New products could increase the number of investors betting against US home loans

Critics say the programs echo the pre-credit crisis era
May 18, 2017 09:45AM

New York Stock Exchange (Getty Images)

From TRD Los Angeles: A fledgling U.S. mortgage-bond market could be jumpstarted by a new service that allows investors to short home loans.

But some say the rise of derivatives on credit-risk transfer notes sold by Fannie Mae and Freddie Mac has echoes of the 2008 credit crisis, when the market plunged under the weight of collapsing subprime securities.

Fannie and Freddie – the biggest guarantors of U.S. home loans – started transferring mortgage-default risk to bond funds and other investors in 2013 to help reduce risks to taxpayers, Bloomberg reported. But the program has been generating more traction in recent months, after New York-based Vista Capital Advisors rolled out a pilot program that would eventually allow investors to bet on U.S. homeowner defaults.

Craig Phillips, a former BlackRock executive serving as head of financial markets advisory and client solutions for the Treasury Department, said credit-risk transfers will be core to U.S. housing policy.  [Bloomberg]Subrina Hudson