Fannie-Freddie Risk Bonds Threaten Big Losses for Fund Managers

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.

The issue is an unintended side effect of the response to the global ...