Subprime Mortgage Defaults and Credit Default Swaps

Eric Arentsen, David C. Mauer, Brian Rosenlund, Harold H. Zhang and Feng Zhao

Journal of Finance, 2015, vol. 70, issue 2, 689-731

Abstract: type="main">

We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.

Date: 2015
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