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Secondary Mortgage Markets and Access to Credit: 1992-2002

Stuart A. Gabriel and Stuart S. Rosenthal
In the last few decades, U.S. financial markets have witnessed a dramatic increase in the sophistication and size of the secondary market for mortgage loans. By 2002, close to 90 percent of conforming mortgage loan originations in the U.S. were sold into the secondary market. Although there is widespread consensus that an active secondary market enhances the efficiency of mortgage credit allocation, that belief has gone largely untested. Drawing on a largely overlooked feature of the Home Mortgage Disclosure Act (HMDA) data, this paper begins to fill that gap. We combine HMDA data from 1992 to 2002 with various years of census tract sociodemographic information obtained from Decennial Censes. Controls are included for endogenous mortgage market activity along with a host of other considerations. In addition, we focus our analysis on conventional home purchase loans that conform to secondary market loan size limits. Results indicate that U.S. mortgage markets became more efficient over the decade of the 1990s, at least as measured by the declining impact of primary market denials on secondary market purchases. In addition, increasing purchases by 50 loans in a given census tract, equivalent to the inter-quartile range for purchases in 2000, would increase the share of applications originated by primary lenders by 3.7 percent. Among non-financial institutions, an equivalent increase in secondary market purchases results in an even larger 8 percent increase in the origination share. These estimates are of similar magnitude to the 3.5 percentage point rise in the U.S. homeownership rate between 1990 and 2000. Our results confirm the long held belief that an active secondary market enhances the efficiency of mortgage credit allocation and in so doing expands the supply of credit extended to potential borrowers.