Residential Mortgage Credit Derivatives

33 Pages Posted: 14 Oct 2008

See all articles by Jefferson Duarte

Jefferson Duarte

Rice University

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Multiple version iconThere are 3 versions of this paper

Date Written: October 7, 2008


As the fallout from subprime losses clearly demonstrates, the credit risk in residential mortgages is large and economically significant. To manage this risk, this paper proposes the creation of derivative instruments based on the credit losses of a reference mortgage pool. We argue that these derivatives would enable banks to retain whole loans while also enjoying the capital benefits of hedging the credit risk in their mortgage portfolios. In comparisons of hedging effectiveness, we show that instruments based on credit losses outperform contracts based on house-price appreciation.

Keywords: Credit risk, residential mortgages, credit derivatives

JEL Classification: G21

Suggested Citation

Duarte, Jefferson and McManus, Douglas A., Residential Mortgage Credit Derivatives (October 7, 2008). Available at SSRN: or

Jefferson Duarte (Contact Author)

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States
703-903-2953 (Phone)

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