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Federal Reserve Bank of New York
Staff Reports
The mortgage rate conundrum
Alejandro Justiniano
Giorgio E. Primiceri
Andrea Tambalotti

We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve’s expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large data set with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower, and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid-2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.

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Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, The mortgage rate conundrum, Federal Reserve Bank of New York, Staff Reports 829, 01 Nov 2017.
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Keywords: credit boom; housing boom; securitization; private label; subprime
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