Working Paper: NBER ID: w23784
Authors: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
Abstract: We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large dataset with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid 2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.
Keywords: Credit Boom; Housing Boom; Securitization; Private Label; Subprime
JEL Codes: E32; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Failure of mortgage rates to rise (E43) | Easier mortgage credit conditions (G21) |
| Drop in conditional mortgage spread (G21) | Failure of mortgage rates to rise (E43) |
| Failure of mortgage rates to rise (E43) | Shift in underlying credit conditions (E51) |
| Rise in delinquency rates (G33) | Mortgages issued after mid-2003 (G21) |
| Drop in conditional mortgage spread (G21) | Adverse effects on loan performance (G21) |