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Discussion Paper Details

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Title: The Mortgage Rate Conundrum

Author(s): Alejandro Justiniano, Giorgio E Primiceri and Andrea Tambalotti

Publication Date: September 2017

Keyword(s): Credit boom, housing boom, private label, Securitization and subprime

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

Abstract: We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large dataset with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid 2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.

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Bibliographic Reference

Justiniano, A, Primiceri, G and Tambalotti, A. 2017. 'The Mortgage Rate Conundrum'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12265