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Fannie-Freddie Risk Bonds Threaten Big Losses for Fund Managers

  • Covid could hit holders of credit-risk-transfer securities
  • Investors lobby Fannie-Freddie regulator to protect them
Residential Real Estate As Missing Payments Have Landlords Worrying
Photographer: Bing Guan/Bloomberg

Hedge funds and mutual funds are among bond holders that could lose $2 billion as a consequence of U.S. lawmakers letting millions of homeowners delay their mortgage payments during the coronavirus pandemic.

At stake are so-called credit-risk-transfer securities whose owners include fixed-income funds run by Franklin Resources and AllianceBernstein Holding LP. The securities, which threaten to lead to estimated losses of between $1 billion and $2 billion, are intended to shift the risk of borrower defaults on Fannie Mae and Freddie Mac mortgages to private investors.