Mortgage Delivery to the Secondary Market when Interest Rates are Falling

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

A borrower whose loan is committed to the securitization process has the ability and incentive to switch lenders if market rates drop during the loan origination period, which creates significant exposure for primary lenders. A simple secondary market contract innovation we call a mortgage rate drop guarantee (MRDG) could shift this risk to the securitizers who represent portfolio investors. Our simulation results indicate this shifting would have improved the risk/return distribution faced by originators without damaging the risk/return position of securitizers during our 1977-2010 sample period. Assuming conservative loan lives and origination periods, and competitive lending markets, the risk reduction features of MRDGs could also have generated significant interest savings for borrowers.

Original languageEnglish (US)
Pages (from-to)219-246
Number of pages28
JournalFinancial Review
Volume47
Issue number2
DOIs
StatePublished - May 1 2012

Fingerprint

Interest rates
Mortgages
Secondary market
Loans
Risk-return
Mortgage rates
Innovation
Incentives
Investors
Securitization
Guarantee
Lending
Risk reduction
Return distribution
Simulation
Savings

Keywords

  • Originate to deliver
  • Secondary mortgage markets
  • Securitization

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Mortgage Delivery to the Secondary Market when Interest Rates are Falling. / Heuson, Andrea; Su, Tie.

In: Financial Review, Vol. 47, No. 2, 01.05.2012, p. 219-246.

Research output: Contribution to journalArticle

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