Rising borrower equity and the refinancing boom have supported CRT credit fundamentals.

Performance for Fannie Mae and Freddie Mac Agency Credit Risk Transfer (CRT) securities has been strong throughout 2021. The group’s year-to-date total return of 3.12% has exceeded many other fixed income sectors. CRT has benefitted from two main factors: a robust housing market that has boosted borrowers’ equity, and low interest rates that have driven a refinancing boom.

Per the most recent Case-Shiller U.S. National Home Price Index data from April 2021, home values nationally have risen by 14.5% in the last 12 months and 39.4% over the past five years. Robust home prices benefit CRT transactions as growing home equity improves borrowers’ creditworthiness. For context, the average borrower in a CRT transaction who took out a mortgage in 2016 has seen their loan-to-value ratio decline from 81% at origination to under 50% today. Refinancing activity remains robust with 30-year fixed rate mortgages averaging 2.88% nationally—just above all-time lows. As borrowers in CRT transactions refinance, credit exposure to bond-holders declines. The combined effects of rising borrower equity and the refinancing boom have resulted in upgrades to investment grade for a range of originally non-IG CRT credits.

We remain positive on CRT, most notably seasoned deals that have benefitted from the aforementioned trends. Current spreads on these bonds are approximately 90 – 100, 130 – 150 and 225 – 275 basis points for investment grade, BB and single-B/unrated classes, respectively. We expect strong housing market fundamentals will remain supportive of the sector. Demographic change should continue to fuel robust demand for homeownership as the largest Millennial age cohort (28-30 years old) has yet to reach median first-time home buyer age (33 years old). According to Freddie Mac projections, housing remains undersupplied nationally and new home completions remain well below historical averages, with current levels comparable to those experienced during the 1991 recession.

We expect continued robust refinancing activity as average interest rates on mortgages referenced in seasoned CRT deals are approximately 4.33%—well above prevailing rates. Additionally, the coming months will likely see additional new issuance as Fannie Mae is expected to return to the CRT market by the fourth quarter. Wall Street estimates suggest that this will result in an additional $4 billion to $5 billion of new supply that should create additional investment opportunities.