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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Credit scoring and mortgage securitization: do they lower mortgage rates?
Andrea Heuson
Wayne Passmore
Roger Sparks
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.


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Andrea Heuson & Wayne Passmore & Roger Sparks, Credit scoring and mortgage securitization: do they lower mortgage rates?, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2000-44, 2000.
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Keywords: Mortgage loans ; Interest rates ; Mortgages ; Asset-backed financing
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