To Securitize or To Price Credit Risk?

Journal of Financial and Quantitative Analysis

98 Pages Posted: 15 Aug 2018 Last revised: 30 Jun 2021

See all articles by Danny McGowan

Danny McGowan

University of Birmingham

Huyen Nguyen

University of Nottingham

Date Written: April 28, 2020


Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along US 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.

Keywords: loan pricing, securitization, credit risk, GSEs

JEL Classification: G21, G28, K11

Suggested Citation

McGowan, Danny and Nguyen, Huyen, To Securitize or To Price Credit Risk? (April 28, 2020). Journal of Financial and Quantitative Analysis, Available at SSRN: or

Danny McGowan (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

Huyen Nguyen

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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