Credit Risk Transfer, Informed Markets, and Securitization

21 Pages Posted: 10 Dec 2018

See all articles by Susan M. Wachter

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: December 2018

Abstract

Mortgage-backed securities (MBS) funded the U.S. housing bubble, while the ensuing bust resulted in systemic risk and the global financial crisis of 2007-09. In the run-up to the crisis, MBS pricing failed to reveal the growing credit risk. This article draws lessons from this failure that could inform the use of credit risk transfers (CRTs) to price credit risk. The author concludes that the CRT market, as currently constituted, could have appropriately priced and revealed credit risk during the bubble years because it met three key requirements: 1) transparency, through the full provision of information on the mortgages underlying the CRTs and the standardization of mortgages that arose from the predominance of Fannie Mae, Freddie Mac, and Ginnie Mae in the mortgage market; 2) open pricing in liquid markets; and 3) no counterparty risk. The author also describes areas of GSE reform that could either impair or enhance the ability of the CRT market to limit credit risk going forward, including the possible presence of multiple guarantors and the use of a common securitization platform.

Keywords: credit risk transfer; securitization; GSEs; transparency; market efficiency

JEL Classification: H81, G28, G01, G14

Suggested Citation

Wachter, Susan M., Credit Risk Transfer, Informed Markets, and Securitization (December 2018). Economic Policy Review, Vol. 24, No. 3, 2018. Available at SSRN: https://ssrn.com/abstract=3298991 or http://dx.doi.org/10.2139/ssrn.3298991

Susan M. Wachter (Contact Author)

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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