Credit scoring and mortgage securitization: do they lower mortgage rates?

Andrea J. Heuson, Wayne Passmore and Roger Sparks

No 2000-44, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper 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 qualifies 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 surpringly, we find plausible conditions under which securization fails to lower the mortgage rate. Secondly, 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.

Keywords: Mortgage loans; Interest rates; Mortgages; Asset-backed financing (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (3)

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