Pricing fixed rate mortgages: Some empirical evidence |
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| Authors: | C F Sirmans John D Benjamin |
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| Institution: | (1) Department of Finance, College of Business Administration, Louisiana State University, 70803 Baton Rouge, LA, USA;(2) Department of Finance and Real Estate, College of Business Administration, The American University, 20016 Washington, D.C., USA |
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| Abstract: | We develop a simple model based on the hypothesis that yields in the secondary mortgage market provide a basis for pricing new loans in the primary mortgage market. The model is then expanded to include potential interest rate variations due to lender characteristics and whether the loans meet securitization requirements. The empirical results, using a two-year sample of single-family mortgage rates, conform to the predictions of the model. In particular, we find that the interest rates on FRMs in the primary market move in a one-to-one relationship with secondary market yields. We also find significantly lower interest rates on these mortgages that can be sold in the secondary market versus those that cannot, thus indicating the value of the ability to securitize mortgages. |
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