The impact of the agencies on conventional fixed-rate mortgage yields

✍ Scribed by Patric H. Hendershott; James D. Shilling

• Publisher: Springer US
• Year: 1989
• Tongue: English
• Weight: 796 KB
• Volume: 2
• Category: Article
• ISSN: 0895-5638
• DOI: 10.1007/bf00159793

✦ Synopsis

Between the early 1980s and 1986, the share of new conforming (under $153,000 in 1986) conventional fixed-rate mortgages (FRMs) that went into Fannie Mae and Freddie Mac mortgage pools increased from under 5% to over 50%. The impact of these agencies moving from negligible participants to dominant players in this market is investigated in this study by an analysis of yields on 4,900 loans closed in California during May-June 1978 and 1,800 closed in May-June 1986.

Our analysis indicates that the loan rate depends on the loan-to-value ratio, the loan size, and, in 1986, whether the loan is far above, just above, or below the conforming loan limit. Rates on loans far above the conforming loan limit exceed those on otherwise comparable loans below the limit by 30 basis points and those on loans destined to exceed the limit within a year by 15 basis points. That is, the expanded agency securitization of conforming FRMs has significantly lowered the rates on both conforming loans and loans somewhat above the conforming limit (27% of nonconforming loans in 1986) relative to what they would otherwise have been.