Abstract: This paper develops a model of the interactions between borrowers,
originators, and a securitizer in primary and secondary mortgage
markets. In the secondary market, the securitizer adds liquidity and
plays a strategic game with mortgage originators. The securitizer
sets the price at which it will purchase mortgages and the credit
score standard that qualifies a mortgage for purchase. We investigate
two potential links between securitization and mortgage rates. First,
we analyze whether a portion of the liquidity premium gets passed on
to borrowers in the form of a lower mortgage rate. Somewhat
surpringly, we find plausible conditions under which securization
fails to lower the mortgage rate. Secondly, and consistent with
recent empirical results, we derive an inverse correlation between the
volume of securitization and mortgage rates. However, the causation
is reversed from the standard rendering. In our model, a decline in
the mortgage rate causes increased securitization rather than the
other way around.
Keywords: Mortgages, mortgage securitization, credit scoring, mortgage rates
Full paper (137 KB PDF)
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Last update: February 14, 2001
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