The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

44 Pages Posted: 1 Feb 2005

See all articles by S. Wayne Passmore

S. Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section

Shane M. Sherlund

Federal Reserve Board of Governors

Gillian Burgess

NYU School of Law

Date Written: January 2005

Abstract

We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates (the jumbo-conforming spread). Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread.

Keywords: Fannie Mae, Freddie Mac, GSEs, mortgages, MBS, securitization, mortgage rates

JEL Classification: G18, G21

Suggested Citation

Passmore, Stuart Wayne and Sherlund, Shane M. and Mecum Burgess, Gillian, The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates (January 2005). FEDS Working Paper No. 2005-06. Available at SSRN: https://ssrn.com/abstract=658263 or http://dx.doi.org/10.2139/ssrn.658263

Stuart Wayne Passmore (Contact Author)

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section ( email )

Washington, DC 20551
United States
202-452-6432 (Phone)
202-452-3819 (Fax)

Shane M. Sherlund

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Mailstop 93
Washington, DC 20551
United States
202-452-3589 (Phone)
202-728-5887 (Fax)

Gillian Mecum Burgess

NYU School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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