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

Heuson, Andrea J.; Passmore, S. Wayne; Sparks, Roger

doi:10.2139/ssrn.249287

Cited by 44 publications

(40 citation statements)

References 16 publications

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“…The banks are liquidity constrained: the discount factor of security buyers, which we normalize to one, exceeds the discount factor of the banks, which is denoted 2 (0; 1). 19 The two banks have the same cost of capital, which is normalized to one.…”

Section: Payo¤smentioning

confidence: 99%

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Securitization and Lending Competition

Frankel

2015

Review of Economic Studies

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We study the effects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. If banks cannot securitize, the outcome is efficient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is inefficient, raises the mean default risk, and may lead to a deceptive rise in credit scores. AbstractWe study the e¤ects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. If banks cannot securitize, the outcome is e¢ cient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is ine¢ cient, raises the mean default risk, and may lead to a deceptive rise in credit scores. JEL: D82, G14, G21.

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Section: Payo¤smentioning

confidence: 99%

“…Heuson, Passmore, and Sparks [19] (HPS) study a model in which applicants have a continuum of publicly observable default probabilities. A bank chooses whether to lend to an applicant and, if so, whether to securitize the loan.…”

Section: Lending With Securitizationmentioning

confidence: 99%

Securitization and Lending Competition

Frankel

2015

Review of Economic Studies

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“…Sellon and Van Nahmen (1988) argued that the development of mortgage pass-through securities will improve the efficiency of housing finance thereby increasing the liquidity of the mortgage market. Lenders achieve greater liquidity by holding a mortgagebacked security instead of the mortgage itself (Heuson et al, 2001). Liquidity will reduce liquidity risk, facilitate participation in the mortgage market and increase lending activities, by providing lenders access to the capital market and expanded funding opportunities.…”

Section: Mortgage Securitization and Housing Financementioning

confidence: 99%

Secondary mortgage market (SMM): Is it right for financing housing in Ghana?

Boamah¹

2009

Jnl Sci Tech

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The formal housing finance system in Ghana is inadequate and highly underdeveloped. The formal finance institutions have provided very little mortgages particularly to the low and middle-income households. However, the fast growing capital market of Ghana offers an opportunity for sustainable housing finance in the country. This paper explores the possibility of addressing the housing finance problems in the country through the use of Secondary Mortgage Market (SMM). It does so by surveying the literature on SMM. It also examines the housing finance system in Ghana. It finds out that an SMM in principle will enable Ghana to overcome some of the constraints on the mortgage market and attract housing funds. But in practice it is not the best way of solving the housing finance problems in the country since the fundamentals are not right for a successful implementation of SMM. It notes that the scale of mortgage origination in the primary market is limited; the adjudication process is slow; collateralization is inadequate; and the land title regime is poor. It suggests that it is appropriate for Ghana to concentrate on solving these basic problems before any attempt at implementing a secondary mortgage market in the country.

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“…For a discussion of first mover and adverse selection problems in mortgage securitization, see Heuson, Passmore, and Sparks (2001). For a discussion about how the GSEs misprice catastrophic risk in the run-up to a crisis, see Hancock and Passmore (2016b).…”

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confidence: 99%

Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages

Passmore¹,

Hafften²

2018

FEDS

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The 30-year fixed-rate fully amortizing mortgage (or "traditional fixed-rate mortgage") was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With this sluggish equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowners might have better uses for this money. Third, refinancing mortgages is often very costly. Expensive refinancing may prevent homeowners from taking advantage of falling rates.To resolve these three flaws, we propose a new fixed-rate mortgage, called the FixedPayment-COFI mortgage (or "Fixed-COFI mortgage"). This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and does not require a down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward lower monthly payments or toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk "wedges" between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders.We discuss two variations of the Fixed-COFI mortgage. Homeowners with "affordable" Fixed-COFI mortgages are rebated the "wedges" between the traditional fixed-rate mortgage payments and the COFI mortgage payment. After the "wedges" are rebated, these homeowners may pay substantially less to purchase their homes in 30 years than homeowners with traditional fixed-rate mortgages. This mortgage design may help alleviate housing affordability pressures in many areas of the United States.

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

Cited by 44 publications

References 16 publications

Securitization and Lending Competition

Securitization and Lending Competition

Secondary mortgage market (SMM): Is it right for financing housing in Ghana?

Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages

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