Did you know that residential credit investments can generate yields approaching 10% — nearly double what’s available in traditional fixed income? Yet, many financial advisors are still overlooking this high-income sector.
With inflation eroding purchasing power and bond yields lagging, advisors face a critical challenge: where can they find strong, risk-adjusted income for their clients? Residential credit offers a compelling answer. Supported by historically high homeowner equity, low household leverage, and resilient credit performance, this asset class presents an opportunity to capture institutional-level returns with robust downside protection.
For financial advisors seeking to increase investment income while enhancing portfolio diversification, residential credit offers a compelling alternative to traditional fixed income.
Residential credit investments fall into three key categories:
- Core Income – Lower-volatility assets offering stable returns.
- Yield Enhancement – Higher-yielding assets with strong risk-adjusted return potential.
- Special Opportunities – Discounted, distressed, or structured assets where expert managers can extract value.
Each of these categories presents a way for financial advisors to tap into income streams approaching or exceeding 10% while benefiting from a resilient and fundamentally strong U.S. housing market.
1. Core Income:
The Case for Credit Risk Transfer (CRT) Securities
Many advisors are familiar with Agency Mortgage-Backed Securities (MBS), a core fixed-income asset backed by government-sponsored entities like Fannie Mae and Freddie Mac. However, fewer recognize the Credit Risk Transfer (CRT) securities that provide higher yield opportunities without departing from the agency mortgage universe.
Why CRTs Offer a High-Yield Advantage
- CRTs share the same underlying mortgage pools as traditional Agency MBS, but they do not have an agency-backing and, as such, investors earn a premium for taking on some of the credit risk.
- Unlike traditional fixed-rate MBS, CRTs are floating rate, making them valuable tools for capturing rising interest rates or hedging against inflation.
- The yield advantage: While Agency MBS might yield 4-5%, modestly levered CRT yields may reach an upwards of 10%, providing a powerful alternative for income-seeking portfolios. Reflecting the all-weather potential of the sector, the CRT Index published by the Federal Reserve Bank of St. Louis cited positive returns in 2022, an otherwise negative year for fixed income, and double-digit total returns in 2023 and 2024.
1 Bernhard Eschweiler, “Housing slump supports Agency CRT notes”, Zais Insights, November 2023
2 Monika Carlson, “Do You Have Questions About CRTs? We Have Answers.” Alliance Bernstein, April 22, 2024
3 Andrew Davidson & Co., Inc., AD&Co US Mortgage High Yield Index: Mid-Tier [CRTINDEXMIDTIER], retrieved from
FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CRTINDEXMIDTIER, viewed April 23,
2025. The index is a mix of CAS and STACR CRTs from M1 to B2 (AD&Co US Mortgage High Yield Index: Mid-Tier).
How Managers Add Value
Expert credit managers navigate the CRT market by analyzing risk-adjusted returns across different vintages, loan-to-value ratios, and mortgage performance trends. Advanced data analytics help optimize portfolio allocation, maximizing yield while mitigating risk exposure. Managers can strategically apply leverage to further enhance returns.
For financial advisors looking for extra yield potential, CRTs offer an attractive core income solution.
2. Yield Enhancement:
The Appeal of Second Mortgages
Homeowners hold an unprecedented $35 trillion in equity, yet many remain in place, locked into ultra-low mortgage rates. Instead, many choose to tap their home equity via second mortgages, creating a compelling opportunity for lenders and investors.
Why Second Mortgages Offer a High-Yield Advantage
- Securitized second liens often produce higher yields than first-lien loans with yields around 6-7%. Despite their subordinated second position, strong credit borrowers and accumulated home price growth mitigate potential credit risks.
- Additionally, the ability of second liens to be securitized can enable yields on second lien collateral to exceed 10%.
- Homeowners taking out second mortgages typically have strong credit and substantial equity buffers, reducing the probability of defaults.
How Managers Add Value
A skilled real estate credit manager adds value by targeting regions and borrower profiles with the strongest risk-adjusted returns. This can include:
- Origination strategies: Working with lenders to source high-quality second mortgage borrowers at attractive rates.
- Market selection: Identifying geographies with strong home price appreciation, ensuring a robust equity cushion for borrowers.
For advisors, second mortgages present a distinctive combination of high yield, equity protection, and borrower stability in today’s housing market.
3. Special Opportunities:
The Power of NPL/RPL Investing
While residential credit markets remain strong, a portion of loans continue to be distressed, creating select opportunities in non-performing (NPLs) and re-performing loans (RPLs). NPLs and RPLs are deeply discounted mortgage assets that provide both high current income and appreciation potential when actively managed. Fannie Mae and Freddie Mac periodically offer pools of NPL and RPL loans to investors.
Investing in the NPL/RPL markets requires a nimble specialist, since the opportunity set varies over time. For example, the NPL/RPL market expanded during the pandemic-related downturn but has since shrunk, reflecting its cyclical nature.
Why NPL/RPL Loans Offer a High-Yield Advantage
- Acquired at a discount: NPLs are often purchased at 70-80 cents on the dollar, creating an embedded return opportunity.
- Multiple paths to profit: Sophisticated managers can restructure, modify, or refinance loans to elevate them from non-performing to performing status.
- Attractive yields: Once resolved, RPLs and cured NPLs can provide double-digit net returns.
How Managers Add Value
Effective NPL/RPL investing requires careful asset selection and active management, including:
- Loan restructuring: Adjusting interest rates, extending terms, or offering forbearance to bring borrowers back on track.
- Resolution strategies: Managing short sales, refinancing, or foreclosure alternatives to optimize investor returns and provide solutions for borrowers.
For advisors seeking uncorrelated, high-income strategies, NPL/RPL investing offers strong yields with built-in appreciation potential.
Review:
Residential Credit as a High-Income Alternative
With today’s unique housing market dynamics—high homeowner equity, low leverage, and a constrained housing supply—residential credit offers compelling high-yield opportunities across multiple risk-return profiles.
- Core Income Generators like CRTs provide enhanced yields, given credit risk and floating rates associated with such products, as compared to traditional Agency MBS.
- Yield Enhancement Sectors like second mortgages have attractive risk-adjusted return profiles given several protections factors, like the substantial increase in homeowner equity.
- Special Opportunities like NPL/RPL investing allow managers to capture discounted assets and create upside through loan resolution.
For financial advisors looking to diversify client portfolios beyond traditional fixed income, these residential credit strategies provide a high-income solution with strong fundamentals.
Learn More
Interested in learning more about how residential credit investments can enhance your portfolio? Discover how expert credit managers like Ellington capitalize on these high-yield opportunities to deliver superior income solutions.