Abstract not found

Between 1996 and 2006, real housing prices rose by 53 percent according to the Federal Housing Finance Agency price index. One explanation of this boom is that it was caused by easy credit in the form of low real interest rates, high loan-to-value levels and permissive mortgage approvals. We revisit the standard user cost model of housing prices and conclude that the predicted impact of interest rates on prices is much lower once the model is generalized to include mean-reverting interest rates, mobility, prepayment, elastic housing supply, and credit-constrained home buyers. The modest predicted impact of interest rates on prices is in line with empirical estimates, and it suggests that lower real rates can explain only one-fifth of the rise in prices from 1996 to 2006. We also find no convincing evidence that changes in approval rates or loan-to-value levels can explain the bulk of the changes in house prices, but definitive judgments on those mechanisms cannot be made without better corrections for the endogeneity of borrowers ’ decisions to apply for mortgages.

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the

This paper presents three main findings that reconfirm that securitization had an effect on subprime mortgage lenders ' screening standards around the FICO score of 620. First, using data on securitized and bank-held loans, we document a consistent and robust discontinuity in both securitization and default rates at the 620 threshold in the low documentation subprime market which confirms results established in our previous work. No such pattern exists in full documentation subprime loans or prime loans. Some recent work pools mortgages across prime and subprime markets, thereby obscuring this connection between the ease of securitization and screening in the low documentation subprime market. Second, we provide new evidence from the time series evolution of the securitization market for subprime loans that reinforces the role of ease of securitization on lenders ' screening standards. Finally, we explain that there are other dimensions besides securitization rates that impact the ease of securitization. Importantly, these dimensions are more likely to be captured by the number of securitized loans (unconditional securitization rates) which we analyzed in our earlier work. On examining one such aspect – the time it takes to securitize a loan-- we identify discontinuities that are consistent with greater ease of securitization above the 620 threshold in the low documentation subprime market. Note:

of Chicago, UC-Berkeley, and UCLA for comments on previous versions of the paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau

* I thank Cory Lambert and Scott E. Spittler from BlackBox Logic for their help in providing the data, as well as Paul Wolfson for his assistance with data manipulation. I also thank Kris Gerardi, Robert Hansen and Paul Willen for helpful This paper examines the impact of the presence of Fannie Mae and Freddie Mac as the largest investors in the subprime mortgage-backed securities (MBS) market on the risk characteristics and prices of those securities. Given the size of the investments of the government-sponsored enterprises (GSEs) in this market, these two investors had strong incentives to collect information about the assets they purchased. At the same time, the GSEs are widely believed to have relied on the implicit government guarantee to take on excessive risk and they bought primarily triple-A MBS, which are usually thought of as information insensitive securities. We use a unique feature of the subprime MBS market to identify the effect of the GSEs on this market. Subprime MBS deals were commonly split into a conforming and a non-conforming pool. Only the conforming pool was eligible to be bought by the GSEs, but the fact that both types of pools were found in the same deals eliminates most sources of unobserved heterogeneity that would typically confound a study of this nature. The results show that subprime triple-A pools that were eligible to be bought by the GSEs had similar ex ante risk characteristics, but had much better ex post performance once the crisis hit. We also find that the yields on the securities purchased by the GSEs are more informative about the riskiness of the deals than equivalent non-conforming pools. These results indicate that the GSEs acted as relatively informed investors in the subprime MBS market and that the conforming triple-A tranches were better risk-adjusted investments than those made by investors in this market as a whole.