The Rising Gap between Primary and Secondary Mortgage Rates

23 Pages Posted: 13 Jan 2014

See all articles by Andreas Fuster

Andreas Fuster

École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Laurel Madar

Federal Reserve Bank of New York

Linsey Molloy

Federal Reserve Banks - Emerging Markets and International Affairs Group

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Date Written: December 1, 2013

Abstract

While mortgage rates reached historic lows during 2012, the spread between primary and secondary rates rose to very high levels. This trend reflected a number of factors that potentially affected mortgage originator costs and profits and restrained the pass-through from lower secondary rates to borrowers’ funding costs. This article describes the mortgage origination and securitization process and the way in which originator profits are determined. The authors calculate a series of originator profits and unmeasured costs (OPUCs) for the period 1994 to 2012, and show that these OPUCs increased significantly between 2008 and 2012. They also evaluate the extent to which some commonly cited factors, such as changes in loan putback risk, mortgage servicing rights values, and pipeline hedging costs contributed to the rise in OPUCs. Although some costs of mortgage origination may have risen in recent years, a large component of the rise in OPUCs remains unexplained, pointing to increased profitability of originations. The authors conclude by discussing possible drivers of the rise in profitability, such as capacity constraints and originators’ pricing power resulting from borrowers’ switching costs.

Keywords: mortgages, banking

JEL Classification: E44, G21

Suggested Citation

Fuster, Andreas and Goodman, Laurie S. and Lucca, David O. and Madar, Laurel and Molloy, Linsey and Willen, Paul S., The Rising Gap between Primary and Secondary Mortgage Rates (December 1, 2013). Economic Policy Review, Vol. 19, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=2378439

Andreas Fuster (Contact Author)

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center ( email )

2100 M Street NW
Washington, DC 20037
United States

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Laurel Madar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Linsey Molloy

Federal Reserve Banks - Emerging Markets and International Affairs Group ( email )

33 Liberty Street
New York, NY 10045
United States

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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