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.

Keywords: Securitization, consumer mortgage costs, CMOs, derivatives

JEL Classification: G15, G13, F31