The Mortgage Rate Conundrum
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.
We thank, without implicating, Gene Amromin, Gadi Barlevy, Douglas Duncan, Francesco Ferrante, Andreas Fuster, Simon Gilchrist, Andrew Haughwout, Ethan Ilzetzki, Nels Lind, David Lucca, Carl Tannenbaum, Arlene Wong, as well as seminar and conference participants for comments and suggestions, and Aaron Kirkman for outstanding research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Banks of Chicago, New York or the Federal Reserve System. Giorgio Primiceri is a consultant for the Federal Reserve Bank of Chicago and a research visitor at the European Central Bank. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.