Residential Mortgage Price Risk and Market Returns of Publicly Listed Mortgage Originators in Kenya

Mwikamba Tumaini Mutugi ,Willy Muturi ,Oluoch Oluoch

doi:10.7176/rjfa/12-10-10

Abstract

Interest rates play a critical role for mortgage originating firms. Interest rate volatility significant influences mortgage uptake among other factors. Empirical literature focus on the relationship between interest rate volatility, and financial performance, and stock return. However, literature is inconclusive and inconsistent with reference to the relationship between residential mortgage price risk and market returns for mortgage originating firms in Kenya. Consequently, the overall objective of this study was to ascertain the effect of residential mortgage price risk on market returns of publicly listed mortgage originators in Kenya. The Loanable Funds Theory of Interest and Efficient Market Hypothesis model were utilized as the theoretical foundation of the study. The study adopted a descriptive form of research design. A census was conducted on the target population - 11 publicly listed mortgage originators in Kenya. The study sourced its secondary data from the following sources: Central Bank of Kenya bank supervision reports, and the Nairobi Securities Exchange. Data was collected for the period between 2009 and 2019. The statistical software STATA was utilized to analyze data collected. A panel data regression model was used to draw inference from the data collected. The mean and standard deviation findings for residential mortgage interest rate as 0.2193 and 0.11195 respectively. The findings reveal a significant negative effect of residential mortgage price risk on market returns of publicly listed mortgage originators in Kenya. It is recommended that mortgage originators use derivative instruments and competitive interest rates to hedge against fluctuations in interest rates. Keywords: Price Risk, Interest Rates, Mortgage, Mortgage Originators, Residential Mortgage. DOI: 10.7176/RJFA/12-10-10 Publication date: May 31 st 2021

Highlights

Interest rate is a proportion of principal charged by lender for money lent (Shiller, 2012; Agenor & Montiel, 2015)
This suggests that 45.29% of variations of market returns for publicly listed mortgage originators is influence by residential mortgage price risk
With reference to the mortgage industry, price risk is the adverse effect in the value of the mortgage commitment as a consequence of changes in mortgage rates (Shiller, 2012)

Summary

Introduction

Interest rate is a proportion of principal charged by lender for money lent (Shiller, 2012; Agenor & Montiel, 2015). Interest rate fluctuations have a direct influence on borrower loan cost. Interest rates are a source of income to the lender. Interest rates have a direct influence on savings and investment (Agenor & Montiel, 2015). It is for this reason that Central Banks – regulators – manage interest rates through various monetary policy instruments to attain idyllic economic growth and development. Revenues for financial institutions can be classified into interest income and non-interest income (Molyneux & Vallelado, 2008). According to Molyneux and Vallelado (2008), interest income is one of the major source of revenues for lending financial institutions

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Conclusion