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

Andrea Heuson, Wayne Passmore, Roger Sparks

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

This article 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.

Original languageEnglish (US)
Pages (from-to)337-363
Number of pages27
JournalJournal of Real Estate Finance and Economics
Volume23
Issue number3
DOIs
StatePublished - Dec 1 2001

Keywords

  • Credit availability
  • Credit scoring
  • Mortgage rate determination
  • Mortgage securitization

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Urban Studies

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