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

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.

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

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

JEL Classification: G1, G21