Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability

Posted: 10 May 2002

See all articles by Andrea J. Heuson

Andrea J. Heuson

University of Miami - Department of Finance

S. Wayne Passmore

Board of Governors of the Federal Reserve System

Roger Sparks

Mills College

Multiple version iconThere are 2 versions of this paper

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 surprisingly, we find very plausible conditions under which securitization fails to lower the mortgage rate. Second, 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.

Keywords: mortgage securitization, secondary mortgage markets

Suggested Citation

Heuson, Andrea J. and Passmore, Stuart Wayne and Sparks, Roger W., Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability. Available at SSRN: https://ssrn.com/abstract=302132

Andrea J. Heuson

University of Miami - Department of Finance ( email )

P.O. Box 248094
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United States
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Stuart Wayne Passmore (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Roger W. Sparks

Mills College ( email )

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United States
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510-430-2304 (Fax)

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