GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization

GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private firms, with an emphasis on how each type of mortgage securitization affects mortgage rates. We build a model illustrating that market structure, government sponsorship, and the characteristics of the mortgages securitized are all important determinants of mortgage rates. We find that GSEs generally—but not always—lower mortgage rates, particularly when the GSEs behave competitively, because the GSEs' implicit government backing allows them to sell securities without the credit enhancements needed in the private sector. Using our simulation model, we demonstrate that when mortgages eligible for purchase by the GSEs have characteristics similar to other mortgages, the GSEs' implicit government-backing generates differences in mortgage rates similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs are less costly to originate and securitize, and if the GSEs behave competitively, then the simulated spread in mortgage rates can be much larger than that observed in the data. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization

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Publisher
Springer Journals
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1016577809655
Publisher site
See Article on Publisher Site

Abstract

Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private firms, with an emphasis on how each type of mortgage securitization affects mortgage rates. We build a model illustrating that market structure, government sponsorship, and the characteristics of the mortgages securitized are all important determinants of mortgage rates. We find that GSEs generally—but not always—lower mortgage rates, particularly when the GSEs behave competitively, because the GSEs' implicit government backing allows them to sell securities without the credit enhancements needed in the private sector. Using our simulation model, we demonstrate that when mortgages eligible for purchase by the GSEs have characteristics similar to other mortgages, the GSEs' implicit government-backing generates differences in mortgage rates similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs are less costly to originate and securitize, and if the GSEs behave competitively, then the simulated spread in mortgage rates can be much larger than that observed in the data.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 18, 2004

References

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