Forbearance and the Cost of Credit.
This study examines the CARES Act’s unintended impact on mortgage credit risk pricing and default expectations using CRT spreads.
What it examines
This study examines how the CARES Act mortgage forbearance policy affected credit risk pricing. Using CRT market data and a difference-in-differences method along with simulations, the research investigates investor expectations of future defaults and credit supply changes, particularly in states with judicial foreclosure processes.
What it concludes
The results show that forbearance raised expectations of future defaults reflected in higher CRT spreads and short-term delinquencies, though later fiscal support limited actual defaults. These findings can help design better mortgage policies and improve risk pricing in credit markets, with clear implications for public policy and financial stability.
Evidence objects
A study reveals that the CARES Act mortgage forbearance policy unexpectedly triggered credit supply contraction, reflected in higher Credit Risk Transfer (CRT) spreads and investor concerns about rising future defaults.
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Researchers discovered that increased judicial exposure amplified CRT spreads, with judicial states experiencing nearly $$0.57$$ percentage point rise per one percentage point exposure on the day the policy took effect.
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The analysis innovatively combined forward-looking market data, rigorous difference-in-differences econometric methods, and simulations to quantify default probabilities, while suggesting that further research should explore long-term policy impacts and borrower behavior.
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The paper innovatively combines novel CRT market data with the natural experiment provided by the CARES Act to assess forbearance policies effects. Its forward-looking pricing methodology, distinguishing judicial from non-judicial states, uncovers unintended credit market impacts. This original and fresh approach yields vital insights for credit, debt, and quantitative finance.
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Raw abstract and provenance
- … Using novel data from the GSE Credit Risk Transfer market and the 2020 CARES Act as a natural experiment, we show that private investors significantly reduced credit …
Source row: 886 · abstract type: snippet