WASHINGTON - A study by the Federal Reserve Board suggests that, counter to prevailing belief, the existence of a secondary mortgage market does little to lower interest rates for homebuyers.

A model constructed by the authors of the report found that the increased liquidity enjoyed by lenders that have access to a secondary market was not passed on to borrowers in the form of lower rates. Because the securitizer sets the underwriting standard for loans it will accept and the rates it pays for mortgage-backed securities, the authors argue, lenders' liquidity premium is realized mainly when they serve borrowers who have higher credit quality.

The secondary market gives lenders no advantage when serving marginal borrowers, the study found, and it is the cost of serving that market that largely determines mortgage rates.

The study was conducted by Wayne Passmore, an assistant director at the Fed, Andrea Heuson, an associate professor at the University of Miami, and Roger Sparks, an associate professor at Mills College. It makes no explicit mention of Fannie Mae and Freddie Mac, the government-sponsored secondary mortgage market giants, which have been under attack from lawmakers and activists who want to do away with their federal subsidies.

The study is available at www.federalreserve.gov

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