Risk and Delinquency in Mortgage Markets
Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Kristopher Gerardi, Federal Reserve Bank of Atlanta
Private Capital and Mortgage Stress. Evidence from Natural Disasters and the Credit Risk Transfers.
AbstractWe study how private capital in mortgage markets would absorb credit risk. Our identification exploits Hurricanes Harvey and Irma and the Credit Risk Transfers (CRT) issued by the GSEs. CRTs are structured securities to transfer some of their credit risk to private investors. CRTs differ in the geographical and loan-to-value composition of their reference pool, and in subordination class. These heterogeneities generate differences in exposure to the mortgage defaults caused by the hurricanes. We find significant increases in the price of credit risk right after the hurricanes' landfall. One percentage point larger geographical exposure to disaster areas increases the compensation investors demand by 200 basis points on average, which is 80% of the standard deviation of the CRT secondary market pricing.
Harping on about HARP: Consequences of Ineligibility for the Home Affordable Refinance Program
Abstract"We analyze the impact of being ineligible for the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans (Bbx) we analyze loan performance and quantify potential wealth, consumption and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for HARP. We
estimate that such private borrowers are annually approximately 9% less likely to prepay their mortgages after the HARP announcement than comparable borrowers whose mortgages are owned or secured by Freddie Mac. We find significant loss in wealth and increase in default for a comparable set of borrowers in the private loan sample. The greatest detriment is documented in CBSAs with the largest housing price declines in
the financial crisis. "
Credit Risk Transfers: Optimal Structuring
AbstractFannie Mae and Freddie Mac, at the instigation of their regulator, have undertaken Credit Risk Transfer (CRT) programs that share some of their risk with private investors. This is not new: Freddie Mac sold off some risk at the turn of the millennium. The new structures are essentially synthetic CDOs, not unlike the infamous Abacus deal from 2007. However, the new structures are different and with different incentives for risk-taking. We analyze CRTs via a model of optimal incentives, and we contrast them with the incentive problems of Abacus. We conclude that the deals are similar to our optimal structure, which has deal managers holding a vertical slice of the deal, as opposed to first-loss retention in some securitization deals.
- G2 - Financial Institutions and Services
- R2 - Household Analysis