Mortgage bonds are getting riskier

TRD New York /
May.May 16, 2018 02:30 PM

It may not be time to panic yet, but investors are starting to buy riskier mortgage bonds.

Homeowners whose mortgages get packaged into so-called credit risk transfer securities (CRTs) have lower credit scores and higher debt levels than they did in recent years, Bloomberg reported.

CRTs, like traditional mortgage-backed securities, are issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants. But unlike traditional housing bonds, CRTs aren’t fully guaranteed by the federal government. That means investors have to cover for losses, and makes the recent fall in credit scores worrying to some.

“Underwriting starts out very strict and as time goes on, it’s kind of the proverbial frog in the pot of boiling water,” John Kerschner of Janus Henderson Group told Bloomberg. “The heat keeps going up and up and then you realize, oh, this is really not good.”

The average credit score in Fannie Mae’s most recent two CRT issues was 743, compared to 765 in 2013. Meanwhile borrowers’ average debt-to-income ratio rose to 36 percent, up from 31.7 percent in 2013.

Still, the total volume of CRTs is just $50 billion — a fraction of the $40 trillion bond market — and some observers are more concerned about corporate bonds. Bank of America analysts noted that looser lending standards will be “prudent rather than leading to excesses as seen in the last decade.” [Bloomberg]Konrad Putzier

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