Rajdeep Sengupta

Yu Man Tam

English

Research Papers in Economics

August 2008 MonetaryTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
T
he Freddie Mac Primary Mortgage Market Survey
indicates that the interest rate on commitments for
30-year fixed-rate mortgages declined from a peak
of 8.52 percent in May 2000 to 5.23 percent in June 2003
(Figure 1). A sharp decline in interest rates typically leads
to increased demand for mortgage originations: First,
potential homeowners seek to take advantage of the low
rate to purchase a home. Second, existing mortgage holders
are keen to refinance their mortgages at the lower interest
rate. Mortgage lenders were able to meet this increased
demand because of a low cost of funds during this time
period, thereby resulting in a steady increase in total
mortgage originations. According to the Mortgage Bankers
Association, the dollar value of total mortgage origina-
tions for 1- to 4-family homes steadily increased from
$238 billion in 2000:Q1 to roughly $1,200 billion in
2003:Q3 (Figure 1).
If this growth in originations reflects the decline in the
interest rate, then mortgage originations might be expected
to decline when the contract rate increases. Indeed, mort-
gage originations did decline when contract rates rose after
2003. However, as Figure 1 shows, the level of originations
continued to remain higher on average than pre-2003 levels.
Why? Two reasons: First, interest rates in the post-2003
period remain below the high levels attained in the pre-
2003 era. Second, there was a change in the composition
of originations, with substantial growth in the nonprime
segment affecting the overall market.
Figure 2 shows the breakdown of mortgage originations
by market segment. Prime mortgages include loans secu-
ritized by an “agency”—namely, Freddie Mac, Fannie Mae,
and Ginnie Mae. Jumbo loans are prime mortgages but are
for amounts exceeding agency-conforming limits. Non  -
prime mortgages include both subprime and Alt-A markets.
Subprime mortgages generally include loans to borrowers
with incomplete or impaired credit histories, while Alt-A
mortgages include loans to borrowers who usually have high
credit scores but are unable or unwilling to document a stable
income history or are buying second homes or properties for
investment purposes.1 Figure 2 shows that an increase in
agency mortgages is the major factor behind the growth in
total mortgage originations between 2000 and 2003. However,
prime originations declined sharply after 2003. The growth of
originations after 2003 was sustained by the subprime and Alt-A
segments of the mortgage market.
—Rajdeep Sengupta and Yu Man Tam
1 Fabozzi, Frank J. (editor). The Handbook of Mortgage-Backed Securities. 
New York: McGraw-Hill, 2006.
Mortgage Originations: 2000-2006
research.stlouisfed.org
9 9
8 8
7 7
6 6
5 5
1,200
1,000
800
600
400
200
2000 2001 2002 2003 2004 2005 2006
SOURCE: FHLMC: PMMS Survey, Mortgage Bankers Association.
Interest Rate on 30-Year Fixed-Rate  
Mortgages: U.S. (%)
Mortgage Originations:
1- to 4-Family: Total (billion $)
Figure 1
0
500
1,000
1,500
2,000
2,500
3,000
2001 2002 2003 2004 2005 2006
Mortgage Originations by Year (in billion $)
Subprime
Alt-A
Jumbo
Agency
SOURCE: Inside Mortgage Finance Publications, Inc.
Figure 2

Mortgage originations: 2000-2006

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Mortgage originations: 2000-2006

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