The GSEs’ 1Q earnings show that Fannie and Freddie are continuing deeply to subsidize their credit-risk transfers (CRT) structures, doing so at costs that threaten continued earnings as the strategy plays out in a rising-rate environment that puts still more stress on the hedge funds and structured investors that initially sustained CRT demand.  Insurance companies and reinsurers have stepped up despite costly capital requirements, but their ability and willingness to do so as rates rise is also uncertain.  Falling rates could resuscitate yield-chasing – albeit during a new macroeconomic downturn that does no one any good.  To keep the CRT deals flowing, the GSEs must have new investors.  Enter the REITs and, with them, new risks.

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