The effects of securitization on consumer mortgage costs

Steven Todd

Loyola University Chicago

School of Business Administration
Department of Finance
820 N. Michigan Avenue
Chicago, IL 60611

(312) 915-7218
stodd@luc.edu

January, 2000

This paper can be downloaded from the

Social Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=223585
The effects of securitization on consumer mortgage costs

Abstract

We examine the effects of securitization on two dimensions of consumer mortgage

costs: coupon rates and loan origination fees. We find no evidence that securitization reduces

the coupon rates on fixed or adjustable-rate mortgages. Instead, securitization appears to lower

mortgage loan origination fees, resulting in substantial savings for consumers. Securitization

activity includes passthrough creation and collateralized mortgage obligation (CMO) creation.

We test for differences between the effects of passthrough and CMO creation on primary

mortgage costs. Surprisingly, these activities appear to have indistinguishable effects on loan

rates and origination fees, suggesting a large derivatives market for mortgage loans isn’t

creating value for consumers.

Classification codes: G13, G21, G28

Keywords: securitization, consumer mortgage costs, CMOs, derivatives

2
The effects of securitization on consumer mortgage costs

Introduction

Securitization, the pooling of illiquid loans or assets into marketable securities, is one of the

more powerful trends transforming the landscape of financial markets. Pass-through mortgage

securities, first introduced by GNMA in 1970, and collateralized mortgage obligations (CMOs),

first launched by FHLMC in 1983, now constitute a $2 trillion market, making the market for

mortgage-backed securities nearly as large as the market for corporate bonds.1 Within the last

ten years, securitization has been applied to credit card receivables, car loans, lease receivables,

home equity loans, commercial mortgage loans and corporate bonds.

In theory, securitization creates value by reducing intermediation costs and increasing risk

sharing and risk diversification activities [Hess and Smith (1988)]. As a result of securitization,

mortgage assets are more liquid and mortgage risks are shared by a larger audience of investors.

Studies by Amihud and Mendelson (1986), Merton (1987), and Kadlec and McConnell (1994)

show there are gains associated with an increase in liquidity and the expansion of an investor

base. These studies focus on equity markets, but their findings may well apply to fixed-income

markets, especially mortgage assets, which are burdened by high information costs and

heterogeneous valuations [Bernardo and Cornell (1997)].

1
Source: Federal Reserve Bulletin, December 1997.

3
Previous research has examined whether securitization reduces the yields of fixed-rate mortgages

or passthrough securities. This is the first study to test directly securitization’s effect on loan

origination fees. Fees are an important component of the cost of a mortgage loan, perhaps

reflecting prepayment penalties or other adverse selection costs faced by loan originators [Chari

and Jagannathan (1989)]. Homebuyers paid more than $16 billion in mortgage fees in 1993

alone.

This is also the first study to test securitization’s effect on adjustable-rate mortgage costs.

Adjustable-rate mortgages merit study for several reasons. First, these loans comprise a large

share of the overall mortgage loan market. More than half of the mortgages issued in 1984, 1985

and 1988 were adjustable-rate. Second, compared to their fixed-rate counterparts, adjustable-rate

mortgages have been securitized more slowly. Finally, adjustable-rate mortgages differ from

fixed-rate mortgages in their prepayment and interest-rate risk characteristics [Berk and Roll

(1988) and Cunningham and Capone (1990)]. Studies that bundle fixed and adjustable-rate loans

together potentially produce misleading results.

A principal goal of this paper is to examine the effects of CMO creation on consumer mortgage

costs. If financial markets are incomplete and CMOs offer risk/return strategies that are

otherwise unavailable to financial intermediaries, then mortgage originators should experience a

reduction in their lending costs [Hess and Smith (1988)]. Furthermore, this reduction should be

passed along to borrowers, provided the market for mortgage loans is competitive.

4
CMO issuer effects are worth studying for several reasons. First, the CMO market has spawned

a number of important financial innovations which market practitioners claim have broadened

the investor base for mortgage-backed securities [Ames (1997)]. Ginnie Mae made a similar

argument to Congress when it lobbied for the authority to issue CMOs, long after it had

established a successful passthrough program. 2 Second, our tax dollars support the Federal

housing agencies’ CMO issuance efforts. Finally, the answer to the question “Do CMO markets

benefit homebuyers?” tells us something about the value of derivative markets to primary market

participants.

This study examines the effects of securitization on two dimensions of consumer mortgage costs:

coupon rates and loan origination fees. In the case of adjustable-rate mortgages, we find no

evidence that securitization lowers coupon rates. Moreover, we find no association between

securitization and the coupon rates on fixed-rate mortgages. Instead, securitization appears to

lower mortgage loan origination fees, resulting in substantial savings for homebuyers. A one

percent increase in the monthly level of passthrough creation is associated with a 0.5 basis point

reduction in loan origination fees. In 1993 alone, securitization likely produced consumer

savings of more than $2 billion in loan origination fees.

No doubt, some of these savings reflect the benefits of zero-point mortgages, which were

introduced during the period we examine. An increase in the use of zero-point mortgages will

2
Source: “GNMA Remics ‘Would Save $379 Million’”, National Mortgage News, November 23, 1992, page 2.

5
likely lower the average loan origination fee data we observe. It is impossible to discern whether

banks made zero-point mortgages available because of securitization. Thus, it is possible we

misstate the savings in fees directly attributable to securitization.

Securitization activity includes passthrough creation and CMO creation. We test for differences

between the effects of passthrough and CMO creation on consumer mortgage costs.

Surprisingly, these activities appear to have indistinguishable effects on coupon rates and loan

origination fees. Either CMO creation has not reduced mortgage originators’ lending costs,

contrary to Hess and Smith (1988), or mortgage originators have not passed the savings on to

consumers. In either case, the evidence suggests a large derivatives market for mortgage loans

isn’t creating value for consumers.

Literature Review

Several studies have examined securitization’s effect on secondary market mortgage yields.

Black, Garbade and Silber (1981) find that increases in the marketability of GNMA passthroughs

over the period 1971 - 1978 lowered the spread between GNMA passthroughs and Treasury

securities. They conclude the decline in secondary market spreads implies a reduction in the

costs of FHA mortgage loans. In contrast to Black, Garbade and Silber (1981), Rothberg, Nothaft

and Gabriel (1989) find no relation between passthrough creation and the GNMA - Treasury

spread, although investors demanded a liquidity premium on GNMA passthroughs in the early

years of securitization. Likewise, in the conventional mortgage market, Rothberg, Nothaft and

6
Gabriel (1989) find no relation between FHLMC passthrough yield spreads and securitization

activity.

Other studies have examined securitization’s effect on primary market mortgage yields.

