Secondary Mortgage Market Research Articles

Did the Federal Reserve’s MBS Purchase Program Lower Mortgage Rates?

We employ empirical pricing models for mortgage-backed security (MBS) yields and for mortgage rates to measure deviations from normal market functioning in order to assess how the Federal Reserve MBS purchase program--a 16 month program announced on November 25, 2008 and completed on March 31, 2010--affected risk premiums that were embedded in mortgage and swap markets. Our pricing models suggest that the announcement of the program, which signaled strong and credible government backing for mortgage markets in particular and for the financial system more generally, reduced mortgage rates by about 85 basis points between November 25 and December 31, 2008, even though no MBS had (yet) been purchased by the Federal Reserve ; Once the Federal Reserve's MBS program started purchasing MBS, we estimate that the abnormal risk premiums embedded mortgage rates decreased roughly 50 basis points. However, observed mortgage rates declined only slightly because of generally rising interest rates. ; After May 27, 2009 fairly normal pricing conditions existed in U.S. primary and secondary mortgage markets; that is, the relationship between mortgage rates and its determinants was similar to that observed prior to the financial crisis. After the end of the Federal Reserve's MBS purchase program on March 31, 2010, mortgage rates and interest rates more generally were significantly less than they had been at the beginning. ; In sum, we estimate that the Federal Reserve's MBS purchase program removed substantial risk premiums embedded in mortgage rates because of the financial crisis. The Federal Reserve also re-established a robust secondary mortgage market, which meant that the marginal mortgage borrower was funded by the capital markets and not directly by the banks during the financial crisis-had bank funding been the only source of funds, primary mortgage rates would have been much higher. ; Lastly, many observers have attributed part of the Federal Reserve's effect from purchasing MBS to portfolio rebalancing. We find that if portfolio rebalancing had a substantial effect, it may have had its greatest importance only after the Federal Reserve's purchases ended, but while the Federal Reserve held a substantial portion of the stock of outstanding MBS.

Licensing Considerations in the New Secondary Residential Mortgage Market Frontier

Licensing Considerations in the New Secondary Residential Mortgage Market Frontier

Subprime mortgage default

This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime crisis. Given the estimated model, contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination. It is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance, a change which can be first detected in late 2004. On the other hand, the evidence also indicates that the secondary mortgage market became aware of this change at about this same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.

Mortgage Modification Meltdown: When Will Congress Take the Plight of Homeowners Seriously?

Since 2007, over two million families have lost their homes, and studies show that many more millions will lose theirs over the next several years. Even though the crisis has impacted all people across the United States, Hispanic and African-American communities have been considered the “ground zero” of this economic catastrophe, and this problem is coupled with the fact that minorities have generally suffered the greatest job losses as well. Although Congress and the mortgage servicing industry have attempted loan modification reform in the past, many of these efforts have not produced effective results. As part of a multi-pronged approach to combat the foreclosure crisis, the Homes Act adds incentives and extra pressures to encourage mortgage servicers to modify loans, instead of foreclosing on residential property. These provisions involve protecting servicers from TILA liability if they enter into “qualified loss mitigation plans” with homeowners, creating additional TILA disclosure requirements to increase transparency in the secondary mortgage market, and offering payments to servicers if they refinance mortgages in cooperation with the Department of Housing and Urban Development (hereinafter “HUD”) through the Hope for Homeowners program. A judicial approach to the foreclosure crisis is also important, but in passing this bill Congress rejected Senator Dick Durbin’s proposed amendments to the Bankruptcy Code that would have allowed U.S. Bankruptcy Judges to modify residential mortgages in the face of impending foreclosure. It is critical for the federal government and mortgage industry to follow through with this legislation that increases consumer ability to modify home mortgages, in addition to promoting potential judicial mortgage modification authority, in order to stabilize the U.S. housing market. Other strategies for mitigating the foreclosure crisis include promoting the spread of financial information, making significant improvements to the standard mortgage contract, and developing new financial consumer products to reduce the strain upon homeowners who face periods of financial distress. This Note starts by addressing the background of the U.S. home mortgage crisis that began in the latter half of 2007, and continues as of the date of this publication. There follows an examination of a few of the major types of mortgages that exist today, some important past legislation regarding home mortgage lending, and previous failed attempts at reform. Next, this Note analyzes the Homes Act to see if it offers a better source of reform, and compares it to a piece of parallel state legislation from New Jersey. This Note concludes by recommending other avenues for home mortgage modification and reform, including the potential for judicial modification via bankruptcy court, and modern pro-consumer financial products that might alleviate the distressful situation affecting millions of Americans today.

