RMBS

Sein is always interested in new research that helps shed light on the complex dynamics of the housing market. A recently updated research note by Andreas Fuster and Basit Zafar of the Federal Reserve Bank of New York (FRBNY) provides important insights in understanding the impact of monetary policy on the dynamics of housing demand in relation to mortgage rates and down payment requirements. Specifically, using the change in willingness to pay (WTP), Fuster and Zafar conclude:

• A decrease in down payment requirements or an increase in non-household wealth has large affects on WTP;
• A decrease of 2-percentage points in rates changes WTP on average by 5%.

Research and analysis of housing market behaviors has gained additional significance in recent years, as several analysts have been attributing major importance to the housing price dynamics and their impact on the economy. Various attempts have been made to investigate and explain these dynamics and the characteristics of the housing market.

We explore the usefulness of loan-level performance data now being published by Fannie Mae and Freddie Mac, the two main US housing GSEs. A recent article by Scott Anderson and Janet Jozwik, titled “Building a Credit Model Using GSE Loan-Level Data” published in the Spring 2014 “Journal of Structured Finance”, gives us the opportunity to explore the practical usefulness of this data. Their work confirms that the GSE data is suitable for building a credit model, as it provides enough information to model the behavior of the borrower, including the probability of becoming delinquent.