Hendershott and Shilling (1989) analyze conforming (i.e., securitizable) and non-conforming,

conventional fixed-rate mortgage yields during a pre-securitization period (1978) and a post-

securitization period (1986). They find that conforming loans enjoyed a yield discount of 39

basis points vis-a-vis non-conforming loans during the post-securitization period. This compares

with a yield discount of only 5 basis points during the pre-securitization period. Sirmans and

Benjamin (1990) find a similar yield discount of 40-50 basis points for conforming loans during

a two-year period beginning in 1985. Also, the authors document a near one-for-one

correspondence between primary and secondary market mortgage yields.

It is possible that the yield effects Hendershott and Shilling (1989) and Sirmans and Benjamin

(1990) attribute to securitization are transitory. Kolari, Fraser and Anari (1998) examine the

long-run effects of securitization. Using quarterly data for a blend of fixed and adjustable-rate

mortgage loans that closed during the period 1985 - 1995, the authors find that a 10% increase in

the level of securitization activity reduces mortgage yields by as much as 20 basis points in the

long-run.

This study extends the literature by examining the effects of securitization on loan origination

fees and adjustable-rate mortgages. We are interested in long-run effects and seek to address the

7
stationarity issues raised by Kolari, Fraser and Anari (1998) by searching for co-integrating

relations among the non-stationary time series. Like Rothberg, Nothaft and Gabriel (1989), we

believe the prepayment option is a significant determinant of mortgage spreads. We consult the

option pricing literature for variables that proxy for prepayment and interest-rate risks. We also

believe that fixed and adjustable-rate mortgages are best handled separately because of

differences in their prepayment and interest-rate risk characteristics. As we document below,

studies that bundle fixed and adjustable-rate loans together potentially produce misleading

results.

Data

The data used in this study come from a variety of sources. We obtain adjustable-rate mortgage

data from the FHLMC weekly survey of mortgage lenders. These data represent commitment

rates on new, 30-year conventional mortgage loans indexed to the one-year Treasury bill, with

loan-to-value ratios of 80%. Our sample includes the survey rate for the first week of each

month for the period July 1984 through December 1995. This time period is particularly

interesting because adjustable-rate mortgages first gained acceptance in the early 1980s and were

first securitized in 1984.

We obtain fixed-rate mortgage data from the FHLMC weekly survey of mortgage lenders.

These data represent commitment rates on new, 30 year conventional mortgage loans with loan-

to-value ratios of 80%. Our sample includes the survey rate for the first week of each month for

the period January 1980 through December 1995. This time period is particularly interesting for

8
several reasons. First, previous studies [Hendershott and Shilling (1989), Sirmans and Benjamin

(1990) and Kolari, Fraser and Anari (1998)] document a securitization effect during this time

period. Second, CMOs were first issued in 1983. Finally, conventional mortgage loans were not

securitized with routine frequency until after 1982.3

We obtain monthly loan origination fee data from the Federal Reserve Bulletin. These data are

averages for all loans (both fixed and adjustable-rate mortgages) that close.

It is common for mortgage lenders to offer homebuyers a menu of loan prices, with varying fees

and coupon rates that are interdependent. Unfortunately, these data are not available to us. We

test for interaction or feedback effects between coupon rates and fees. These tests use the

national, aggregate data described above. More direct tests of feedback effects between coupon

rates and fees would require time-series data for a single lender.

We obtain securitization data come from GNMA, FNMA, FHLMC and Inside Mortgage

Finance. These data allow us to separate monthly securitization figures into passthrough and

CMO issuance measures. Whole loan origination data come from Mortgage Banking and the

FHLBB. These data allow us to categorize monthly loan issuance by market type (conventional

and government-guaranteed) and loan type (fixed and adjustable rate).

3
Less than two percent of all outstanding conventional mortgage loans were securitized prior to 1980. Between
1986 and 1995, annual conventional loan securitization rates surpassed fifty percent of new loan originations.

9
Mortgage loan delinquency data come from the Mortgage Bankers Association survey of

mortgage lenders. These data measure the percentage of outstanding conventional mortgage

loans for which payments are more than 30 days late. Additional capital markets data come from

Citibase and the Wall Street Journal.

Table 1 presents summary statistics for the data. All of the variables in panel A have mean

values that are statistically different from zero at a 1% level of significance. For adjustable-rate

mortgages, the mean spread over one-year Treasury bills is 0.86%; for fixed-rate mortgages, the

mean spread over a Treasury bond matched on average life is 1.69%; loan origination fees

average 0.38%.

Many of the variables in panel A are highly autocorrelated. We first difference each variable and

report in panel B summary statistics for monthly changes in each variable. None of the variables

in panel B have mean values that are statistically different from zero. For the differenced

variables, the first-order autocorrelation measures are quite large. Such high autocorrelations

suggest non-stationarity.

Multivariate regressions of non-stationary time series generally yield spurious results. We test

for stationarity in each of the variables in table 1 by performing an augmented Dicky-Fuller t

test. At a 5% level of significance, we fail to reject the null hypothesis that a unit root exists for

many of the variables in panel A. We repeat the test for each of the differenced time series in

10
panel B. Here, we reject the null hypothesis of a unit root at a 1% level of significance for each

of the differenced variables.

Although differencing the data will overcome the spurious regression problems associated with

non-stationary series, we run the risk of eliminating valuable long-run information. As Hendry

(1986) states, "By analysing only the differences of economic time-series, all information about

potential (long-run) relationships between the levels of economic variables is lost; this seems a

drastic 'solution' to possible spurious regressions." Hence, we endeavor to deal with the non-

stationarity problems of the data by first searching for potential long-run relationships using co-

integration tests.

We follow the maximum likelihood approach proposed by Johansen (1988). For each regression

system we model, we calculate trace and maximal-eigenvalue test statistics to test for co-

integrating relations among the non-stationary variables. In all cases, each of these statistics fails

to confirm the existence of any co-integrating relationships among the time series. There being

no long-term equilibrium relationships among these non-stationary variables, we proceed with

our analysis using first differences.

Adjustable-rate mortgages

In this section we examine securitization’s effect on adjustable-rate mortgage spreads. Our

approach is similar to Black, Garbade and Silber (1981) and Rothberg, Nothaft and Gabriel

(1989).

11
A model for adjustable-rate mortgages

We are interested in estimating the following regression for the period July 1984 to December

1995.

ASPRDt+1 = b0 + b1 SLOPEt+1 + b2 VOLT1t+1 + b3 QUAL t+1 + b4 DELt+1 + b5 TBLSPDt+1

+ b6 SECt+1 + et+1 (1)

The dependent variable, ASPRD denotes the adjustable-rate mortgage spread, which is calculated

by subtracting the yield on a one-year Treasury bill from the adjustable mortgage coupon rate.

We use the one-year Treasury bill as our benchmark because the mortgage data represent

commitment rates on new, 30-year conventional mortgage loans indexed to the one-year

Treasury bill. The independent variables include economic proxies for liquidity, default and

interest-rate risk premia.

