yunhui, 2016. "Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market," MPRA Paper 81083, University Library of Munich, Germany, revised 01 Aug 2017.
    13. 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 8572, USC Lusk Center for Real Estate.
    14. Shane M. Sherlund, 2008. "The jumbo-conforming spread: a semiparametric approach," Finance and Economics Discussion Series 2008-01, Board of Governors of the Federal Reserve System (U.S.).
    15. Lucas, Deborah & McDonald, Robert L., 2006. "An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 155-176, January.

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