The financial press ran a number of stories last week that referred to a Federal Reserve study on the economics of the mortgage market. The study, entitled Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability, raised the possibility that mortgage securitization, and by implication the existence of Fannie Mae and Freddie Mac, does not necessarily lead to lower mortgage rates.

The main conclusions of the study are that conditions exist where securitization may fail to lower the mortgage rate. Additionally, the authors conclude that a decline in the mortgage rate causes increased securitization rather than the other way around. In our opinion, the study is undertaken using highly controlled conditions and assumptions, and does not fully reflect the dynamics of the rate-setting processes. Also, the main conclusions of the study are based upon the credit risk of mortgages and do not account for the effect of prepayments on both issuance volume and borrower behavior.

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