We assume the liquidity premium on mortgage loans is related to secondary mortgage market

trading activity. Passthrough and CMO creation typically coincides with the purchase and sale

of tens or hundreds of individual mortgage loans. SEC measures the percentage of newly

originated mortgage loans (both fixed and adjustable-rate) that are securitized. This measure of

liquidity implicitly captures secondary trading activity relative to the primary mortgage market

and is analogous to differential liquidity premium measures used by Garbade and Silber (1979)

and Kamara (1988). We expect a negative relation between securitization activity and

adjustable-rate mortgage spreads.

12
The default premium compensates mortgage originators for credit risk. We use two measures of

default risk. QUAL measures the spread between corporate bonds rated AAA and those rated

BAA. We expect a positive relation between the corporate quality spread and adjustable-rate

mortgage spreads, consistent with Black, Garbade and Silber (1981) and Jameson, Dewan and

Sirmans (1992). DEL measures the delinquency rate on conventional mortgage loans. We expect

a positive relation between mortgage delinquency rates and adjustable-rate mortgage spreads.

The interest-rate premium compensates loan originators for the risks imposed by discrete reset

intervals, periodic and lifetime rate caps and teaser rates.4 Cap option values increase with the

volatility of interest rates [Black and Scholes (1973)]. A steepening yield curve also increases

the value of cap options because it increases the probability that interest rates will rise and the

caps will be in-the-money. Since mortgage originators are short a series of cap options, we

expect adjustable-rate mortgage spreads to be positively related to both the slope of the yield

curve (SLOPE) and the volatility of one-year Treasury bill yields (VOLT1).

Teaser rates compress the spread between the initial mortgage coupon rate and the benchmark

Treasury security. We hypothesize that originators are more inclined to use teaser rates when the

4
The coupon rate on an adjustable-rate mortgage changes at regular, discrete intervals, designated reset dates. At
each reset date, a new coupon rate is set by adding a fixed spread (margin) to the prevailing level of an underlying
index (e.g., the yield on one-year Treasury bills). Most adjustable-rate mortgage contracts include periodic rate caps
that prevent coupon rates from rising by more than a fixed percentage between successive reset periods. Lifetime
rate caps constrain coupon rates from rising above the initial coupon rate at loan origination by more than a fixed
percentage. Finally, it is common for the initial coupon rate to be lower than the fully indexed rate, computed by
adding the margin to the initial level of the index. For this reason, the initial rate is often called a teaser rate.
13
short-maturity segment of the yield curve is steep and yields are expected to rise in the near

term.5 A steep short-maturity segment of the yield curve likely coincides with lower deposit

costs, relative to the returns available on longer-maturity assets. Ceteris paribus, when deposit

costs are low, mortgage originators are more likely to settle for lower rates on adjustable-rate

mortgages. Conversely, when the short-maturity segment of the yield curve is negatively sloped,

yields are expected to fall in the near term and adjustable-rate mortgage originators are unlikely

to offer homebuyers additional financing incentives in the form of teaser rates. As a proxy for

short-term expected changes in interest rates, we use the yield spread between three- month and

one-year Treasury bill rates. We expect adjustable-rate mortgage spreads to be negatively

related to the Treasury bill spread (TBLSPD).

Stationarity and co-integration tests of the adjustable-rate mortgage data

Table 2, panel A summarizes the results of augmented Dicky-Fuller stationarity tests of the

adjustable-rate mortgage data. These tests confirm non-stationarity in the levels of the following

time series: adjustable-rate mortgage spreads (ASPRD), yield curve slope (SLOPE), mortgage

delinquencies (DEL), securitization activity (SEC), passthrough creation (PT) and CMO creation

(CMO). In panels B and C of table 2, we report co-integration tests for the two non-stationary

regression systems we are interested in estimating. For each of these systems, we cannot reject

the hypothesis that there are no co-integrating relations among the variables. Both the trace and

maximal-eigenvalue test statistics are insignificant at the 5% level.

5
By "short-maturity segment of the yield curve", we mean that portion of the yield curve that comprises one
complete coupon reset period.

14
Since there are no equilibrium relationships among the levels of the non-stationary time series,

we replace the levels of the non-stationary variables with their first differences. We also include

in our regression system the first differences of the stationary regressors. Equation (2) describes

the model we estimate.

∆ASPRDt+1 = b0 + b1 ∆SLOPEt+1 + b21 VOLT1t+1 + b22 ∆VOLT1t+1 + b31 QUALt+1

+ b32 ∆QUALt+1 + b4 ∆DELt+1 + b51 TBLSPDt+1 + b52 ∆TBLSPDt+1 + b6 ∆SECt+1 + et+1 (2)

Adjustable-rate mortgage estimates

Estimation results for model (2) are reported in table 3. We find no relation between adjustable-

rate mortgage spreads and securitization activity, suggesting that neither passthrough nor CMO

creation have an effect on mortgage spreads. An F-test reveals that the passthrough and CMO

coefficients are not statistically different. This is consistent with the CMO market generating no

incremental cost savings for adjustable-rate mortgage borrowers.

We find a positive relation between adjustable-rate mortgage spreads and the slope of the yield

curve and a positive relation between spreads and the volatility of short-term interest rates,

consistent with Berk and Roll (1988) and Kau, Keenan, Muller and Epperson (1993). Estimates

of the yield curve slope coefficient suggest a 100 basis point increase in the slope of the yield

curve increases mortgage spreads by about 22 basis points. Similarly, a 10% spike in the level of

short-term rate volatility increases adjustable-rate mortgage spreads by 5 basis points.

15
Table 3 also provides evidence that mortgage originators demand higher spreads when short-

term interest rates are expected to decline in the immediate future. We find a negative relation

between adjustable-rate mortgage spreads and the Treasury bill yield spread, consistent with our

hypothesis. We also find a positive relation between mortgage spreads and mortgage

delinquency rates. Estimates of the delinquency coefficient suggest that a 1% rise in the level of

delinquencies is associated with about a 50 basis point increase in adjustable-rate mortgage

spreads.

Robustness checks

We experiment with alternative measures of securitization activity based on monthly, quarterly

and semi-annual loan issuance. We also consider securitization measures based on adjustable-

rate mortgage loan originations only. Our results are insensitive to these measures of

securitization activity. Finally, as a proxy for securitization activity, we consider FNMA and

FHLMC secondary market loan purchases. Our results are broadly similar.

Fixed-rate mortgages

In this section we examine securitization’s effect on fixed-rate mortgage spreads. Our approach

is similar to Black, Garbade and Silber (1981) and Rothberg, Nothaft and Gabriel (1989).

A model for fixed-rate mortgages

We are interested in estimating the following regression for the period January 1980 to

December 1995.

