Conservatorship, Quantitative Easing, and Mortgage Spreads: A New Multi-Equation Score-Driven Model of Policy Actions

Abstract

This paper studies how United States (US) policy actions impacted mortgage-backed securities (MBS) investors and mortgage borrowers during the subprime mortgage crisis of 2007 to 2010. The effects of the following policy actions on MBS spreads and mortgage lending spreads are studied: (i) US Government conservatorship of Fannie Mae and Freddie Mac; (ii) US Federal Reserve quantitative easing (QE) programs. We provide the following contributions: (i) The novel multi-equation score-driven t-QVARMA (quasi-vector autoregressive moving average) model of the multivariate t-distribution is used for the robust measurement of policy effects. (ii) In addition to the effects of QE, the effects of government conservatorship are also measured. (iii) The data period of the relevant literature is extended to March 2020, which provides a larger sample size for the pre-crisis and post-crisis periods. The results indicate that both policy actions significantly reduced MBS and mortgage lending spreads.

Keywords: Government-Sponsored Enterprises, Quantitative Easing, Conservatorship, Mortgage-Backed Securities, Dynamic Conditional Score, Generalized Autoregressive Score, United States

JEL Classification: C32, C52, E52, E58, G21, G28