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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page The Effect of Automated Underwriting on the Profitability of Mortgage Securitization
Wayne Passmore and Roger Sparks

Abstract: Over the past two years, many mortgage market analysts have praised automated underwriting as a technological innovation that will lower the costs of processing mortgage applications. However, automated underwriting is unlikely to decrease processing costs uniformly for all mortgage applications. Instead, it makes identifying and processing low-risk mortgage borrowers less costly, but may not significantly lower the costs of identifying and processing relatively high-risk applicants. Our results suggest that after the one-time cost reduction produced by automated underwriting, the resulting mortgage market equilibrium is characterized by lower mortgage rates and lower profits for the mortgage securitizer.

Keywords: Automated underwriting, credit scoring, mortgages, securitization

Full paper (201 KB PDF) | Full paper (312 KB Postscript)

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Last update: July 16, 1997