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FNMA Mortgage Purchase Commitments As Put Options: An Empirical Examination

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  • Thomas D. Berry
  • Adam K. Gehr

Abstract

The Federal National Mortgage Association (FNMA) auctions commitments to purchase mortgages. An examination of the terms of the commitment contract shows that these commitments are actually put options on mortgages. The contract is unusual, however, in that the price of the commitment is a fixed percentage of the value of the mortgages. In the auction, the dealers effectively bid the exercise price at which they would be willing to pay the fixed commitment price. In this paper, we study the economics of the FNMA auction. We use a two‐state approximation to the American put pricing model for interest‐dependent securities to examine the behavior of the auction results. We find that the model performs reasonably well for several years — giving results which are, on the average, correct — and then, quite abruptly, the performance of the model deteriorates. Some possible reasons for this result are then examined.

Suggested Citation

  • Thomas D. Berry & Adam K. Gehr, 1985. "FNMA Mortgage Purchase Commitments As Put Options: An Empirical Examination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(1), pages 93-106, March.
    • Handle: RePEc:bla:reesec:v:13:y:1985:i:1:p:93-106
    DOI: 10.1111/1540-6229.00343
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    Cited by:

    1. Austin Kelly, 1994. "Capitalization of Above Market Financing - or, A Tale of 2 Condos," Urban/Regional 9412001, University Library of Munich, Germany, revised 24 Dec 1994.
    2. Austin Kelly, 1998. "Capitalization of Above Market Financing: Condos and Co-ops," Journal of Real Estate Research, Taylor & Francis Journals, vol. 15(2), pages 163-175, January.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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