The Journal of Real Estate Finance and Economics
Volume 25, Issue 2, Article 3 (Abstract)
Title:	The Effects of Purchases of Mortgages and Securitization by Government Sponsored Enterprises on Mortgage Yield Spreads and Volatility
Author:	Andy Naranjo and Alden Toevs
Abstract:	In this paper, we investigate the effects of GSE (government sponsored enterprise) activities on mortgage yield spreads and volatility. Using various regression procedures (i.e., Vector Error Correction and GARCH models) and controlling for default and prepayment risk, we find that securitizations and purchases of mortgages by GSEs reduce mortgage yield spreads and volatility. In particular, we find that the yield spread between conforming and 10-year Constant Maturity Treasury rates decreases by 8.0 bp per $1B increase in the level of GSE securitizations. Similarly, if GSEs inrease mortgage purchases, the yield spread decreases 10.5 bp per $1B increase of purchases. In addition, we hypothesize and find that GSE activites have a spillover effect to the non-conforming mortgage market; via investor substitutions, GSE purhcases and securitizations of conforming loans reduce non-conforming loan rates. Thus, the measured influence of GSE activities is biased downward when measured using the spread of non-conforming loans over conforming loan rates. We also find that purhcases of mortgages by GSEs significantly reduce mortgage yield volatility. In sum, our findings show that GSE activities reduce and stabilize mortgage market rates.
Keywords:	mortgage rates, mortgage volatility, government sponsored enterprises, conforming vs. non-conforming rates, vector error correction model, GARCH model