To Securitize or to Price Credit Risk?

Danny McGowan and Huyen Nguyen

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 1, 289-323

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.

Date: 2023
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Working Paper: To securitize or to price credit risk? (2020)
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