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The effect of housing government-sponsored enterprises on mortgage rates

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  • Wayne Passmore
  • Shane M. Sherlund
  • Gillian Burgess

Abstract

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates (the jumbo-conforming spread). Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread.

Suggested Citation

  • Wayne Passmore & Shane M. Sherlund & Gillian Burgess, 2005. "The effect of housing government-sponsored enterprises on mortgage rates," Finance and Economics Discussion Series 2005-06, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2005-06
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    References listed on IDEAS

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    1. Nothaft, Frank E & Pearce, James E & Stevanovic, Stevan, 2002. "Debt Spreads between GSEs and Other Corporations," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 151-172, Sept.-Dec.
    2. Passmore, Wayne & Sparks, Roger, 1996. "Putting the Squeeze on a Market for Lemons: Government-Sponsored Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 27-43, July.
    3. Passmore, Wayne & Sparks, Roger & Ingpen, Jamie, 2002. "GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 215-242, Sept.-Dec.
    4. 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.
    5. McKenzie, Joseph A, 2002. "A Reconsideration of the Jumbo/Non-jumbo Mortgage Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 197-213, Sept.-Dec.
    6. John L. Goodman & Wayne Passmore, 1992. "Market power and the pricing of mortgage securitization," Finance and Economics Discussion Series 187, Board of Governors of the Federal Reserve System (U.S.).
    7. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-363, November.
    8. Sanders, Anthony B, 2002. "Government Sponsored Agencies: Do the Benefits Outweigh the Costs?," The Journal of Real Estate Finance and Economics, Springer, vol. 25(2-3), pages 121-127, Sept.-Dec.
    9. 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.
    10. Wayne Passmore & Roger W. Sparks, 2000. "Automated Underwriting and the Profitability of Mortgage Securitization," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(2), pages 285-305.
    11. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    12. Ambrose, Brent W. & Thibodeau, Thomas G., 2004. "Have the GSE affordable housing goals increased the supply of mortgage credit?," Regional Science and Urban Economics, Elsevier, vol. 34(3), pages 263-273, May.
    13. Ambrose, Brent W & Buttimer, Richard & Thibodeau, Thomas, 2001. "A New Spin on the Jumbo/Conforming Loan Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 309-335, November.
    14. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(1), pages 5-29, August.
    15. Bolder, David & Streliski, David, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
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    Keywords

    Government-sponsored enterprises ; Mortgage loans ; Interest rates;

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