16
FSPRDt+1 = b0 + b1 SLOPEt+1 + b2 VOLT30t+1 + b3 QUALt+1 + b4 DELt+1 + b5 FUTt+1

+ b6 SECt+1 + et+1 (3)

The dependent variable, FSPRD denotes the fixed-rate mortgage spread, which is calculated by

subtracting the yield of a Treasury bond matched on average life from the fixed-rate mortgage

coupon rate.6 The independent variables include economic proxies for liquidity, default,

prepayment and interest-rate risk premia. These variables are similar to those used for

adjustable-rate mortgage spreads, with two exceptions. Here, VOLT30 measures the volatility of

long-term interest rates and FUT measures the difference between the prices of adjacent delivery

Treasury bond futures.

The prepayment premium compensates mortgage originators for a series of distinct, American-

style call options that they have sold to borrowers. Schwartz and Torous (1989) show there is a

positive relation between the prepayment premium and interest-rate volatility. Hendershott and

Van Order (1989) argue that a steepening yield curve reduces the value of call options because it

increases the probability that interest rates will rise. Therefore, we expect mortgage spreads to be

positively related to long-term interest-rate volatility and negatively related to the slope of the

yield curve.

6
We compute the average life of the mortgage under the assumption of no prepayment. We also experiment with
Treasury benchmarks matched on the maturity or duration of the mortgage. Our results are insensitive to these
alternative benchmarks.

17
The interest-rate risk premium compensates mortgage originators for the risk that mortgage rates

rise during the loan approval period, after the borrower has been guaranteed a rate. Originators

frequently use Treasury bond futures contracts to hedge this interest-rate risk. The price

differential between adjacent delivery Treasury bond futures contracts provides an estimate of

expected changes in future long-term rates. The larger the price differential, the greater the

expected increase in long-term rates and the larger the interest-rate risk premium. We,

therefore, expect a positive relation between FUT and fixed-rate mortgage spreads.

Stationarity and co-integration tests of the fixed-rate mortgage data

Table 4, panel A summarizes the results of augmented Dicky-Fuller stationarity tests of the

fixed-rate mortgage data. These tests confirm non-stationarity in the levels of the following time

series: mortgage delinquencies (DEL), Treasury bond futures price differential (FUT),

securitization activity (SEC), passthrough creation (PT) and CMO creation (CMO). In panels B

and C of table 4, we report co-integration tests for the two non-stationary regression systems we

are interested in estimating. For each of these systems, we cannot reject the hypothesis that there

are no co-integrating relations among the variables. Both the trace and maximal-eigenvalue test

statistics are insignificant at the 5% level.

Since there are no equilibrium relationships among the levels of the non-stationary time series,

we replace the levels of the non-stationary variables with their first differences. Equation (4)

describes the model we estimate.

18
FSPRDt+1 = b0 + b1 SLOPEt+1 + b2 VOLT30t+1 + b3 QUALt+1 + b4 ∆DELt+1 + b5 ∆FUTt+1

+ b6 ∆SECt+1 + et+1 (4)

Fixed-rate mortgage estimates

Estimation results for equation (4) are reported in table 5. We find no relation between fixed-

rate mortgage spreads and securitization activity. Both passthrough creation and CMO creation

appear to have no effect on mortgage spreads. An F-test reveals that the passthrough and CMO

coefficients are not statistically different.

The absence of a significant relation between mortgage spreads and securitization activity

conflicts with the findings of Kolari, Fraser and Anari (1998). One possible reason for this

disparity is that the dependent variable Kolari, Fraser and Anari (1998) model is a blend of fixed

and adjustable-rate mortgage loans that closed. We investigate this issue further in the

robustness checks discussed below.

We find a negative relation between fixed-rate mortgage spreads and the slope of the yield curve,

consistent with Rothberg, Nothaft and Gabriel (1989). Estimates of the yield curve slope

coefficient suggest a 100 basis point increase in the slope of the yield curve reduces mortgage

spreads by 23 basis points. Earlier we saw that adjustable-rate mortgage spreads increase as the

yield curve steepens. Here we see the opposite effect, supporting our claim that fixed and

adjustable-rate loans have different risks.

19
We find a positive relation between fixed-rate mortgage spreads and the volatility of long-term

interest rates, consistent with Rothberg, Nothaft and Gabriel (1989). A 10% spike in the level of

long-term rate volatility increases mortgage spreads by about 28 basis points. This is

substantially larger than the increase in spreads that adjustable-rate mortgages experience when

short-term rate volatility spikes higher, supporting Berk and Roll (1988).

Table 5 shows that fixed-rate mortgage spreads are positively related to the corporate quality

spread. A 100 basis point increase in the corporate quality spread is associated with a 75 basis

point increase in mortgage spreads. This result conflicts with Kolari, Fraser and Anari (1998)

who find no significant relation between mortgage spreads and default risk. It also conflicts with

Cunningham and Capone (1990) who find that adjustable-rate mortgages have greater default

risk than fixed-rate mortgages.

Robustness checks

Our results are qualitatively similar for alternative measures of securitization activity based on

fixed-rate loan originations only, as well as monthly, quarterly and semi-annual loan issuance.

We also consider FNMA and FHLMC secondary market loan purchases as a proxy for

securitization activity. These results are qualitatively similar.

We include dummy variables for tax and regulatory changes over the sample period. One

dummy signals passage of the Tax Reform Act of 1986, which permitted financial institutions to

sell mortgage assets through Real Estate Mortgage Investment Conduits (REMICs). Another

20
dummy signals passage of the Financial Institutions Reform, Recovery and Enforcement Act

(FIRREA) of 1989. This legislation established risk-based capital standards for Federally-

insured mortgage lenders and assigned primary mortgage loans to the second highest allowable

risk class, requiring a 50% capital allocation. None of the coefficients on these dummies are

significant. We also include a linear time trend regressor to allow for trends in the dependent

variable. The time trend regressor is not significant. Finally, we re-estimate table 5 using both

maturity and duration matched Treasury benchmarks. The results are qualitatively similar.

When we replace the dependent variable in table 5 with the spread on a blend of fixed and

adjustable-rate mortgage loans that closed during the 1985 - 1995 period, we observe a

statistically significant negative relation between mortgage spreads and various measures of

securitization activity, similar to Kolari, Fraser and Anari (1998). Yet, this relation disappears

when the dependent variable is the fixed-rate mortgage spread. Tables 3 and 5 provide evidence

that fixed and adjustable-rate mortgages differ in their interest-rate and prepayment risk

charactertistics. We believe fixed and adjustable-rate mortgages are best treated separately

because of these differences.

Mortgage loan origination fee estimation

In this section, we examine the effect of securitization on loan origination fees. Loan origination

fees are quoted in "points," which are simply a percentage of the principal amount on the

mortgage. Fees might reflect the administrative costs of making loans, or they may be related to

the risks of mortgage loans, in much the same way that mortgage coupon rates reflect interest-

21
rate, prepayment, default and liquidity risks. The fact that fees are directly related to the

principal amount on the loan suggests the later relation. Chari and Jagannathan (1989) show that

when prepayment penalties are prohibited by law, points serve as effective prepayment penalties.

