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

34 Pages Posted: 23 Jul 2001

See all articles by S. Wayne Passmore

S. Wayne Passmore

Board of Governors of the Federal Reserve System

Roger Sparks

Mills College

Jamie C. Ingpen

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private markets, 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, then implicit government-backing generates differences in mortgage rates that are similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs differ substantially from other mortgages and the GSEs behave competitively, the simulated spread in mortgage rates can be much larger than that observed in the data.

Keywords: GSEs, Fannie Mae, Freddie Mac, Mortgage, Securitization

JEL Classification: G2

Suggested Citation

Passmore, Stuart Wayne and Sparks, Roger W. and Ingpen, Jamie C., Gses, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization (June 2001). Available at SSRN: https://ssrn.com/abstract=275008 or http://dx.doi.org/10.2139/ssrn.275008

Stuart Wayne Passmore (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Roger W. Sparks

Mills College ( email )

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United States
510-430-2137 (Phone)
510-430-2304 (Fax)

Jamie C. Ingpen

affiliation not provided to SSRN

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