The Credit Risk Transfer (CRT) market was launched in 2013 by the GSE’s to help protect taxpayers from credit risk (risk of borrower nonpayment) by sharing mortgage losses with private investors. The market has grown substantially since that time, with the outstanding balance of reference loans reaching over $2 trillion at the end of 2019. Over this time, investors have largely been rewarded, as home prices have continued to rise and labor market conditions have been robust. Chart 1 shows these for the sixteen most recent high loan-to-value (LTV) Fannie Mae deals from their CRT program Connecticut Avenue Securities (CAS).
1. Cumulative Default Rate for CAS Securities
As US society goes deeper into “Shelter in Place” and “Social Distancing” to protect itself from the COVID-19 virus, jobs are being lost at a rapid pace. Jobless claims in the United States for the week ending March 21 came in at a record high 3.28 million. In turn, household finances are being stretched around the country. Fiscal stimulus and various debt forbearance plans can help to mitigate the damage, but families will have to make decisions about how to allocate scarce resources based on their own priorities.
A key metric in the decision regarding investment in MBS is prepayment speeds. Investors concerned about lower interest rates naturally find value in lower-prepaying pools. In looking into the drivers of differing prepayments, it’s useful to look into differences in performance for different groups of loans. Chart 1 looks at the prepayment speeds for the entire books of Fannie Mae and Freddie Mac mortgages as measured by the 1-month conditional prepayment speeds (CPR).