What are CRTs in investing?

CRTs, or Collateralized Residential Mortgage Obligations, are a unique type of financial instrument issued by government-backed entities such as Fannie Mae and Freddie Mac. These housing agencies play a pivotal role in the US housing market, providing liquidity and stability to the mortgage market.

The structure of CRTs is similar to that of traditional agency bonds, where numerous individual mortgages are combined into a single, larger security. This pooling process allows investors to diversify their exposure across a wide range of loans, reducing their risk compared to investing in individual mortgages.

One of the key features of CRTs is that investors receive regular payments based on the performance of the underlying loans. These payments are typically structured to include both principal and interest payments, providing a steady income stream for investors.

The performance of CRTs is closely tied to the health of the housing market and the broader economy. If the economy weakens and mortgage defaults increase, the payments to CRT investors may be impacted. However, the government sponsorship of Fannie Mae and Freddie Mac provides a level of support and stability for CRTs.

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