Agency Mortgage-Backed Securities: The Cornerstone of the Mortgage Market

Introduction

Agency mortgage-backed securities (MBS) are debt securities that are backed by a pool of mortgage loans. These loans are typically originated by banks, credit unions, and other lenders and then sold to a government-sponsored enterprise (GSE) such as Fannie Mae, Freddie Mac, or Ginnie Mae. The GSEs then issue MBS, which are purchased by investors.

MBS are a major source of funding for the mortgage market. In 2021, the total outstanding balance of MBS was $11.6 trillion. This represents approximately 50% of all outstanding mortgage debt in the United States.

Benefits of Agency MBS

There are several benefits to investing in agency MBS. First, MBS are considered to be very safe investments. This is because the underlying loans are guaranteed by the full faith and credit of the U.S. government. Second, MBS offer a relatively high rate of return. The average yield on agency MBS is currently around 3.5%. Third, MBS are very liquid. This means that they can be easily bought and sold in the secondary market.

Risks of Agency MBS

There are also some risks associated with investing in agency MBS. First, the value of MBS can decline if interest rates rise. This is because investors will demand a higher yield on their investments when rates are rising. Second, the value of MBS can decline if the housing market experiences a downturn. This is because the underlying loans are more likely to default during a downturn.

Who Should Invest in Agency MBS?

Agency MBS are a good investment for investors who are looking for a safe and secure investment with a relatively high rate of return. MBS are also a good investment for investors who are looking for a liquid investment that can be easily bought and sold.

How to Invest in Agency MBS

There are two ways to invest in agency MBS. The first way is to buy them directly from a GSE. The second way is to buy them through a mutual fund or exchange-traded fund (ETF) that invests in MBS.

Conclusion

Agency MBS are a major source of funding for the mortgage market. They are a safe and secure investment with a relatively high rate of return. MBS are also a good investment for investors who are looking for a liquid investment that can be easily bought and sold.

MBS Issuance and Performance

Issuance

MBS issuance varies depending upon demand for mortgage financing. In 2021, total issuance was $3.7 trillion. This is a historic high and was driven by the low interest rate environment.

Performance

The performance of MBS can be measured by several factors, including:

• Yield: The yield on MBS is inversely related to interest rates. When interest rates rise, MBS prices fall and yields increase.
• Default rate: The default rate on MBS is the percentage of loans that default. The default rate is typically low, but it can increase during economic downturns.
• Prepayment rate: The prepayment rate on MBS is the percentage of loans that are paid off early. The prepayment rate can be high when interest rates are falling, as borrowers refinance their loans into lower-rate mortgages.

Types of Agency MBS

There are three main types of agency MBS:

• Pass-through securities: Pass-through securities are the most common type of MBS. They represent a direct ownership interest in a pool of mortgage loans.
• Collateralized mortgage obligations (CMOs): CMOs are a type of MBS that is backed by a pool of mortgage loans that have been divided into tranches based on risk.
• Real estate mortgage investment conduits (REMICs): REMICs are a type of MBS that is backed by a pool of mortgage loans that have been securitized.

Uses of Agency MBS

Agency MBS are used in a variety of ways, including:

• To provide funding for the mortgage market: MBS are the primary source of funding for the mortgage market. They allow banks and other lenders to originate more mortgages than they would be able to if they had to hold the loans on their own books.
• To hedge against interest rate risk: MBS can be used to hedge against interest rate risk. This is because the value of MBS is inversely related to interest rates.
• To generate income: MBS can be used to generate income. The yield on MBS is typically higher than the yield on other types of fixed-income investments.
• To diversify a portfolio: MBS can be used to diversify a portfolio. They are not perfectly correlated with other types of investments.

Tips for Investing in Agency MBS

Here are some tips for investing in agency MBS:

• Do your research. Before you invest in MBS, it is important to do your research and understand the risks involved.
• Consider your investment goals. MBS are a good investment for investors who are looking for a safe and secure investment with a relatively high rate of return.
• Diversify your portfolio. Do not put all of your eggs in one basket. Diversify your portfolio by investing in a variety of different types of investments.
• Rebalance your portfolio regularly. As your investment goals change, you should rebalance your portfolio to make sure that it still meets your needs.

Tables

Table 1: Agency MBS Issuance

Table 2: Agency MBS Performance

Table 3: Types of Agency MBS

Table 4: Uses of Agency MBS

Conclusion

Agency MBS are a safe and secure investment with a relatively high rate of return. They are a good investment for investors who are looking for a way to diversify their portfolio and generate income.