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The Mortgage Rate Conundrum

Author

Listed:
  • Giorgio Primiceri

    (Northwestern University)

  • Andrea Tambalotti

    (Federal Reserve Bank of New York)

  • Alejandro Justiniano

    (Federal Reerve Chicago)

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 easing cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leaving mortgage rates persistently depressed. We label this phenomenon the “mortgage rate conundrum,” because it echoes the under-reaction of long-term Treasury rates to the rise in the Federal Funds rate during the subsequent tightening cycle highlighted by Alan Greenspan. We uncover this phenomenon by analyzing a large dataset with millions of loan-level observations. These detailed data allow us to control for a variety of loan, borrower and geographic characteristics, guaranteeing that the low level of mortgage rates after mid 2003 was not just due to a change in observable risk factors.

Suggested Citation

  • Giorgio Primiceri & Andrea Tambalotti & Alejandro Justiniano, 2017. "The Mortgage Rate Conundrum," 2017 Meeting Papers 471, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:471
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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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    9. 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.
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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, 2021. "Why were interest only mortgages so population during U.S. housing boom?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 205-224, July.
    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

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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