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The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis |
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| Authors: | Brent W Ambrose Michael LaCour-Little Anthony B Sanders |
| Institution: | Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506-0053 or .;Wells Fargo Home Mortgage and Washington University, St. Louis, Clayton, MO 63105 or .;Finance Department, The Ohio State University, Columbus, OH 43210 or . |
| Abstract: | The magnitude of the effect of government-sponsored enterprise purchases on primary mortgage market rates has been a difficult research question with differing data and competing methodologies producing varying results. Here we present a new approach using loan level data and controlling for credit risk differentials between conforming and nonconforming loans. Our method also addresses econometric problems of endogeneity and sample selection bias. We find that conforming loans have yield spreads about 5.5% lower compared to other loans on a risk-adjusted basis. This is lower than previous estimates appearing in the literature. |
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