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To Securitize or to Price Credit Risk?

Author

Listed:
  • McGowan, Danny
  • Nguyen, Huyen

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.

Suggested Citation

  • McGowan, Danny & Nguyen, Huyen, 2023. "To Securitize or to Price Credit Risk?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(1), pages 289-323, February.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:1:p:289-323_9
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    Cited by:

    1. Ryan, Alexander, 2025. "Financial Risks in Flooding: Bank Response to Climate-Induced Natural Disasters," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 360730, Agricultural and Applied Economics Association.
    2. Padagnassou Simda & Gregory Gimpel, 2025. "Managing regulatory risks of small bank—fintech collaborations," Journal of Banking Regulation, Palgrave Macmillan, vol. 26(4), pages 827-839, December.
    3. Mueller, Isabella & Nguyen, Huyen & Nguyen, Trang, 2025. "Carbon transition risk and corporate loan securitization," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    4. Mai, Chung & Scheule, Harald, 2026. "Time-varying repayment contracts for financial resilience in mortgage lending," Journal of Banking & Finance, Elsevier, vol. 182(C).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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