Mortgage rates and credit risk: Evidence from mortgage pools

In the 1990s, securitised subprime loans supported the growth of mortgage lending. We study the evolution of initial mortgage rates as a function of loan and borrower characteristics during 1992-2015. We compare the evolution of initial rates on securitised subprime mortgages with rates of prime privately securitised mortgages, mortgages securitised by government-sponsored enterprises, and nonsecuritised mortgages. Starting in 2003 the risk premium on subprime loans decreases until it disappears at the onset of the Global Financial Crisis. We find that loading factors on subprime rates are cointegrated with delinquencies and house price movements, providing evidence of the important role of the subprime market.