The Mortgage Rate Conundrum

Abstract

We study the interest rates of privately securitized residential mortgages during the credit boom of the early 2000s. They reveal a sharp and persistent drop in the spread between mortgage and Treasury rates starting in the summer of 2003. The emergence of this mortgage rate conundrum immediately followed the collapse of an unprecedented refinancing wave, and it was more pronounced in the regions where that wave had grown faster. These same areas also experienced more originations of the nonconforming mortgages that boosted private label securitization after 2003. Mortgages originated after this shift are the first to show signs of deteriorating quality.