Investment Performance of Credit Risk Transfer Securities (CRTs): The Early Evidence

Posted: 8 Jun 2018

See all articles by Chao Gao

Chao Gao

Australian National University, RSFAS

John J. McConnell

Purdue University

Date Written: April 4, 2018

Abstract

Credit Risk Transfer (CRT) securities were introduced by Fannie Mae and Freddie Mac in 2013. As of the end of 2017, in combination, the two Government Sponsored housing Enterprises (GSEs) had issued a total of $53 billion in CRTs linked to residential mortgage loans with a total face value of $1.79 trillion. The goal is to shift mortgage risk from tax payers to the private sector. In return, investors expect to be compensated. We document the returns earned by investors in the various CRT tranches since their inception. The most senior tranches have provided an average representative return of 0.26% per month. The most junior tranches have provided an average representative return of 1.71% per month. These compare with average monthly returns of 0.03%, 0.15%, and 0.87% to T-bills, 15-year agency MBS, and 10-year high-yield corporate bonds, respectively, over the same time periods.

Keywords: CRT, Credit Risk Transfer, Fannie Mae, Freddie Mac, Government Sponsored Enterprises, Mortgage Backed Securities

JEL Classification: G12, G21

Suggested Citation

Gao, Chao and McConnell, John J., Investment Performance of Credit Risk Transfer Securities (CRTs): The Early Evidence (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=3183505 or http://dx.doi.org/10.2139/ssrn.3183505

Chao Gao

Australian National University, RSFAS ( email )

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John J. McConnell (Contact Author)

Purdue University ( email )

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