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• W3122291942 abstract "* While the mortgage rate is a closely tracked series, it is an imperfect measure of the pass-through between secondary-market valuations and primary-market borrowing costs. * This study tracks cash flows during and after the mortgage origination and securitization process to determine how many dollars (per $100 loan) are absorbed by originators, either to cover costs or as originator profits. * The authors calculate a series of originator profits and unmeasured costs (OPUCs) for the period 1994-2012, and show that these OPUCs increased significantly between 2008 and 2012. * Although some mortgage origination costs may have risen, a large component of the rise in OPUCs remains unexplained by cost increases alone, pointing to increased profitability of originators. 1. INTRODUCTION The vast majority of mortgage loans in the United States are securitized in the form of agency mortgage-backed securities (MBS). Principal and interest payments on these securities are passed through to investors and are guaranteed by the government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac or by the government organization Ginnie Mae. (1) Thus, investors in these securities are not subject to loan-specific credit risk; they face only interest rate and prepayment risk--the risk that borrowers may refinance the loan when rates are low. (2) In the primary mortgage market, lenders make loans to borrowers at a certain interest rate, whereas in the secondary market, lenders securitize these loans into MBS and sell them to investors. When thinking about the relationship between these two markets, policymakers and market commentators usually pay close attention to the primary-secondary spread This is calculated as the difference between an average mortgage interest rate (usually coming from the Freddie Mac Primary Mortgage Market Survey) and a representative yield on newly issued agency MBS--the current-coupon rate. [GRAPHIC 1 OMITTED] Chart 1 shows a time series of the through the end of 2012. The was relatively stable from 1995 to 2000, at about 30 basis points; it subsequently widened to about 50 basis points through early 2008, but then reached more than 100 basis points in early 2009 and during 2012. Following the September 2012 Federal Open Market Committee announcement of additional MBS purchases, the temporarily rose to more than 150 basis points--a historical high that attracted much attention from policymakers and commentators at the time. While the is a closely watched series, it is an imperfect proxy for the degree to which secondary-market movements are reflected in mortgage borrowing costs (the pass-through) since, among other things, the secondary yield is not directly observed, but model-determined, and thus subject to model misspecification. Furthermore, mortgage market pass-through depends on the evolution of the GSEs' guarantee fees (or g-fees, the price the GSEs charge for insuring the loan) as well as on mortgage originators' margins. To understand changes in the extent of pass-through over time, it is useful to track the two components separately. While g-fee changes are easily observable, we argue that originator margins are best studied by tracking the different cash flows during and after the origination process, rather than by looking at the (even after netting out g-fees). Indeed, since originators are selling the loans, their margin depends on the price at which they can sell them, rather than the interest rate on the security into which they sell the loans. [GRAPHIC 2 OMITTED] To get a sense of what lenders earn from selling loans, we first consider a simple back-of-the-envelope calculation. We track the secondary-market value of the typical offered mortgage loan (according to the Freddie Mac survey) over time, assuming that the lender securitizes and sells the loan as an agency MBS. …" @default.
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• W3122291942 date "2013-12-01" @default.
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• W3122291942 title "The Rising Gap between Primary and Secondary Mortgage Rates" @default.
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