Fannie Mae’s and Freddie Mac’s Credit Risk Transfer bonds (CRT) offer investors the ability to access scalable mortgage credit and housing market exposure while eliminating interest rate risk and benefitting from the structural advantages of investing in bonds supported by fully amortizing loans.
We believe there is an immediate opportunity within the mezzanine and subordinated tranches of these CRT bonds. Both B1 and B2 profiles should perform very well against the backdrop of 2022, supported by the rapid accumulation of home equity through home price appreciation (HPA) and structural de-levering of these bonds, the result of rapid mortgage refinancing activity.
The opportunity is based on:
Agency Credit Risk Transfer Outlook:
Ideally positioned for 2022’s rising rates and continued inflation expectations.
Fannie Mae’s and Freddie Mac’s Credit Risk Transfer bonds (CRT), issued on their CAS and STACR shelves, offer investors the ability to access scalable mortgage credit and housing market exposure at various levels of the capital stack, while eliminating interest rate risk and benefitting from the structural advantages of investing in bonds supported by fully amortizing loans.
Mezzanine/subordinated CRT bonds, both B1 and B2 profiles, should perform very well against the backdrop of 2022, supported by the rapid accumulation of home equity through HPA and structural de-levering of these bonds, the result of rapid mortgage refinancing activity:
CRT bonds were first issued in 2013, as a way for the GSEs to transfer risk on a portion of their mortgage market guarantees to the private market. Since inception the GSEs have transferred over $100 billion in credit risk with $45 billion of bonds currently outstanding. Each CRT transaction, typically a 1bn in total bond size, references large, geographically diverse, collateral pools in the hundreds of billions. The program has been successful in transferring the potential for losses from mortgages away from the GSEs while offering very strong overall returns for investors over the sector’s life. Last year the former director of the FHFA published a white paper lamenting the cost of the program to the GSEs and the negligible losses that have been passed on to investors – a negative for the issuers but a strong positive for investors. The market has seen significant changes over the last several months, including Fannie Mae’s delayed return to the market following the pandemic, the first tender offers by Fannie and Freddie, and structural changes to the most recent CRT transactions making seasoned bonds even more attractive in comparison.
Our 2022 outlook for the CRT sector is very positive for several reasons:
Source: Semper, Morgan Stanley, BAML, Nomura
The example below shows how the STACR 2020-DNA4 has de-levered since issuance in Q3 2020:
Source: Semper, Bloomberg
Overall, the outlook for the Credit Risk Transfer market is positive for 2022 given:
In our view, the best way to express these views is through the B1 and B2 subordinated classes of deals issued prior to late 2021, which we believe have already become relatively more attractive than new issues and stand to benefit most directly from the dynamics described above.
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