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To Securitize or to Price Credit Risk?

Published online by Cambridge University Press:  11 July 2022

Danny McGowan Open the ORCID record for Danny McGowan [Opens in a new window]  and
Huyen Nguyen
Danny McGowan*
Affiliation:
University of Birmingham
Huyen Nguyen
Affiliation:
Halle Institute for Economic Research (IWH) and Friedrich Schiller University Jena huyen.nguyen@iwh-halle.de
*
d.mcgowan@bham.ac.uk (corresponding author)
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Abstract

Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along U.S. state borders, we find that lenders securitize mortgages that are eligible for sale to the government-sponsored enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs’ buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs’ debt holdings.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 289 - 323
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, Toni Ahnert, Adolfo Barajas, Christa Bouwman, Ralph Chami, Piotr Danisewicz, Hans Degryse, Bob DeYoung, Ronel Elul, Mara Faccio (the editor), Larissa Fuchs, Martin Götz, Reint Gropp, Iftekhar Hasan, Dasol Kim, Michael Koetter, Jonathan Lee, Xiang Li, Elena Loutskina, Mike Mariathasan, William Megginson, Klaas Mulier, Trang Nguyen, Enrico Onali, Fotios Pasiouras, George Pennacchi, Amiyatosh Purnanandam, Klaus Schaeck, Glenn Schepens, Koen Schoors, Amit Seru, Christophe Spaenjers, Philip Strahan, Armine Tarazi, Jerome Vandenbussche, and seminar and conference participants at Bangor, Birmingham, Durham, the EFI Research Network, the Financial Intermediation Research Society, the 2018 FINEST Spring Workshop, FMA Europe, FSU Jena, the IMF, IWH-Halle, Leeds, Limoges, Loughborough, Nottingham, and the Western Economic Association for helpful comments and suggestions.

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