Agency Preemption and the Subprime Crisis

A few years before the subprime mortgage market collapsed, several states began to notice a dramatic increase in the rate of foreclosures among many of their most vulnerable citizens. Attributing the increase to predatory lending, these states enacted a new type of fair lending law that, for the first time, imposed liability not only on the originators of abusive subprime loans, but also on investors in the secondary mortgage market that helped to finance those loans. National banks, which were some of the biggest players in the secondary market, went to their federal regulator, the Office of the Comptroller of the Currency (OCC), and asked the agency to preempt the state laws. The OCC agreed, and in January 2004 declared the laws preempted.This paper examines that preemption determination and uses it as a case study to explore how best to address the phenomenon of agency preemption. The consensus view is that permitting agencies with narrow regulatory agendas to preempt state laws could unjustifiably undermine state autonomy. In response, commentators have repeatedly called on the courts to help check agency preemption. But courts are unlikely to prove up to the task: as a general matter, they lack the institutional competence to counter an agency’s expert and informed determination that certain state laws pose a substantial obstacle to federal regulatory goals. It is therefore unsurprising that the courts have readily deferred to the OCC’s highly contestable preemption determination. Effectively curbing agencies’ appetite to preempt will instead require the development of alternative approaches, which could include deputizing independent intra-agency authorities to vet preemption determinations, constituting a new body to institutionalize a greater role for state officials in regulatory decision-making, or crafting new procedural tools to guide courts’ review of agency preemption determinations.

Did the Federal Reserve's MBS Purchase Program Lower Mortgage Rates?

We employ empirical pricing models for mortgage-backed security (MBS) yields and for mortgage rates to measure deviations from normal market functioning in order to assess how the Federal Reserve MBS purchase program--a 16 month program announced on November 25, 2008 and completed on March 31, 2010--affected risk premiums that were embedded in mortgage and swap markets. Our pricing models suggest that the announcement of the program, which signaled strong and credible government backing for mortgage markets in particular and for the financial system more generally, reduced mortgage rates by about 85 basis points between November 25 and December 31, 2008, even though no MBS had (yet) been purchased by the Federal Reserve. Once the Federal Reserve's MBS program started purchasing MBS, we estimate that the abnormal risk premiums embedded mortgage rates decreased roughly 50 basis points. However, observed mortgage rates declined only slightly because of generally rising interest rates. After May 27, 2009, fairly normal pricing conditions existed in U.S. primary and secondary mortgage markets that is, the relationship between mortgage rates and its determinants was similar to that observed prior to the financial crisis. After the end of the Federal Reserve's MBS purchase program on March 31, 2010, mortgage rates and interest rates more generally were significantly less than they had been at the beginning. In sum, we estimate that the Federal Reserve's MBS purchase program removed substantial risk premiums embedded in mortgage rates because of the financial crisis. The Federal Reserve also re-established a robust secondary mortgage market, which meant that the marginal mortgage borrower was funded by the capital markets and not directly by the banks during the financial crisis-had bank funding been the only source of funds, primary mortgage rates would have been much higher. Lastly, many observers have attributed part of the Federal Reserve's effect from purchasing MBS to portfolio rebalancing. We find that if p

Asymmetric Information in the Subprime Mortgage Market

Because of impersonal securitization in the secondary market, the ultimate investors in a mortgage have only a limited amount of information about the borrower’s characteristics. This creates an asymmetric information problem because of hidden knowledge on the part of the primary lenders, who naturally have much better access to this information. This is aggravated by the free rider problem when there are multiple investors. We discuss to what extent the secondary market then seeks to sort the loans to ameliorate this problem and what role reputations play. More importantly, however, the actions of the primary lender in terms of which kinds of loans they choose to approve are partly hidden, and this typical principal-agent situation importantly aggravates the incentive problem. To judge the nature and magnitude of this moral hazard dilemma, we use data to compare how well investors in the secondary mortgage market can predict default given the information they typically have access to as compared to the ability of primary lenders to similarly predict default given the larger set of information they typically will have access to. Finally, the implications of these results are indicated, particularly in light of the recent mortgage crisis.

