Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability |
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Authors: | Heuson Andrea Passmore Wayne Sparks Roger |
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Affiliation: | (1) Department of Finance, University of Miami, Box 248094, Coral Gables, FL, 33134;(2) Federal Reserve Board, Mail Stop 93, Washington, DC, 20551;(3) Department of Economics, Mills College, 5000 MacArthur Blvd., Oakland, CA, 94613-1399 |
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Abstract: | This article 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 surprisingly, we find very plausible conditions under which securitization fails to lower the mortgage rate. Second, 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. |
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Keywords: | mortgage securitization credit scoring mortgage rate determination credit availability |
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