The rising gap between primary and secondary mortgage rates

RePEc Short ID: pfu92
ORCID iD: 0000-0002-4256-5005

Fuster, Andreas; Goodman, Laurie; Lucca, David O.; Madar, Laurel; Molloy, Linsey; Willen, Paul S.

Journal Article

The rising gap between primary and secondary mortgage rates

Abstract: While mortgage rates reached historic lows during 2012, the spread between primary and secondary rates rose to very high levels. This trend reflected a number of factors that potentially affected mortgage originator costs and profits and restrained the pass-through from lower secondary rates to borrowers? funding costs. This article describes the mortgage origination and securitization process and the way in which originator profits are determined. The authors calculate a series of originator profits and unmeasured costs (OPUCs) for the period 1994 to 2012, and show that these OPUCs increased significantly between 2008 and 2012. They also evaluate the extent to which some commonly cited factors, such as changes in loan putback risk, mortgage servicing rights values, and pipeline hedging costs contributed to the rise in OPUCs. Although some costs of mortgage origination may have risen in recent years, a large component of the rise in OPUCs remains unexplained, pointing to increased profitability of originations. The authors conclude by discussing possible drivers of the rise in profitability, such as capacity constraints and originators? pricing power resulting from borrowers? switching costs.

Keywords: banking; mortgages;

JEL Classification: E44; G21;