Understanding Credit Risk Transfer Transactions
Research Paper
April 29, 2016
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In 2013, Fannie Mae and Freddie Mac began issuing unsecured debt notes linked to residential mortgages. The aim was to transfer credit risk from the agencies' mortgage books and to reduce taxpayers' risk, in accordance with the Federal Housing Finance Agency's Conservatorship Strategic Plan. Called credit risk transfer transactions ("CRTs"), these are similar to non-agency residential mortgage-backed securities in many respects. This paper introduces the basics of CRTs and describes how to analyze their risk and return profiles using MSCI's RiskManager. To understand the possible performance of CRT notes in extreme scenarios, we stress tested them using historical cohorts with similar attributes as a proxy and a Constant Default Rate from the turbulent market period from 1999 to 2007.
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