What is the difference between agency and non-agency MBS?

What’s The Difference Between Agency And Non-Agency MBS? The biggest difference between agency and non-agency MBS is that non-agency MBS are not guaranteed by the U.S. government or any government-sponsored enterprise. Non-agency MBS investors open themselves to more risk.

Why do mortgage backed securities have negative convexity?

Convexity Example Most mortgage-backed securities (MBS) will have negative convexity because their yield is typically higher than traditional bonds. As a result, it would take a significant rise in yields to make an existing holder of an MBS have a lower yield, or less attractive, than the current market.

What is agency and non-agency?

There are two types of mortgage-backed securities: agency or non-agency. Agency MBS are created by government or quasi-government agencies. Non-agency MBS are created by private entities. Learn more about agency and non-agency MBS. It can help you decide whether they have a place in your portfolio.

What is the risk in agency MBS?

The main risk with agency MBS is that the timing of mortgage prepayments on the underlying collateral is uncertain. If interest rates fall and homeowners prepay their mortgages to refinance at lower interest rates, then the duration of the agency MBS will shorten.

Are agency MBS guaranteed?

The majority of MBSs are issued or guaranteed by an agency of the U.S. government such as Ginnie Mae, or by GSEs, including Fannie Mae and Freddie Mac. MBS carry the guarantee of the issuing organization to pay interest and principal payments on their mortgage-backed securities.

What are non-agency securities?

Non-agency securities (also referred to as “private label” MBS) refer to MBS that are made up of mortgage loans that are not guaranteed by one of these agencies. For example, jumbo loans (mortgages above a certain dollar amount) are not eligible to be guaranteed, nor are loans on commercial properties.

Can convexity be negative?

Negative convexity exists when the shape of a bond’s yield curve is concave. Most mortgage bonds are negatively convex, and callable bonds usually exhibit negative convexity at lower yields.

What is an example of a non-agency relationship?

Let’s say your mom has a friend at church who wants to sell her house but doesn’t want to hire an agent or pay commission. Always protect your reputation and your real estate license, not to mention your mother’s relationship with her friend. This is one example of a non-agency relationship.

Which risk is not applicable to Ginnie Mae pass through certificates?

Treasury Bills are not subject to reinvestment risk because they are essentially short term “zero-coupon” obligations. Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? Ginnie Maes are guaranteed by the U.S. Government so there is no risk of default.

Can agency MBS default?

Agency MBS are guaranteed by the GSEs that issue them, and because of that, they are considered to have very little risk of default. Consequently, their yield is generally quite low, usually only offering a small pick-up over US treasuries. Their main risk factors are interest rate risk and pre-payment risk.

Does GNMA issue MBS?

Ginnie Mae does not issue or sell MBS*. Ginnie Mae does not service loans, with the exception of seized portfolios.