Journal of Real Estate Finance and Economics, 23:3, 337±363, 2001
# 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Credit Scoring and Mortgage Securitization:
Implications for Mortgage Rates and Credit Availability
Department of Finance, University of Miami, Box 248094, Coral Gables, FL 33134
Federal Reserve Board, Mail Stop 93, Washington, DC 20551
Department of Economics, Mills College, 5000 MacArthur Blvd., Oakland, CA 94613-1399
This article develops a model of the interactions between borrowers, originators, and a securitizer in primary and
secondary mortgage markets. In the secondary market, the securitizer adds liquidity and plays a strategic game
with mortgage originators. The securitizer sets the price at which it will purchase mortgages and the credit-score
standard that quali®es a mortgage for purchase. We investigate two potential links between securitization and
mortgage rates. First, we analyze whether a portion of the liquidity premium gets passed on to borrowers in the
form of a lower mortgage rate. Somewhat surprisingly, we ®nd very plausible conditions under which
securitization fails to lower the mortgage rate. Second, and consistent with recent empirical results, we derive an
inverse correlation between the volume of securitization and mortgage rates. However, the causation is reversed
from the standard rendering. In our model, a decline in the mortgage rate causes increased securitization rather
than the other way around.
Key Words: mortgage securitization, credit scoring, mortgage rate determination, credit availability
This article develops a model of the primary and secondary mortgage markets. The
primary market is competitive, consisting of numerous originators and a continuum of
borrowers with differing default probabilities. In the secondary market, a monopolist sells
mortgage-backed securities, which yield a liquidity bene®t, in exchange for mortgages
offered by originators. The monopolist/securitizer sets both the price for these mortgages
and the credit-quality standard that quali®es a mortgage for purchase. Although credit
scoring ensures that originators do not enjoy an information advantage over the securitizer,
they do enjoy a ``®rst-mover advantage'' in selecting which qualifying mortgages to sell.
The main purpose of the analysis is to shed light on how securitization affects the interest
rate paid by borrowers and the availability of mortgage credit.