Global Financial Crisis and Mortgage Finance and Valuation Problems: An Assessment of the U.S. and Turkish Mortgage Systems

Abstract After emerging from the U.S. real estate and financial markets, financial crisis has gradually become global. Due to both primary and secondary mortgage market problems in the U.S. are accepted as the essential reasons of the current crisis, it is believed that financial markets and real estate sector need a new design. In this paper, the author condiders the importance of real estate valuation in the origination of crisis and whether Turkish mortgage market has similar problems with the U.S. It is argued in the paper that real estate valuation is one of the most critical reasons of crisis. To implement effectively of the real estate valuation, market culture and knowledge are of great importance expected to developed by market players, NGOs, SROs, regulators, academicians etc. The author suggests that brand new establishment of The Association of Appraisal Experts of Turkey is important for the development of sound real estate valuation. But the next and bigger step should be a new property valuation legislation which should cover all relevant (and possible) real estate valuation rules and practices of the Turkish law/commercial life.

Adverse Selection in Mortgage Securization

We investigate determinants of lenders’ choice to securitize loans, focusing on the quality of loans they sell to investors in the secondary mortgage market relative to ones they retain on their balance-sheets. Using several large datasets of mortgage loans originated between 2004 and 2007, we find that the impact of securitization on lender's choice differs significantly across markets. In the prime market, banks generally sold low-default-risk loans into the secondary market while retaining higher-default-risk loans in their portfolios. In contrast, these lenders retain loans with lower prepayment risk relative to loans they sold. We rationalize these findings by arguing that GSEs impose control on default-risk of loans originated by lenders since they offer guarantees only against default risk to investors. In contrast, the subprime market does not exhibit any clear pattern. Finally, securitization strategy of lenders securitizing in the prime market changed dramatically in 2007 as the crisis set in with most unwilling to retain higher-default-risk loans in return for lower prepayment risk.

Do the GSEs expand the supply of mortgage credit? New evidence of crowd out in the secondary mortgage market

The dramatic government takeover of Fannie Mae and Freddie Mac in September, 2008 was motivated in part by a desire to ensure a continued flow of credit to the mortgage market. This study examines a closely related issue: the extent to which GSE activity crowds out mortgage purchases by private secondary market intermediaries. Evidence of substantial crowd out suggests that government support for the GSEs may be less warranted, whereas the absence of crowd out implies that GSE loan purchases enhance liquidity. Using 1994–2008 HMDA data for conventional, conforming sized loans, three distinct periods with regard to GSE crowd out are apparent. From 1994 to 2003, the share of loans sold to the secondary market increased from 60 to over 90%, private sector and GSE market shares of loan purchases were roughly similar for most market segments, and IV estimates indicate relatively little GSE crowd out of private secondary market purchases. From 2004 to 2006, private loan purchases boomed and dominated those of the GSEs, while IV estimates indicate crowd out jumped to 50% at the peak of the boom. This is especially true in the market for home purchase as opposed to refinance loans. With the crash in housing and mortgage markets in 2007, private sector intermediaries pulled back, the GSEs regained market share, and evidence of GSE crowd out disappeared in both the home purchase loan and refinance markets. These patterns suggest that the degree of GSE crowd out varies with market conditions and that the federal takeover of Fannie Mae and Freddie Mac likely served to enhance liquidity to the mortgage market during the 2007–2009 financial crisis.

