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Securitization and Rate Setting in the UK Mortgage Market *
Author(s) -
PAIS AMELIA
Publication year - 2008
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2008.00074.x
Subject(s) - securitization , interest rate , business , secondary mortgage market , monetary economics , financial system , capital market , economics , actuarial science , finance , mortgage insurance , casualty insurance , insurance policy
The objective of this paper is to investigate the way mortgage rates are set by lenders funded by deposits versus lenders funded in the capital markets by securitization. The paper tests the response of both types of lenders to changes in market rates using an Error Correction Model. The results obtained here show that the rates of lenders opting for securitization adjust slightly faster to changes in market rates, lowering borrower costs at times of falling interest rates; the difference in mark‐up over the market rate is also lower on average for these lenders although it is not statistically significant. On the contrary, depository institutions seem to engage in more interest rate smoothing, confirming one of the distinctive characteristics of traditional bank lending, the provision of risk‐sharing opportunities to borrowers.