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Pricing Residential Mortgage Credit Risk in the Post-GFC Era

Author

Listed:
  • Agostino Capponi
  • Stijn Van Nieuwerburgh
  • Xinkai Wu

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.

Suggested Citation

  • Agostino Capponi & Stijn Van Nieuwerburgh & Xinkai Wu, 2026. "Pricing Residential Mortgage Credit Risk in the Post-GFC Era," NBER Working Papers 34708, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34708
    Note: AP CF EFG ME
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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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