Investment Memo

Credit Risk Transfer

The latest innovation in mortgage backed structured products, Credit Risk Transfer (CRT), is a growing asset class that warrants closer examination.

  • CRT securitizations are the result of a 2012 mandate initiated by the Federal Housing Finance Agency (FHFA) to reduce the overall risk held by Fannie and Freddie.
  • Despite being classified as unsecured general obligations of the government sponsored enterprises (GSEs), these securities are technically considered derivatives since the cash flows are based on a reference pool, unlike traditional MBS where investors are entitled to the contractual cash flows held in a separate legal trust.
  • While CRT is a relatively new asset class, the issuance has grown exponentially with an outstanding market value of approximately $33 billion as of Q4 2016, per SIFMA statistics.
  • To date, Merganser has not participated in this asset class due to the unproven track record, thin levels of credit enhancement, low ratings and limited secondary market liquidity. However, we will continue to monitor developments as these securities increase in relevance to the capital markets.