KOREA N REAL ESTATE MARKET AND BOOSTING POLICIES: FOCUSING ON MORTGAGE LOANS

The Korean real estate market is currently slowing down due to the global economic crisis, which resulted from subprime mortgage crisis in the United States. In response, the Korean government has adopted various policies in an attempt to deregulate real estate speculation. For example, the Loan to value ratio (LTV) has been increased in order to stimulate housing supply, demand, and housing transactions. However, these policies could potentially result in a mortgage crisis due to an increase in over‐amplified and high‐risk derivatives in Korea's secondary mortgage market. Consequently, the housing market could fall into such deep confusion that it will be even more difficult to perform empirically based housing market forecasting. Therefore, a comprehensive and systematic method is required to analyze the real estate financial market and the causal relationships between market influence factors. With an integrated perspective and an application of a system dynamics methodology, this paper proposes Korean Real Estate and Mortgage Market dynamics models based on the fundamental principles and causal loops of housing markets, which are determined by the economic activities of consumers, financial agencies, and real estate financing investors. The potential effects of the Korean government's deregulation policies are also considered by focusing on the main factor of these policies: the mortgage loan. Santruka Korejos nekilnojamojo turto rinka šiuo metu išgyvena nuosmuki del pasaulines ekonomines krizes, kuri kilo del JAV būsto paskolu rinkos krizes. Reaguodama i tai, Korejos Vyriausybe emesi ivairiu politikos priemoniu, siekdama užkirsti kelia nekilnojamojo turto spekuliacijai. Pavyzdžiui, buvo padidintas paskolos ir vertes santykis (angl. LTV), siekiant skatinti būsto pasiūla, paklausa ir būsto sandorius. Tačiau šios politicos priemones galetu lemti būsto krize del per daug išplestos ir dideles rizikos išvestinemis priemonemis, didinant Korejos antrinio būsto rinka. Tačiau būsto rinka gali atsidurti tokioje painioje situacijoje, kad bus dar sunkiau atlikti empiriškai pagrista būsto rinkos prognoze. Todel reikalingas išsamus ir sisteminis metodas, padedantis analizuoti finansine nekilnojamojo turto rinka ir priežastini ryši tarp rinka veikiančiu veiksniu. Be integruotos perspektyvos ir dinamiško sistemingu metodu taikymo, šiame straipsnyje siūlomi Korejos nekilnojamojo turto ir paskolu rinkos dinamikos modeliai, pagristi pagrindiniais principais ir pagrindinemis nesekmemis būsto rinkose, kurios nustatomos pagal ekonomine vartotoju veikla, finansuojančias institucijas, ir nekilnojamaji turta finansuojančiais investuotojais. Galimas Korejos Vyriausybes pertvarkymo politicos rezultatas - sutelkti demesi i svarbiausia šiu politikos krypčiu rodikli - būsto paskolas.

Rethinking Federal Housing Policy

Problem: Federal housing policy is made up of disparate programs that a) promote homeownership; b) assist low-income renters’ access to good-quality, affordable housing; and c) enforce the Fair Housing Act by combating residential discrimination. Some of these programs are ineffective, others have drifted from their initial purpose, and none are well coordinated with each other. Purpose: We examine the trends, summarize the research evaluating the performance of these programs, and suggest steps to make them more effective and connected to each other. Methods: We review the history of housing policy and programs and empirical studies of program effectiveness to identify a set of best principles and practices. Results and conclusions: In the area of homeownership, we recommend that the federal government help the nation's housing markets quickly find bottom, privatize aspects of the secondary mortgage market, and move to eliminate the mortgage interest deduction and replace it with a 10-year homeownership tax credit. In the area of subsidized rental housing, we recommend that the current system of vouchers be regionalized (or alternatively, converted into an entitlement program that works through the income tax system), sell public housing projects to nonprofit sponsors where appropriate, and eliminate some of the rigidities in the Low Income Housing Tax Credit program. In the area of fair housing, we recommend that communities receiving Community Development Block Grants be required to implement inclusionary zoning programs. Takeaway for practice: In general, we recommend that federal policy build on proven programs; focus on providing affordable housing for low- and moderate-income families and provide the funding to meet that goal; avoid grandiose and ideological ambitions and programs; use fewer and more coordinated programs; offer tax credits, not tax deductions; and promote residential filtering. Research support: Partial funding support was provided by the National Science Foundation.

The Government Sponsored Enterprises: Recovering from a Failed Experiment

The Federal takeover of Fannie Mae and Freddie Mac last September spells the end of an experiment in the public-private hybrid known as the Government Sponsored Enterprises (GSE). This paper documents the subsidies provided to the enterprises and the public and private benefits generated. The public benefits included somewhat reduced interest rates for borrowers receiving conforming mortgages. The public subsidies allowed the firms to use the implicit guarantee of their debts to borrow at attractive rates to invest in mortgage portfolios and also to provide a fee-based service in issuing mortgage-backed securities.We suggest reforming the functions provided by the GSEs. In particular we advocate spinning off the portfolio investment activities into a fully private firm. We also advocate conducting the services necessary to issue mortgage-backed securities within a government-owned corporation responsible directly to federal authorities. These reforms would curb excess risk taking in the secondary mortgage market and would provide the liquidity necessary to support the primary mortgage market.