In this section, we assume loan origination fees reflect the economic risks of mortgage loans.

We also assume loan originators simultaneously set coupon rates and fees. This is analogous to

a two-part tariff, where homebuyers are charged a one-time (loan origination) fee for the right to

make annuity payments to a bank, in exchange for the capital necessary to purchase a home.

If the market for mortgage loans is competitive, then loan originators have no discretion about

the coupon rates and loan origination fees they charge consumers. Both charges reflect the

marginal costs of making mortgage loans. These costs are a function of the interest-rate,

prepayment, default and liquidity risks of mortgage loans.

If the market for home financing services is not purely competitive, then the pricing strategy for

a particular bank is non-trivial. This is because different consumers have different demand

curves for financing, it is difficult to distinguish one group of consumers from another, and, in

general, all consumers who meet the underwriting standards of the bank must be charged the

same loan rate and fee at a given time. In a non-competitive market, each bank sets its rates and

fees simultaneously, in such a way as to maximize its surplus.

It is common for mortgage lenders to offer homebuyers a menu of loan prices, with varying fees

and coupon rates. At a fixed point in time, one bank might offer 30-year fixed-rate mortgages

22
with a coupon rate of 8% and loan origination fees equal to 2 points, or with a coupon rate of

8.25% and loan origination fees equal to 1 point. The existence of multiple loan prices from a

single lender supports the notion that the market for mortgage loans is not purely competitive. It

also suggests that coupon rates and loan origination fees share an inverse relation. We test for

this relation below.

Loan origination fees and fixed-rate mortgages

We modify equation (3) to allow for interaction or feedback effects between coupon rates and

fees and obtain the following model for changes in fixed-rate mortgage costs.

∆FSPRDt+1 = b0 + b1 ∆SLOPEt+1 + b2 ∆VOLT30t+1 + b3 ∆QUALt+1 + b4 ∆DELt+1

+ b5 ∆FUTt+1 + b6 ∆SECt+1 + b7 ∆FEESt+1 + et+1 (5a)

∆FEESt+1 = β0 + β1 ∆SLOPEt+1 + β2 ∆VOLT30t+1 + β3 ∆QUALt+1 + β4 ∆DELt+1

+ β5 ∆FUTt+1 + β6 ∆SECt+1 + β7 ∆FSPRDt+1 + εt+1 (5b)

Equations (5a) and (5b) are estimated using a two-stage least squares procedure. The results,

reported in table 6, fail to document an inverse relation between fixed-rate mortgage coupon

rates and loan origination fees. ∆FEES enters equation (5a) with a positive coefficient and

23
∆FSPRD enters equation (5b) with a positive coefficient. Neither coefficient is statistically

significant at a 5% level.7

Coefficient estimates for the spread equation (5a) conform with results presented in table 5. We

find a negative relation between fixed-rate mortgage spreads and the slope of the yield curve and

a positive relation between spreads and the volatility of long-term interest rates. Mortgage

spreads increase with the corporate quality spread and the Treasury bond futures price

differential. We find no relation between fixed-rate mortgage spreads and securitization activity.

For the fee equation (5b), none of the economic proxies for interest-rate, prepayment and default

risks are significant. However, some of the measures of securitization activity are marginally

significant with p-values of .107 and .084 for the securitization and passthrough measures

respectively.

Loan origination fees and adjustable-rate mortgages

We follow a similar joint estimation procedure for adjustable-rate spreads and loan origination

fees. Again, we find no statistically significant inverse relation between rates and fees.

Coefficient estimates for the adjustable-rate spread relation conform with results presented in

table 3. The adjustable-rate spread increases with the slope of the yield curve. It increases with

the volatility of short-term interest rates and mortgage delinquencies; it decreases with the

7
Although time-series tests of aggregate fee and spread data (averaged across many mortgage lenders) fail to
document an inverse relation between these two mortgage costs, it is possible that cross-sectional tests would
conform such a relation.

24
Treasury bill yield spread. We find no relation between adjustable-rate mortgage spreads and

securitization activity. For the fee relation, most of the economic proxies for interest-rate,

prepayment and default risks are insignificant.

A model of loan origination fees

Since we do not observe a feedback relation between loan origination fees and mortgage coupon

rates, we endeavor to test a simplified model of loan origination fees, given by equation (6).

FEESt+1 = β0 + β1 SLOPEt+1 + β21 VOLT30t+1 + β22 VOLT1t+1 + β3 QUALt+1 + β4 DELt+1

+ β51 FUTt+1 + β52 TBLSPDt+1 + β6 SECt+1 + εt+1 (6)

Augmented Dicky-Fuller stationarity tests of the fee data are reported in table 7, panel A. These

tests confirm non-stationarity in the levels of the following time series: mortgage delinquencies

(DEL), Treasury bond futures price differential (FUT), securitization activity (SEC), passthrough

creation (PT) and CMO creation (CMO). In panels B and C of table 7, we report co-integration

tests for the two non-stationary regression systems we are interested in estimating. For each of

these systems, we cannot reject the hypothesis that there are no co-integrating relations among

the variables. Both the trace and maximal-eigenvalue test statistics are insignificant at the 5%

level.

25
Since there are no equilibrium relationships among the levels of the non-stationary time series,

we replace the levels of the non-stationary variables with their first differences and estimate

equation (7) below.

FEES t+1 = β0 + β1 SLOPEt+1 + β21 VOLT30t+1 + β22 VOLT1t+1 + β3 QUALt+1 + β4 ∆DELt+1

+ β51 ∆FUTt+1 + β52 TBLSPDt+1 + β6 ∆SECt+1 + εt+1 (7)

Estimates of equation (7) appear in table 8, panel A. In this case, there is a negative relation

between loan origination fees and passthrough creation. The coefficient estimate for the

passthrough regressor suggests that a one percent increase in the monthly level of passthrough

creation reduces loan origination fees by 0.5 basis points. Using securitization activity data, we

compute a rough estimate of the fee savings that accrues to consumers. We find that

securitization produced consumer savings of more than $2 billion in loan origination fees in 1993

alone.8

Of course, these savings should be weighed against the costs of public subsidies awarded to the

Federal housing agencies. By some measures, consumers appear to come up short. Implicit

8
On average, consumers paid loan origination fees of 1.30 points on the $1 trillion of mortgage loans issued in
1993. Given a mean contract rate of 7.03% and assuming prepayment at the end of ten years, we compute a net fee
spread of .1454%. Without securitization activity, the net fee spread would have been .1797% [.1454% + .0038 (the
coefficient on securitization activity in the levels regression in table 8) * .0903 (the mean rate of monthly security
issuance for 1993)] and loan origination fees would have averaged 1.52 points. The fee savings that accrues to
consumers is (1.52-1.30)*.01*$1 trillion = $2.2 billion.

