Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/221912
Title: 

To securitise or to price credit default risk?

The document was removed on behalf of the author(s)/ the editor(s).

Authors: 
McGowan, Danny
Nguyen, Huyen
Year of Publication: 
2020
Series/Report no.: 
IWH Discussion Papers 10/2020
Abstract: 
We evaluate lenders' incentives to mitigate credit default risk through pricing or securitisation. Exploiting exogenous variation in credit default risk created by differences in foreclosure law along US state borders, we find that lenders in the mortgage market respond to the law in heterogeneous ways. In the agency market where the GSEs mandate a common interest rate policy, foreclosure law provokes a 4.5% increase in securitisation rates but does not affect interest rates. For nonagency loans where market participants demand risk premium, foreclosure law does not incentivise lenders to transfer the risk through the use of securitisation but causes a 625 basis point increase in interest rates. The results highlight how the GSEs' common interest rate policy inhibits lenders' risk-based pricing incentives, increases the GSEs' debt holdings by $70 billion per annum, and exposes taxpayers to preventable losses in the housing market.
Subjects: 
loan pricing
securitisation
credit risk
GSEs
JEL: 
G21
G28
K11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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The document was removed on behalf of the author(s)/ the editor(s) on: September 8, 2020


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