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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.
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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. 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.
    3. 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.
    4. 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.
    5. Paul, Pascal, 2020. "A macroeconomic model with occasional financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    6. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    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. Bäckman, Claes & Lutz, Chandler, 2020. "The impact of interest-only loans on affordability," Regional Science and Urban Economics, Elsevier, vol. 80(C).
    9. 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.
    10. 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.).

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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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