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The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis
Author(s) -
Kolari James W.,
Fraser Donald R.,
Anari Ali
Publication year - 1998
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00761
Subject(s) - securitization , prepayment of loan , mortgage underwriting , secondary mortgage market , cointegration , commercial mortgage backed security , yield (engineering) , mortgage insurance , economics , financial system , monetary economics , business , financial economics , finance , econometrics , materials science , casualty insurance , metallurgy , insurance policy
Securitization of the residential mortgage market has completely transformed the process of financing home loans in the U.S. over the last two decades. We examine the effects of securitization on yield spreads in the primary mortgage market. Cointegration techniques are employed to test the relationship between the increasing volume of mortgage securities over time and the yield spread on mortgage loan rates. We find that a 10% increase in the level of mortgage securitization as a proportion of total mortgage originations decreases yield spreads on home loans by as much as 20 basis points. Other results indicate that, while prepayment speed has a significant effect on mortgage yield spreads, default risk does not. We conclude that securitization of the residential mortgage market plays an important role in decreasing the cost of home loans.