UCLA

In Chapter 1 of this dissertation, I study the informational content of GSE Credit Risk Transfer (CRT) bonds. CRT bonds amount to catastrophe bonds on underlying mortgage collateral, and are informative about the market price of credit risk for conforming mortgage loans. I analyze the information content of this new asset class, which holds effectively half of the default risk of the \$12 trillion US mortgage market. I build a pricing model and extract default probabilities from a comprehensive hand-collected dataset on CRT bond issuances using TRACE pricing data. I find that while the guaranty-fee (g-fee) implied by early CRT issuances was high and near the level charged by the GSEs (30 bp), the market has stabilized in recent years and implied g-fees have fallen significantly to around 10-20 basis points. I discuss the implications of these findings for several facets of the mortgage market.

In Chapter 2, I build and estimate a top-down portfolio credit model matched to a sample of GSE Credit Risk Transfer bond (CRT) tranche market prices. Two state variables, modeled as exogenous Poisson intensities, represent two sources of default risk affecting mortgages, which intuitively map into a level of routine mortgage defaults and the risk of catastrophic losses. The market views the (risk-neutral) probability of a catastrophic event, on the order of the 2008 housing market crisis, as occurring roughly once every 25 years. The implied guaranty-fee (g-fee) is on the order of 15 basis points over the sample, and both risk factors contribute roughly equally to this spread. I also analyze the level of credit-protection offered by the current CRT design in a simulation study, and discuss the conditions under which ``credit risk transfer transfers credit risk."