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The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis

Dice Center Working Paper No. 2001-1

37 Pages Posted: 1 Feb 2002  

Brent W. Ambrose

Pennsylvania State University

Michael LaCour-Little

California State University at Fullerton; Federal National Mortgage Association (Fannie Mae)

Anthony B. Sanders

George Mason University - School of Business

Date Written: November 12, 2002

Abstract

The magnitude of the effect of government-sponsored enterprise purchases on primary mortgage market rates has been a difficult research question to answer with differing data and competing methodologies producing different results. In this paper we present a new approach using loan level data and controlling for any credit risk differential between conforming and non-conforming loans. Our method also addresses econometric problems of endogeneity and sample selection bias. We find that conforming loans have yields spread about 2.6% lower (4.5 basis points) on a risk-adjusted basis compared to other loans. This is lower than previous estimates appearing in the literature and may result from the greater precision available in our loan level dataset that allows us to control for credit risk.

Notes: Previously titled "Credit Spreads: Evidence from the Mortgage Market"

Keywords: Mortgage yield spreads, securitization, government-sponsored enterprise

JEL Classification: G1, G21

Suggested Citation

Ambrose, Brent W. and LaCour-Little, Michael and Sanders, Anthony B., The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis (November 12, 2002). Dice Center Working Paper No. 2001-1. Available at SSRN: https://ssrn.com/abstract=298379 or http://dx.doi.org/10.2139/ssrn.298379

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Michael LaCour-Little

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-3318 (Phone)

Anthony Bown Sanders (Contact Author)

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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