Over the years, there have been countless books on the subject of the financial tsunami, including the movie The Big Short. At the end of the film, a warning line appears on the screen suggesting that the financial world is still the same, and one can't help but feel that Wall Street has once again packaged toxic mortgages as new residential mortgage-backed securities, planting the seeds of another crisis. AllianceBernstein disagrees with this view. Most of the current home loans are non-toxic assets. Under strict lending standards, only high-quality borrowers can obtain loans. For example, credit indicators such as FICO score, borrower's debt-to-income ratio, and loan-to-value ratio have all reached or approached the best state since 2006. In other words, now may be the best time to take on mortgage credit risk. For this reason, AllianceBernstein believes that new credit risk-transfer securities (CRTs) issued by government guarantee agencies such as Freddie Mac and Fannie Mae are worth investing in. In addition to the mortgage-based collateral.
CRTs are completely different from traditional institutional bonds, or RMBS, which are non-institutional bonds issued by banks before the financial crisis. One of the reasons is that the risk level of CRTs is lower than that before the financial crisis. similar product. CRTs are less risky because they cover far fewer problem mortgages. For example, 11 percent of Freddie Mac's loans in 2006 were to customers with low credit scores and high debt-to-income ratios. In contrast, only 0.7% of CRTs products in 2016 belonged to this category. Share risk and get reward Another number list difference between CRTs and traditional agency bonds is that they are not guaranteed by the government. Before the financial turmoil, the risk of interest rate and early repayment was borne by investors, but Fannie Mae and Freddie Mac guaranteed the payment of interest and principal. Even if the underlying loan defaulted, they were still obligated to repay. As the name suggests, CRTs are credit risk sharing, in which private investors absorb a certain percentage of losses when a loan defaults significantly.
Through CRTs, Freddie Mac and Fannie Mae share credit risk with private investors, so that if they encounter difficulties in the future, they do not need to take US taxpayer money to bail out. As investors take on more credit risk, CRTs typically yield higher yields than traditional agency RMBS, and some even match high-yielding corporate bonds. Such risks may seem dire, but they are not. AllianceBernstein believes that the main mortgage loans of CRTs have strong credit fundamentals, so the risk-reward is very attractive. Freddie Mac and Fannie Mae, which only started issuing CRTs in 2013, are still relatively new financial products, but so far, the returns are not only comparable to other assets, or even higher, and less volatile. In addition, CRTs have low linkages with other bond markets, making them a good choice for diversified distribution in addition to high-yield bonds and other high-risk assets (see figure). 12 CRTs can effectively diversify the risks of other risky assets and the correlation of various assets future development CRTs have the potential to become a new direction for US home loan investment.