Fannie Mae and Freddie Mac pay investors to bear a portion of the credit risk on the $5 trillion of mortgages they insure. Are the complex derivatives used to transfer that risk effective? What does their pricing reveal about the cost of mortgage credit risk and its time variation?
At a recent conference at the Federal Reserve Bank of Cleveland on May 29, 2026, GCFP Director Deborah Lucas presented her research paper with GCFP coauthors Niccoló Comati and Edward Golding, “Credit Risk Transfer and the Pricing of Mortgage Default Risk.” The results suggest that less risk transfer occurs than Fannie and Freddie claim. The complexity of the derivatives makes it difficult to draw inferences about the market price of mortgage risk, limiting the informational value created.
The authors suggest that a modest structural change could reduce the cost of risk transfer with minimal impact on the retained risk exposure. The analysis is part of the GCFP research agenda to examine the efficacy of government-designed financial products.