26
government credit guarantees enjoyed by Fannie Mae and Freddie Mac are likely worth several

billion dollars a year9 and the housing agencies are exempt from certain corporate income taxes

and SEC registration fees. This paper does not address the question of whether a secondary

market for mortgage loans would flourish without the Federal housing agencies, yet it is worth

noting that a private market for non-conforming mortgages has ballooned in recent years as

investment and commercial banks have actively securitized these assets.10

It is possible we misstate the savings in fees directly attributable to securitization. The sample

period we examine coincides with the introduction of zero-point mortgages. An increase in the

use of zero-point mortgages will likely lower the national, average loan origination fee data we

observe. We include a linear time trend in equation (7) to capture fee savings attributable to

zero-point mortgages or other financial innovations over the sample period. However, it is

impossible to discern whether banks made zero-point mortgages available because of

securitization.

9
Fannie Mae and Freddie Mac hold more than $500 billion in debt and spend more than $30 billion per year on
debt interest payments. Stripped of the U.S. government’s credit guarantee, debt issued by the housing agencies
would likely trade at yields at least fifty basis points higher.
10
Prior to 1990, private issuers dominated the market for multi-class securities. From 1990 through the present,
Fannie Mae and Freddie Mac have been the largest issuers of CMOs and strips.

27
Possible causes and effects of reduced loan origination fees

It seems reasonable to ask why loan origination fees decline as a result of securitization

activities. One source of savings might be increased competition among mortgage lenders.

Between 1984 and 1994, mortgage companies increased their market share of loan originations

from 23% to 52%.11 Unlike most mortgage lenders, mortgage companies securitize nearly all

their loans. By securitizing standardized loans and selling risky mortgage assets to other

financial intermediaries who can repackage those risks and perhaps sell the repackaged securities

to a wider audience of investors seeking risk reduction strategies, mortgage companies reduce

the costs of lending. Consumers are the direct beneficiaries of their activities.

A reduction in loan origination fees for consumers may carry with it increased risks for mortgage

investors, as discussed in Todd (1999). Lower origination fees exacerbate the negative

convexity problems of most mortgage assets. With lower origination fees, it takes a smaller

decline in interest rates to trigger a loan refinancing. In general, the prepayments that result from

refinancing activities reduce the value of most mortgage assets. Therefore, it is possible that

securitization encourages financial innovation by compounding the risks of mortgage assets and

forcing mortgage investors to find more effective risk reduction strategies.

Conclusion

We examine the effects of securitization on two dimensions of consumer mortgage costs:

coupon rates and loan origination fees. We find no evidence that securitization reduces the

11
Source: U.S. Department of Housing and Urban Development.
28
coupon rates on fixed or adjustable-rate mortgages. Instead, securitization appears to lower

mortgage loan origination fees, resulting in substantial savings for consumers. In 1993 alone,

securitization likely produced consumer savings of more than $2 billion in loan origination fees.

Securitization activity includes passthrough creation and CMO creation. We test for differences

between the effects of passthrough and CMO creation on primary mortgage costs. Surprisingly,

we find that these activities have indistinguishable effects on loan rates and origination fees.

Either CMO creation has not reduced mortgage originators’ lending costs, contrary to Hess and

Smith (1988), or mortgage originators have not passed the savings on to consumers.

29
Acknowledgements

I am grateful to my dissertation committee, Alan Hess (chair), Wayne Ferson and

Jennifer Lynch Koski for their guidance and help. Comments and suggestions from Lu

Hong, Tim Kruse, Tom Nohel and two anonymous referees substantially improved the

exposition of the paper.

30
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33
Table 1 + Summary Statistics
______________________________________________________________________________________

Panel A: Levels Mean Std. Min. Max. Auto-

Dev. corr.
______________________________________________________________________________________
Fixed-rate mortgage spread 1.69 0.78 0.29 4.08 0.83

Adjustable-rate mortgage spread 0.86 0.73 -0.63 2.67 0.92

Loan origination fees 0.38 0.13 0.18 0.78 0.95

Yield curve slope 1.32 1.45 -3.48 4.23 0.95

Treasury bond volatility 11.88 4.59 4.16 31.19 0.26

Treasury bill volatility 18.56 10.35 4.05 60.03 0.33

Corporate quality spread 1.24 0.49 0.55 2.69 0.96

Mortgage delinquencies 3.24 0.48 2.47 4.16 0.98

Treasury bond futures price differential 0.52 0.58 -1.22 1.34 0.94

Treasury bill spread 0.78 0.52 -0.94 2.93 0.85

Securitization activity 5.34 2.64 0.73 11.20 0.93

Passthrough creation 4.11 1.80 0.73 9.15 0.90

CMO creation 1.23 1.23 0.00 5.00 0.87

______________________________________________________________________________________

34
Table 1 (continued)
______________________________________________________________________________________

Panel B: First Differences Mean

Std. Min. Max. Auto-
Dev. corr.
______________________________________________________________________________________

Fixed-rate mortgage spread -0.01 0.45 -1.36 2.86 -0.26

Adjustable-rate mortgage spread 0.00 0.28 -0.66 1.04 -0.09

Loan origination fees -0.00 0.04 -0.12 0.10 -0.36

Yield curve slope 0.01 0.44 -1.69 2.87 0.30

Treasury bond volatility 0.01 5.57 -20.57 19.65 -0.49

Treasury bill volatility 0.03 11.91 -42.36 46.04 -0.43

Corporate quality spread -0.00 0.14 -0.53 0.66 0.18

Mortgage delinquencies -0.00 0.10 -0.49 0.35 -0.00

Tbond futures price differential 0.01 0.18 -0.91 1.09 -0.25

Treasury bill spread 0.00 0.28 -1.32 1.00 0.20

Securitization activity 0.03 0.97 -3.43 3.09 -0.27

Passthrough creation 0.02 0.79 -3.43 2.17 -0.26

CMO creation 0.01 0.64 -2.08 2.62 -0.38

______________________________________________________________________________________
Summary statistics computed from data for the period January 1980 to December 1995, except for statistics
involving the adjustable-rate mortgage spread, which use data from July 1984 to December 1995. The
fixed-rate mortgage spread is the fixed-rate mortgage contract rate minus the yield on a benchmark
Treasury security matched on average life. The adjustable-rate mortgage spread is the adjustable-rate
mortgage contract rate minus the yield on a one-year Treasury bill. Loan origination fees are computed as
the difference between the effective mortgage rate (i.e., the contract rate plus mortgage origination fees
amortized over ten years) and the nominal mortgage rate. Yield curve slope measures the yield differential
between thirty-year Treasury bonds and one-year Treasury bills. Treasury bond and Treasury bill volatility
measures are based on daily yields. The corporate quality spread is the yield differential between corporate
bonds rated AAA and those rated BAA. Mortgage delinquencies measures the percentage of outstanding
conventional mortgage loans for which loan payments are more than 30 days late. The Treasury bond
futures price differential is the difference between the prices of adjacent delivery Treasury bond futures
contracts. The Treasury bill spread measures the yield differential between one-year Treasury bills and
three-month Treasury bills. Securitization activity is the dollar volume of mortgage loans securitized
during the month, expressed as a percentage of the dollar volume of mortgage loans originated over the
previous 12 months. Passthrough creation measures the dollar volume of mortgage loans securitized as
passthroughs during the month and CMO creation measures the dollar volume of mortgage loans
securitized as CMOs during the month, both expressed as a percentage of the dollar volume of mortgage
loans originated over the previous 12 months. Except for autocorrelations, all measures are in percent.

