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The mortgage rate conundrum

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  • Alejandro Justiniano
  • Giorgio E. Primiceri
  • Andrea Tambalotti

Abstract

We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve?s expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large data set with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower, and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid-2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.

Suggested Citation

  • Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2017. "The mortgage rate conundrum," Staff Reports 829, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:829
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    References listed on IDEAS

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    1. Atif Mian & Amir Sufi, 2017. "Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005," Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1832-1864.
    2. Scanlon, Kathleen & Fernández Arrigoitia, Melissa & Whitehead, Christine M E, 2015. "Social housing in Europe," LSE Research Online Documents on Economics 62938, London School of Economics and Political Science, LSE Library.
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    6. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1449-1496.
    7. Un-Habitat, 2015. "Housing Finance Mechanisms in India," Working Papers id:7549, eSocialSciences.
    8. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 155-192, July.
    9. Martin Schneider, 2015. "Comment on "Demystifying the Chinese Housing Boom"," NBER Chapters, in: NBER Macroeconomics Annual 2015, Volume 30, pages 167-175, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2020. "Mildly explosive dynamics in U.S. fixed income markets," European Journal of Operational Research, Elsevier, vol. 287(2), pages 712-724.
    2. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    3. Gadi Barlevy & Jonas Fisher, . "Why were interest only mortgages so population during U.S. housing boom?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    4. Bäckman, Claes & Khorunzhina, Natalia, 2020. "Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform," MPRA Paper 98524, University Library of Munich, Germany.
    5. James A. Kahn & Benjamin S. Kay, 2019. "The Impact of Credit Risk Mispricing on Mortgage Lending during the Subprime Boom," Finance and Economics Discussion Series 2019-046, Board of Governors of the Federal Reserve System (U.S.).
    6. James A Kahn & Benjamin S Kay, 2020. "The impact of credit risk mispricing on mortgage lending during the subprime boom," BIS Working Papers 875, Bank for International Settlements.
    7. Saroj Bhattarai & Choongryul Yang & Felipe Schwartzman, 2019. "The Persistent Employment E ffects of the 2006-09 U.S. Housing Wealth Collapse," 2019 Meeting Papers 671, Society for Economic Dynamics.
    8. Paul, Pascal, 2020. "A macroeconomic model with occasional financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    9. Carlos Garriga & Aaron Hedlund, 2019. "Crises in the Housing Market: Causes, Consequences, and Policy Lessons," Working Papers 2019-33, Federal Reserve Bank of St. Louis.
    10. Bäckman, Claes & Lutz, Chandler, 2020. "The impact of interest-only loans on affordability," Regional Science and Urban Economics, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    credit boom; private label; securitization; subprime; housing boom;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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