Secondary mortgage markets: recent trends and research results

Federal Home Loan Bank Board Journal, April, 1984 by James E. McNulty

The effect of the development of the secondary market for conventional loans on interregional differences has been considered by Morrell and Saba, and by Rudolph, Zumpano, and Karson [6]. Interestingly, neither study found that the secondary market had had a major impact on interregional differences.

In the first study, Morrel and Saba developed a multiple regression equation in which interregional differeces were related to a secondary market variable and several regional variables, representing regional differences in various loan characteristics. (Multiple regression is a statistical technique which forms a mathermatical equation to test for the strength of a relationship among several variables.) The authors concluded that, while regional differences still existed (even after adjustment for differences in loan characteristics), the development of a secondary market for conventional loans has been partially successful in reducing such differentials.

In a related study, Rudolph, Zumpano, and Karson compared interregional mortgage rate differentials on conventional loans for 1968 and 1978 using data for 46 SMSAs. The authors also examined changes in other loan terms such as loan-to-value ratios, term to maturity, and initial fees and charges to ascertain if the development of the secondary market had any impact on these other loan characteristics.

The authors found, for example, that the standard deviation of the contract mortgage rate (a measure of interregional variation) actually increased in the sample of 46 SMSAs from 1968 to 1978. Part of this, however, was due simply to the increase in interest rates over the period. A relative measure, the coefficient of variation (calculated as the standard deviation divided by the mean) showed virtually no change between 1968 and 1978. Further examination of the data (using a technique known as analysis of variance) revealed no statistically significant change in the relationship among the variables between the two years. This suggested that no basic change in the structure of the mortgage market had occurred over this period. Finally, a regression test was performed. For three of the four regions, the development of the secondary market was found to have had no significant impact on the contract mortgage rate. There was also little effect on the other loan characteristics. The study concluded that the secondary market had not had much impact in reducing differeces among local markets. Concluding Comments

Economists stress that markets work in complex ways to allocate resources among various sectors of the economy. In fact, markets work in ways that are oftern unanticipated by the participants. For example, interences with market forces often produces results that are the opposite of what was intended. The effect which rent control--a policy designed to assist low income groups--has had in creating an acute shortage of housing in areas, such as New York City, is a case in point.

A similar situation involving unanticipated effects has occurred in connection with the secondary mortgge market. Savings and loan executives enthusiastically applauded the development of an organized secondary market for conventional loans in the early 1970s. Nonetheless, a decade later, many of the same people were expressing great concern that the existence of this market had made it much more difficult for savings institutions to develop a market in their local area for adjustable rate mortgages. The reason for this is that the primary requirement of pension funds and other buyers of loans in the secondary market is for fixed-rate loans.