Mortgage Rates and Credit Risk : Evidence from Mortgage Pools

Beginning in the 1990s, the growth of mortgage lending was associated with the growth of a new set of mortgage-backed securities. We study the evolution of initial mortgage rates as a function of characteristics of both the loan and the borrower. We find that credit risk historically was priced similarly in all types of mortgage pools with the exception of subprime pools, for which credit risk became increasingly important over time. These results are robust across regions of the United States and the income distribution of borrowers. Finally, delinquencies and, to a lesser extent, house prices are cointegrated with loading factors on subprime rates but not with those of other pools