35
Table 2 + Stationarity and co-integration tests for adjustable-rate mortgage data
______________________________________________________________________________________

Panel A: Augmented Dicky-Fuller stationarity tests

Levels First Differences

Adjustable-rate mortgage spread -2.5 -12.9
Yield curve slope -1.6 -7.6
Treasury bill volatility -6.6 -18.4
Corporate quality spread -5.1 -9.7
Mortgage delinquencies -2.0 -12.3
Treasury bill spread -3.9 -8.7
Securitization activity -2.1 -9.1
Passthrough creation -2.6 -14.0
CMO creation -2.6 -17.2
5% Critical value -3.4 -2.9
______________________________________________________________________________________

Panel B: Co-integration tests for system A

ζr ζr (0.05) ηr ηr (0.05)
N– 4=r=0 17.2 27.3 38.8 48.4
N– 3=r=1 12.6 21.3 21.6 31.3
N– 2=r=2 5.3 14.6 9.0 17.8
N– 1=r=3 3.7 8.1 3.7 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System A includes the following variables: adjustable-rate mortgage spread
(ASPRD), yield-curve slope (SLOPE), mortgage delinquencies (DEL) and securitization activity (SEC).
______________________________________________________________________________________

Panel C: Co-integration tests for system B

ζr ζr (0.05) ηr ηr (0.05)
N– 5=r=0 30.7 33.3 65.2 70.0
N– 4=r=1 18.0 27.3 34.5 48.4
N– 3=r=2 8.4 21.3 16.5 31.3
N– 2=r=3 5.8 14.6 8.1 17.8
N– 1=r=4 2.3 8.1 2.3 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System B includes the following variables: adjustable-rate mortgage spread
(ASPRD), yield-curve slope (SLOPE), mortgage delinquencies (DEL), passthrough creation (PT) and CMO
creation (CMO).
______________________________________________________________________________________

36
Table 3 + Regression results for adjustable-rate mortgage spread model.

______________________________________________________________________________________

Variables: Coef t-Stat Coef t-Stat Coef t-Stat

______________________________________________________________________________________

Intercept -0.13 -1.4 -0.05 -0.5 -0.05 -0.5

Change in yield curve slope 0.18 1.6 0.21* 2.2 0.22* 2.2

Treasury bill volatility 0.00 1.8 0.00 0.6 0.00 0.5

Change in Treasury bill volatility 0.01* 2.0 0.01* 2.0

Corporate quality spread 0.05 0.5 0.06 0.8 0.06 0.8

Change in corporate quality spread -0.16 -0.6 -0.18 -0.6

Change in mortgage delinquencies 0.53* 2.2 0.51* 2.4 0.49* 2.3

Treasury bill yield spread 0.02 0.2 -0.07 -1.1 -0.07 -1.1

Change in Treasury bill yield spread -0.82** -5.7 -0.84** -5.8

Change in securitization activity -0.02 -0.9 -0.03 -1.4

Change in passthrough creation -0.01 -0.4

Change in CMO creation -0.05 -1.6

Adjusted R2 .09 .29 .30

______________________________________________________________________________________
The dependent variable is the monthly change in the adjustable-rate mortgage spread. Securitization
activity includes passthrough creation and CMO creation. An ordinary least squares estimation procedure
is used. * denotes significance at the 5% level (using a two-tailed test); ** denotes significance at the 1%
level.

37
Table 4 + Stationarity and co-integration tests for fixed-rate mortgage data
____________________________________________________________________________________

Panel A: Augmented Dicky-Fuller stationarity tests

Levels First Differences

Fixed-rate mortgage spread -5.3 -18.3
Yield curve slope -3.5 -10.1
Treasury bond volatility -7.2 -23.5
Corporate quality spread -5.9 -11.5
Mortgage delinquencies -2.3 -13.7
Treasury bond futures price differential -2.0 -17.6
Securitization activity -2.4 -18.0
Passthrough creation -2.7 -17.9
CMO creation -3.0 -20.5
5% Critical value -3.4 -2.9
______________________________________________________________________________________

Panel B: Co-integration tests for system A

ζr ζr (0.05) ηr ηr (0.05)
N– 3=r=0 15.8 21.3 29.6 31.3
N– 2=r=1 12.4 14.6 13.8 17.8
N– 1=r=2 1.4 8.1 1.4 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System A includes the following variables: mortgage delinquencies (DEL), Treasury
bond futures price differential (FUT) and securitization activity (SEC).
______________________________________________________________________________________

Panel C: Co-integration tests for system B

ζr ζr (0.05) ηr ηr (0.05)
N– 4=r=0 22.8 27.3 40.4 48.4
N– 3=r=1 9.2 21.3 17.6 31.3
N– 2=r=2 6.1 14.6 8.4 17.8
N– 1=r=3 2.3 8.1 2.3 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System B includes the following variables: mortgage delinquencies (DEL), Treasury
bond futures price differential (FUT), passthrough creation (PT) and CMO creation (CMO).
______________________________________________________________________________________

38
Table 5 + Regression results for fixed-rate mortgage spread model.

______________________________________________________________________________________

Variables Coef t-Stat Coef t-Stat Coef t-Stat

______________________________________________________________________________________

Intercept 0.73** 4.1 0.71** 4.0 0.72** 4.1

Yield curve slope -0.23** -6.5 -0.23** -6.4 -0.23** -6.5

Treasury bond volatility 0.03** 4.5 0.03** 5.3 0.03** 4.6

Corporate quality spread 0.75** 7.1 0.75** 6.9 0.76** 7.2

Change in mortgage delinquencies 0.16 0.7 0.13 0.5

Change in Tbond futures price diff. 0.18 1.5 0.15 1.2

Change in securitization activity 0.00 0.0 -0.00 -0.1

Change in passthrough creation 0.02 0.7

Change in CMO creation -0.03 -0.8

ρ -0.52 -0.55 -0.52

DW 1.98 2.00 1.99

Adjusted R2 .80 .80 .80

______________________________________________________________________________________
The dependent variable is the fixed-rate mortgage spread. Securitization activity includes passthrough
creation and CMO creation. An estimated generalized least squares estimation procedure is used. The
error terms follow a first-order autoregressive process. ρ is the first-order autocorrelation coefficient. DW
measures the Durbin Watson statistic. * denotes significance at the 5% level (using a two-tailed test); **
denotes significance at the 1% level.

