Geographic Disaggregation of House Price Stress Paths: Implications for Single-Family Credit Risk Measurement

Alexander Bogin, LaRhonda Ealey (), Kirsten Landeryou (), Scott Smith and Andrew Tsai ()
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LaRhonda Ealey: Federal Housing Finance Agency
Kirsten Landeryou: Federal Housing Finance Agency
Scott Smith: Federal Housing Finance Agency
Andrew Tsai: Federal Housing Finance Agency

No 23-02, FHFA Staff Working Papers from Federal Housing Finance Agency

Abstract: We explore the impact of geographic disaggregation of house price stress paths on single-family credit risk measurement. Specifically, we focus on the value added of moving from national, to state-level, to core-based statistical area (CBSA)-level house price paths on estimates of mortgage credit related stress losses. To ensure the robustness of our results, we estimate losses across two different loan portfolios and three credit models. We find that CBSA-level paths provide additional insight on localized credit risk and can be reliably constructed using quarterly house price indices. Further, the variation in results across credit models suggests an implicit confidence interval around any one stress loss estimate. Accounting for this uncertainty through a model risk add-on could potentially offer a more conservative view of portfolio credit risk.

Keywords: geographic aggregation; credit modeling; countercyclical (search for similar items in EconPapers)
JEL-codes: E44 G53 R30 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-06
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
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Published in The Journal of Fixed Income, 2024, volume 33, issue 4, pages 63-77

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