Bond traders are doubling down on homeowners. More than ever, they’re betting that homeowners won’t default on their home mortgage loans in 2018.

Statistics back bond trader confidence in homeowners. Foreclosures (3%) and short sales (1%) represented only 4% of housing sales nation-wide in November for the fourth straight month of this year. Last year, foreclosure and short sales were 6% of housing sales.

How are bond traders expressing their confidence in homeowners? By buying credit risk transfer (CRT) securities, instruments created in 2012 by the Federal Housing Authority to help mitigate loan default risk experienced by Freddie Mae and Fannie Mae during the housing crisis.

Investors who; bought subprime mortgage bonds after the housing crisis bought those bonds for pennies on the dollar. Now, those investors are being repaid for their investment to the tune of $80B of principal/year.

Morgan Stanley analysts call CRT bonds “the place to be” in 2018. These bonds are considered to be among their top buys for the coming year,

Already, REITs (real estate investment trusts) have bought some 10% of recently issued CRTs. There were jittery moments during this year’s hurricane season but it turned out that most of the mortgage holders had flood insurance.

With the unemployment rate holding at about 4 – 4.1% and the US economy growing at an annualized rate of +3%, bond traders are feeling that it’s a reasonable bet that prime borrowers will continue to pay their home loans through 2018.

Dave Gooden, head of mortgage backed securities and related bonds at Voya Investment Management shared the latest data on a variety of these CRTs and corporate bonds…

– Fannie Mae CRT +11.3%
– Freddie Mac CRT +10%
– EM Corp Bonds +7.6%
– High Yield Corp Bonds +7.2%
– Investment Grade Corp Bonds +5.5%
– Treasuries +2.2%

Fannie Mae and Freddie Mac anticipate selling $13B CRT securities in 2018. Since 2013, the CRT market has grown +40B.

Just one more thing in the world of real estate to consider in 2018.


[mashshare]