39
Table 6 + Regression results for simultaneous fixed-rate mortgage spread and loan origination fee models.
______________________________________________________________________________________
Dependent Var.: ∆FSPRD ∆FEES ∆FSPRD ∆FEES
Independent Variables
______________________________________________________________________________________
Intercept 0.00 -0.00 0.00 -0.00
(0.2) (-0.3) (0.2) (-0.3)
Change in yield curve slope -0.42** -0.00 -0.42** -0.00
(-6.2) (-0.0) (-6.1) (-0.0)
Change in Treasury bond volatility 0.03** -0.00 0.03** -0.00
(4.6) (-0.2) (4.6) (-0.2)
Change in corporate quality spread 0.50** 0.00 0.49** 0.01
(2.7) (0.2) (2.7) (0.3)
Change in mortgage delinquencies 0.49 0.03 0.49 0.03
(1.8) (1.0) (1.8) (1.0)
Change in Tbond futures price differential 0.44* 0.00 0.42* 0.00
(2.3) (0.1) (2.2) (0.2)
Change in securitization activity 0.01 -0.01
(0.3) (-1.6)
Change in passthrough creation 0.03 -0.01
(0.8) (-1.7)
Change in CMO creation -0.03 -0.00
(-0.6) (-0.5)
Change in loan origination fees 1.05 1.09
(1.5) (1.5)
Change in fixed-rate mortgage spread 0.01 0.01
(1.6) (1.6)
ρ -0.32 -0.38 -0.32 -0.37
DW 2.08 2.07 2.07 2.07
2
Adjusted R .35 .13 .35 .13
______________________________________________________________________________________
Monthly changes in fixed-rate mortgage spreads (∆FSPRD) and loan origination fees (∆FEES) are
estimated simultaneously. A two stage least squares estimation procedure is used. The error terms in each
equation follow a first-order autoregressive process. ρ is the first-order autocorrelation coefficient. DW
measures the Durbin Watson statistic. Securitization activity includes passthrough creation and CMO
creation. * denotes significance at the 5% level (using a two-tailed test); ** denotes significance at the 1%
level. t-statistics are reported in parentheses.

40
Table 7 + Stationarity and co-integration tests for loan origination fee data
______________________________________________________________________________________

Panel A: Augmented Dicky-Fuller stationarity tests

Levels First Differences

Loan origination fees -4.2 -29.3
Yield curve slope -3.5 -10.1
Treasury bond volatility -7.2 -23.5
Treasury bill volatility -6.8 -28.0
Corporate quality spread -5.9 -11.5
Mortgage delinquencies -2.3 -13.7
Treasury bond futures price differential -2.0 -17.6
Treasury bill spread -5.0 -16.6
Securitization activity -2.4 -18.0
Passthrough creation -2.7 -17.9
CMO creation -3.0 -20.5
5% Critical value -3.4 -2.9
______________________________________________________________________________________

Panel B: Co-integration tests for system A

ζr ζr (0.05) ηr ηr (0.05)
N– 3=r=0 15.8 21.3 29.6 31.3
N– 2=r=1 12.4 14.6 13.8 17.8
N– 1=r=2 1.4 8.1 1.4 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System A includes the following variables: mortgage delinquencies (DEL), Treasury
bond futures price differential (FUT) and securitization activity (SEC).
______________________________________________________________________________________

Panel C: Co-integration tests for system B

ζr ζr (0.05) ηr ηr (0.05)
N– 4=r=0 22.8 27.3 40.4 48.4
N– 3=r=1 9.2 21.3 17.6 31.3
N– 2=r=2 6.1 14.6 8.4 17.8
N– 1=r=3 2.3 8.1 2.3 8.1

Trace (ηr) and maximal eigenvalue (ζr) tests of the null hypothesis that there are r co-integrating relations
among the variables. System B includes the following variables: mortgage delinquencies (DEL), Treasury
bond futures price differential (FUT), passthrough creation (PT) and CMO creation (CMO).
______________________________________________________________________________________

41
Table 8 + Regression results for loan origination fee model.

_______________________________________________________________________________________

Panel A: Securitization First Differences

Coef t-Stat Coef t-Stat Coef t-Stat

_______________________________________________________________________________________

Intercept 0.222** 8.4 0.459** 10.3 0.461** 10.4

Yield curve slope -0.022** -3.9 -0.006 -1.2 -0.007 -1.3

Treasury bond volatility 0.000 0.1 0.000 0.0 -0.000 -0.2

Treasury bill volatility 0.000 1.5 0.000 1.1 0.000 1.4

Corporate quality spread 0.120** 7.0 0.043* 2.1 0.042* 2.1

Change in mortgage delinquencies 0.056* 2.2 0.058* 2.4 0.063** 2.6

Change in Tbond futures price diff. -0.019 -1.4 -0.016 -1.3 -0.011 -0.9

Treasury bill spread 0.036** 3.1 0.027* 2.5 0.027* 2.5

Change in securitization activity -0.002 -1.0 -0.002 -0.9

Change in passthrough creation -0.005* -2.0

Change in CMO creation 0.003 0.9

Time -0.002** -6.7 -0.002** -6.7

ρ -.71 -.67 -.67

DW 1.94 1.98 1.97

Adjusted R2 .91 .92 .92

The dependent variable is the loan origination fee. Securitization activity includes passthrough creation and
CMO creation. Time is a linear time trend. An estimated generalized lease squares estimation procedure is
used. The error terms follow a first-order autoregressive process. ρ is the first-order autocorrelation
coefficient. DW measure the Durbin Watson statistic. * (**) denotes significance at the 5% (1%) level
using a two-tailed test.
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Table 8 (continued)
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Panel B: Securitization Levels

Coef t-Stat Coef t-Stat

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Intercept 0.042** 3.3 0.040** 3.1

Corporate quality spread 0.010 1.0 0.013 1.2

Change in mortgage delinquencies 0.049 1.8 0.049 1.8

Treasury bill spread -0.005 -0.8 -0.004 -0.7

Securitization activity -0.004** -3.4

Passthrough creation -0.005** -2.9

CMO creation -0.001 -0.4

Lag1 (loan origination fees) 0.570** 8.3 0.566** 8.2

Lag2 (loan origination fees) 0.348** 5.0 0.351** 5.1

Adjusted R2 .93 .93

The dependent variable is the loan origination fee. Securitization activity includes passthrough creation and
CMO creation. The estimation procedure is ordinary least squares. * (**) denotes significance at the 5%
(1%) level using a two-tailed test.
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