Subprime Mortgage Default

Using data on privately-securitized subprime ARMs (adjustable rate mortgages) originated between 1997 and 2008 and observed between 2000 and 2008, and so covering the start of the subprime crisis, this paper constructs a reduced-form credit risk model of default, and then uses contractual properties of the loans to infer the market’s price of default risk at various times of origination. Treating the hazard of default as a process rather than a single realization for each period of origination permits the probability of default to be calculated without knowledge of the still unfolding hazard realization, allowing one to adopt the same position as lenders, who also cannot foretell the future. It is empirically determined that a change in the inherent nature of borrowers caused some deterioration in their default behavior, a change which we can first detect by late 2004, but of which, evidence indicates, the secondary mortgage market became aware at about the same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.

The Fall and Rise of Fannie and Freddie: Securitization after the Meltdown

This article analyzes the rise and fall of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Owners Loan Corporation (“Freddie Mac”). It explains why they should be revived, and suggests regulatory measures under which they can go forward on a sound basis.During the New Deal, the Administration and Congress perceived a need for a secondary market for mortgages, which had existed during the 1920s but collapsed with the 1929 crash. The market enabled mortgage originators to sell their mortgages, sometimes packaged into mortgage-backed securities, providing them with cash to lend to new borrowers. Congress attempted to fill this niche in housing finance by creating Fannie Mae in 1938.In 1966 Fannie Mae reinvented mortgage-backed securities to help finance the Vietnam War. These mortgage-backed certificates were so successful that Fannie Mae was divided in 1968 into the Government National Mortgage Association (“Ginnie Mae”), which remained a government agency, and the continuing Fannie Mae, which was privatized. In 1970, Freddie Mac was created, and also engaged in buying mortgages and packaging them into mortgage-backed securities.Both enterprises lacked meaningful regulation. They were not required to register with the SEC until after accounting scandals in 2002 showed that they needed oversight. They lacked even internal supervision until the Office of Federal Housing Enterprise Oversight (“OFHEO”) was established in 1992-but OFHEO was understaffed and weak. Outside auditors also failed to draw attention to major accounting problems.The lack of regulation was compounded by political pressures on both organizations to lower their standards to make housing more accessible. Originally, they would accept mortgages only with at least 20% down payments, but this fell to 3% by 2000. After the 2000, standards fell further as the associations began to purchase “subprime” loans with little prospect of repayment. When these loans began to default, both were unable to continue business as usual, and were forced into conservatorship.Conservatorship raises the question of whether Fannie and Freddie are necessary, or should be liquidated. This article argues that they are necessary. Experience has shown that purely private secondary mortgage markets are more sensitive than other securities markets to economic downturns-just when they are most needed to keep mortgage originating institutions lending. Moreover, the sheer volume of mortgages securitized by Fannie and Freddie-more than half the market after 2000-indicates that private securitization alone is insufficient.This leaves the question of how Fannie and Freddie should be regulated to keep them from relapsing after they leave conservatorship. The answer is effective regulation. This should have several key elements: (1) It must take into account the special characteristics of mortgage-backed securities; (2) it must provide minimum standards for capitalization of Fannie and Freddie, the characteristics of the mortgages they are permitted to buy; (3) there must be an outside financial regulator such as the Federal Reserve to enforce the regulatory rules; and there must be transparency both at the institutional level and in connection with the mortgage-backed securities to be sold, that can best be provided by the SEC.

Secondary mortgage market (SMM): Is it right for financing housing in Ghana?

The formal housing finance system in Ghana is inadequate and highly underdeveloped. The formal finance institutions have provided very little mortgages particularly to the low and middle-income households. However, the fast growing capital market of Ghana offers an opportunity for sustainable housing finance in the country. This paper explores the possibility of addressing the housing finance problems in the country through the use of Secondary Mortgage Market (SMM). It does so by surveying the literature on SMM. It also examines the housing finance system in Ghana. It finds out that an SMM in principle will enable Ghana to overcome some of the constraints on the mortgage market and attract housing funds. But in practice it is not the best way of solving the housing finance problems in the country since the fundamentals are not right for a successful implementation of SMM. It notes that the scale of mortgage origination in the primary market is limited; the adjudication process is slow; collateralization is inadequate; and the land title regime is poor. It suggests that it is appropriate for Ghana to concentrate on solving these basic problems before any attempt at implementing a secondary mortgage market in the country.

