An agency problem in the MBS market and the solicited refinancing channel of large-scale asset purchases

John Kandrac and Bernd Schlusche
Additional contact information
John Kandrac: https://www.federalreserve.gov/econres/john-kandrac.htm
Bernd Schlusche: https://www.federalreserve.gov/econres/bernd-schlusche.htm

No 2015-27, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem--a key feature of the MBS market--arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called \"solicited refinancing channel.\" Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.

Keywords: Federal Reserve; LSAP; Monetary policy; QE; mortgage; mortgage-backed securities; prepayment rates (search for similar items in EconPapers)
JEL-codes: E52 G01 G21 R38 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015-03-31
New Economics Papers: this item is included in nep-fmk, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://dx.doi.org/10.17016/FEDS.2015.027 http://dx.doi.org/10.17016/FEDS.2015.027 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-27

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