Investors are betting billions that your neighbor won’t default on his mortgage in 2018

"Credit risk transfers" could the hottest securities next year

New York /
Dec.December 27, 2017 04:05 PM

Wall Street trading floor

It’s only been a decade since the real estate crash fueled by risky mortgage-backed securities, but investors are back at the table and in a big way.

One of the best bond opportunities in 2017, according to Bloomberg, was in “credit risk transfer” residential mortgage-backed securities — in short, investing in mortgage debt from homeowners across the nation and betting they won’t default.

According to data from Bank of America, riskier housing bonds registered returns north of 10 percent through December, outperforming the 7.2 percent returns on U.S. high-yield bonds and the 5.9 percent returns for corporate securities.

“It’s been an incredible year for the space,” Dave Goodson, head of mortgage-backed securities and related bonds at Voya Investment Management, told Bloomberg. Morgan Stanley has called credit-risk transfer bonds, as they’re called, “the place to be” in 2018.

Fannie Mae and Freddie Mac started issuing CRT bonds, which are backed by pools of home loans, in 2013, to offload risk to private investors. In the four ensuing years, the market increased to $40 billion, and the two companies expect to sell roughly $13 billion in CRT securities next year, according to Bloomberg.

Investors are betting that homeowners won’t default on their loans. With unemployment at 4.1 percent and robust economic growth, there’s no reason to believe they will, Goodson said.

There are some potential drawbacks of the sector. For one, Fannie and Freddie are considering restructuring the bonds to make them more attractive to real estate investment trusts, which bought 10 percent of the riskier mezzanine bonds in 2017. Additionally, as more investors enter the space, early adopters are looking elsewhere. Finally, hurricane season spooked investors earlier in the year, and given the extreme wildfire and hurricane seasons experienced this year, that can be a problem going forward. [Bloomberg]Chava Gourarie


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