Secondary mortgage markets: recent trends and research results

The unravelling of an organized secondary market for conventional mortgage loans during the 1970 and early 1980 has render free of accessed up many new opportunites for savings institution managers. It has given the mortgage instrument a abundant higher degree of liquidity, which has provided a great quantity [i]or[/i] amount of greater flexibility in managing the mortgage portfolio. More not long ago selling loans in an active secondary market has provided institutions a way to continue to be mortgage lender without incurring the risk of adding long-term fixed-rate loans to their portfolios.

The unfolding of this market has also created a fertile field for academic research. Researchers have been interested in the way in which the secondary market has affected mortgage rates and loan-terms--both their absolute horizontal and the differences among regions. This article discusses the development of the secondary market since 1970 and then reviews more [i]or[/i] less recent research dealing with these questions. growing of the Market

more [i]or[/i] less perspective on the growth of the secondary mortgage market can be obtained from Charts 1 to 3 Chart 1 present to views the tremendous growth in the amount of mortgage mere securities outstanding from year-end 1970 to year-end 1982 These pond s are represented by Government National Mortgage Association (GNMA) passthrough certificates and Federal dwelling Loan Mortgage Corporation (FHLMC) participation certificates, the one and the other of which have existed since the early 1970 as well as the newer Federal National Mortgage Association (FNMA) passthrough certificates. After rising to $144 billion by dint of the end of 1972, the outstanding amount of mortgage mere securities more than tripled to $568 billion by dint of the end of 1977. At the extreme point of 1972, mortgage pools showed 4.0 percent of total residential mortgage obligation outstanding. (See Chart 2) This increased to 89 percent at the extremity of 1977 and 16.1 percent at the extreme point of 1982.

flat more impressive is the amplitude to which the development in mortgage pools has contributed to the development in outstanding mortgage debt. Chart 3 illustrates this by means of presenting a comparison of the change in the amount of mortgage lake securities with the change in total residential mortgage liability For example, in 1977 mortgage meres increased from $40.7 billion to $568 billion (see Chart 1) while total obligation increased from $544 million to $635 million. The $161 billion increase in mortgage lochs thus represented 17.7 percent of the obligation increase. In 1982, mortgage due increased by only $46.9 billion, reflecting let falled conditions in the housing market. by means of coincidence, mortgage pools also increased by dint of about $47 billion in 1982 in the way that that, in effect, the secondary market accounted for all of the development in mortgage debt in 1982

Talk of the integration of the mortgage market into the general capital markets, which had been prevalent in financial circles since at least the mid-1970s, became a reality by dint of the early 1980s. In fact, the above figures understate the size of the secondary market, since many secondary market transactions involve the sale of individual mortgages and do not be the effect in the creation of market lakes On the other hand, in 1982 the figures are somewhat distorted because a large portion of the extension in mortgage pools reflects the succes of the Federal domicile Loan Mortgage Corporation's "guarantor" program, in which lender swap older low-rate mortgages for passthrough securities. In this situation, a mortgage loch is created without a corresponding amount of of recent origin lending activity. In previous years, meres were created primarily to capital new lending activity.

While there are a certain quantity of measurement problems, the growth of the secondary market--and its support of the primary market--is impressive, as these statistics make clear. For an increasing number of associations, the secondary market has become the mortgage market. It is public for example, to hear of institutions which vend almost all of the fixed-rate loans they make to individual of the mortgage agencies or to private sources. Impact upon Mortgage Yields and Spreads

With this background, we can review the findings of more [i]or[/i] less recent studies on such issues as the result of the development of the secondary market upon mortgage yields and on interregional differences in mortgage rates. In theory, the integration of the mortgage market into the Nation's overall capital market s should have two effects. First, through creating greater competition in the mortgage market and increasing the furnish of mortgage funds, it should bring mortgage rates more in line with other interest rates. Secondly it should bring interregional differences in mortgage rates.

With regard to the first of these results a 1980 study by Hendershott and Villani argues that this is exactly what had happened by the agency of the late 1970s. According to the authors, the disentanglement of the secondary mortgage market "has improved interregional roll ons of mortgage funds and has given mortgage borrowers a greater access to capital markets generally. The principal originate has been a decline in the mortgage rate relative to other market rates..." [2 p 50] This decline in the spread between mortgage rates and other interest rates to which Hendershott and Villani called attention is illustrated in Table 1 For example, from 1963 to 1965 (before the first period of disintermediation in 1966 and before the unravelling of an organized secondary market for conventional loans), the spread between conventional mortgage rates upon loans closed and rates upon 10-year US government bonds ranged from 153 to 193 basis points. by means of 1978, the spread had declined to 113 basis points.