Pricing Residential Mortgage Credit Risk in the Post-GFC Era

Agostino Capponi, Stijn Van Nieuwerburgh and Xinkai Wu

No 34708, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Following the Great Financial Crisis (GFC), the Credit Risk Transfer (CRT) bond market emerged as a new asset class in U.S. mortgage market. We develop an asset pricing framework for CRTs consistent with Treasury, corporate bond, and housing markets. Our analysis reveals that the Government-Sponsored Enterprises compensate investors approximately fairly on average, though they overpay for low-risk tranches and underpay for high-risk ones. Additionally, the post-GFC guarantee fee increases broadly align with underlying credit risk. We find significant reverse cross-subsidization, where high-credit-risk borrowers subsidize low-risk ones. The 2023 reform partially corrected this cross-subsidization.

JEL-codes: E60 G13 G18 G22 G28 G51 R21 (search for similar items in EconPapers)
Date: 2026-01
Note: AP CF EFG ME
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