Effects of securitization on mortgage yield spreads in Australia

Abstract

This paper examines effects of securitization and the resulted market structural change on mortgage yield spreads in Australia. Securitization has enabled mortgage corporations (new entrants solely rely on securitization funding) to intensify competition in the mortgage market with traditional lenders from 1994 to 2003. Responding to the heightened competition, banks and building societies largely reduced their yield spreads (from nearly 400 basis points to 150 basis points). However, there is no study to address how and extent securitization contributed to their reductions. Cointegration tests find positive relationships between bank and building society yield spreads and market concentration, but negative relationships between their spreads and securitization. These findings are consistent with literature in securitization (e.g., Gorton and Pennacchi, 1995; Kolari et al., 1998) and in the price-concentration relationship (e.g., Berger and Hannan, 1989).