Prepayment risk, where faster than expected paydowns shorten the expected cash flow timeline. When functioning efficiently, these markets enhance price discovery and provide depth to fixed income markets.
Mortgage Backed Security Risks Interest Rate Prepayment
In contrast, non-agency securities are created by private institutions and carry higher risk premiums, reflecting the credit quality of the underlying loans and the absence of a government guarantee. These individual loans are then grouped into a pool by a financial institution, which serves as the sponsor.
Agency Versus Non-Agency Securities Agency mortgage backed securities are issued or guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac, or by federal agencies like Ginnie Mae. More complex structures, such as collateralized mortgage obligations, divide cash flows into multiple tranches with varying maturities and risk levels.
How Faster Than Expected Prepayments Shorten Cash Flow Timelines
Liquidity risk, particularly pronounced in non-agency markets during periods of stress. Rating agencies that assess credit risk and assign tranches their grades.
More About What is a mortgage backed security
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More perspective on What is a mortgage backed security can make the topic easier to follow by connecting earlier points with a few simple takeaways.
