Credit Risk Transfer Securities

Credit Risk Transfer (CRT) Securities encompass various structures transferring credit risk from loan originators to capital market investors, including Fannie Mae’s CAS, Freddie Mac’s STACR, and bank regulatory capital trades. The US agency CRT market exceeds $100 billion since 2013 launch, fundamentally changing mortgage risk distribution. Structure involves reference pools of mortgages with investors bearing losses after initial retention. For example, Freddie Mac STACR notes reference $50 billion mortgage pools, with investors taking losses between 50bp and 400bp attachment points. Benefits include reducing taxpayer exposure to mortgage losses, providing price discovery for mortgage credit risk, and attracting private capital to mortgage markets. Investors receive 200-500bp spreads for bearing defined credit risk tranches. Performance through COVID-19 validated structures with limited losses despite forbearance programs. Challenges include prepayment risk affecting deal life, complex waterfall structures, and basis risk between reference pools and actual GSE portfolios. CRT securities demonstrate public-private risk sharing evolution, crucial for housing finance reform while maintaining mortgage market liquidity.