The Rising Gap between Primary and Secondary Mortgage Rates

December 15th, 2013
in econ_news

By Andreas Fuster, Laurie Goodman, David Lucca, Laurel Madar, Linsey Molloy, and Paul Willenh- FRBNY Economic Policy Review

The vast majority of mortgage loans in the United States are securitized in the form of agency mortgage-backed securities (MBS). Principal and interest payments on these securities are passed through to investors and are guaranteed by the government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac or by the government organization Ginnie Mae. Thus, investors in these securities are not subject to loan-specific credit risk; they face only interest rate and prepayment risk—the risk that borrowers may refinance the loan when rates are low.

Follow up:

In the primary mortgage market, lenders make loans to borrowers at a certain interest rate, whereas in the secondary market, lenders securitize these loans into MBS and sell them to investors. When thinking about the relationship between these two markets, policymakers and market commentators usually pay close attention to the “primary-secondary spread.” This spread is calculated as the difference between an average.

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The Rising Gap between Primary and Secondary Mortgage Rates

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