Pricing Mortgage Stress. Lessons from Covid-19 and the Credit Risk Transfers.

Abstract

We hand-collect a unique database of Credit Risk Transfers (CRTs), linked to U.S. mortgages, to study how markets price default risk from natural disasters. Exploiting heterogeneous exposure of CRTs to default risk, we estimate the increases in CRT spreads due to the landfall of two major hurricanes. We calibrate a model of credit supply to match those estimates. Market-implied mortgage rates in counties more often hit by a hurricane are 13% higher than inland counties. Also, market-implied mortgage rates would have increased by 29% due to the Global Financial Crisis, and by 21% due to the covid-19 crisis.