With the goal of saving taxpayers billions of dollars in losses in the event of another mortgage crisis, Fannie Mae and Freddie Mac are planning to ramp up the sale of new types of securities that would transfer potential losses in a housing downturn to private investors.
The securities, called Connecticut Avenue Securities by Fannie Mae and Structured Agency Credit Risk by Freddie Mac, are essentially residential mortgage-backed securities – bonds whose performance is tied to that of a pool of mortgages.
If the mortgages default, investors in the bonds could lose some or even their entire principal, according to the Wall Street Journal. But proponents of the securities see them becoming a mainstay of the bond and housing markets, and possibly even entering major bond indexes.
The sales of the securities are notable because issuances of residential mortgage-backed securities, which also give private investors exposure to the mortgage market, are doing poorly.
But for investors who are still looking to take such risks in the residential mortgage market in search of yields, the new Fannie and Freddie securities are their only outlet.
“Right now, the [securities] are almost the only way for investors to get exposure to new residential mortgage-credit risk,” Deutsche Bank mortgage analyst Steven Abrahams said. [WSJ] – Rey Mashayekhi