The Evolving Paradigm of Laws on Lead-Based Paint: From Code Violation to Environmental Hazard

This article explores the significance of an ongoing paradigm shift for the legal approach to lead-based paint in privately owned residential properties from a housing paradigm to an environmental paradigm. The housing paradigm, still prevalent in most state and local law, has resulted in general silence on the lead-based paint issue in the community and, consequently, to little actual abatement of the hazard. The shift to an environmental paradigm for addressing hazards of lead-based paint in private housing is reflected in some state and federal legislation. Because of its focus on the discovery of health hazards, on the handling of hazardous material, and on long-term planning, an environmental lens offers a paradigm more likely to lead to actual abatement of lead hazards. This article first explores the existing framework of laws on lead hazards. Lead poisoning seriously affects the health of children and pregnant women and disproportionately affects ethnic minorities. Federal legislation separate from the major environmental laws addresses the issue of lead-based paint in federally owned or subsidized housing, but that law has not been extended to privately owned housing. Participants in the housing system - owners, rental property managers, lenders - have resisted accepting responsibility for reduction of the environmental hazard of lead-based paint in part due to the expense of abatement and the uncertainty of safe abatement techniques and standards. State and local health, housing, criminal, and property transfer laws have been generally ineffective in bringing about change in the housing stock and in protecting the health of occupants from poisoning. Examples of stalemates that arise when seeking legal relief from lead hazards are drawn from Maryland law. The article next distinguishes the housing paradigm, under which tenant - landlord disputes have provided the context for the development of the law, from an emerging environmental paradigm, which calls for discovery and response to hazards when occupants, workers, or the community around the dwelling may be affected. The article explores elements of this paradigm in Massachusetts law, in 1992 federal legislation, and in voluntary private market response of requiring an environmental assessment of residential property by the Federal National Mortgage Association (FNMA), a secondary mortgage market entity. By requiring disclosure of this hazard in housing to potential buyers and tenants, the federal government may force the residential real estate market to take the hazard into account in setting the rental amount and sales price. Market aversion to risks of liability and to loss of investment is likely to bring about voluntary compliance with hazard abatement laws. The interdisciplinary approach endorsed in the 1992 legislation is particularly appropriate for an area in which public knowledge and technology are changing. The article concludes with recommendations about how state and federal law on lead hazards might further develop as the paradigm takes hold. At the federal level, the government should set uniform standards for lead dust levels and safe abatement, and should provide a funding mechanism for hazard abatement. At the state level, the law should require both testing and disclosure before the sale of real property, testing and hazard abatement before rental, and provisions for relocation of tenants at landlord expense during hazard abatement. Local registration laws for rental property could trigger the testing process. In addition, states should establish and enforce sanctions for knowing endangerment of persons by lead hazards.

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

The Role of the Securitization Process in the Expansion of Subprime Credit

We analyze the structure and attributes of subprime mortgage-backed securitization deals originated between 1997 and 2007. Our data set allows us to link loan-level data for over 6.7 million subprime loans to the securitization deals into which the loans were sold. We show that the securitization process, including the assignment of credit ratings, provided incentives for securitizing banks to purchase loans of poor credit quality in areas with high rates of house price appreciation. Increased demand from the secondary mortgage market for these types of loans appears to have facilitated easier credit in the primary mortgage market. To test this hypothesis, we identify an event which represents an external shock to the relative demand for subprime mortgages in the secondary market. We show that following the SEC's adoption of rules reducing capital requirements on certain broker dealers in 2004, five large deal underwriters disproportionately increased their purchasing activity relative to competing underwriters in ZIP codes with the highest realized rates of house price appreciation but lower average credit quality. We show that these loans subsequently defaulted at marginally higher rates. Finally, using the event as an instrument, we demonstrate a causal link between the demand for mortgages in the secondary mortgage market and the supply of subprime credit in the primary mortgage market.

The Integration of Mortgage and Capital Markets in Emerging Economies—Evidence from South Africa

Integration of the capital and mortgage markets is an important step in moving emerging countries toward full economic development. With data from South Africa, this research examines the incremental contribution of deregulation and the secondary mortgage market to the integration between the mortgage and capital markets. With deregulation occurring in the early 1980s, the results indicate that the two markets were fully integrated prior to 2001 when a secondary mortgage market was introduced in South Africa. However, we also find that the introduction of the secondary mortgage market has significantly reduced constraints on the supply of mortgage credit.