Agency mortgage-backed securities (MBS) — pools of residential mortgages guaranteed by Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA) — represent the largest segment of the U.S. MBS market and are among the most actively traded fixed-income securities in the world. The federal guarantee on agency MBS (explicit for GNMA, implicit-then-explicit for FNMA and FHLMC post-conservatorship) eliminates credit risk for investors, leaving prepayment risk as the primary analytical variable.
Prepayment risk arises because residential mortgage borrowers have an option to prepay their mortgage at any time — through refinancing when rates fall, or through home sale (curtailment). When prepayment speeds rise (as in a refinancing wave), MBS investors receive principal back faster than expected and must reinvest at lower prevailing rates. When prepayment speeds slow (in a rising-rate environment), investors hold below-market-rate mortgages longer than anticipated. This negative convexity — the price of an MBS declining more than a duration-equivalent Treasury when rates rise — is the defining risk characteristic of MBS.
The Federal Housing Finance Agency (FHFA) regulates Fannie Mae and Freddie Mac, which have operated under conservatorship since 2008. FHFA's Annual Report to Congress provides detailed data on agency MBS outstanding, conforming loan limits, and guarantee fee structures. The Federal Reserve holds a significant portfolio of agency MBS as a result of its quantitative easing programs, and its portfolio management decisions affect agency MBS supply and spreads.
For credit market professionals, agency MBS are relevant as (1) a benchmark for non-agency MBS and CMBS spreads, (2) a primary asset class for bank balance sheets and insurance company portfolios, and (3) a transmission mechanism for monetary policy into mortgage rates and housing finance conditions.
Sources: FHFA Annual Report to Congress; Federal Reserve H.4.1 (Federal Reserve Balance Sheet); Ginnie Mae Disclosure Data; SEC Registration Statements for Agency MBS.