Agency vs. Non-Agency

Agency loans are originations that meet underwriting standards set by Fannie Mae or Freddie Mac, or are insured by Ginnie Mae for FHA, VA, or USDA loans. Because these agencies guarantee timely payment of principal and interest—even if borrowers default—the investor bears only prepayment risk, not credit risk. This guarantee allows agency MBS to trade with narrow spreads over Treasuries and enables deep secondary market liquidity. Ginnie Mae guarantees are backed by the full faith and credit of the U.S. government, while Fannie and Freddie guarantees, though not explicitly guaranteed by the government, carry strong implicit support due to their federal charters.

Non-agency loans are originated outside these programs, often with higher loan amounts, lower credit scores, or non-traditional documentation. Without an agency guarantee, investors assume full credit risk and rely on loan-level underwriting quality, LTV ratios, and pool-level loss models. These securities trade at wider spreads and often require more granular analysis because defaults directly impact cash flows. As a result, pricing reflects not only interest rate expectations but also estimated loss severity and probability.

In practice, the distinction shapes investment strategy: agencies are preferred for income and duration targeting, while non-agency securities may be selected for credit alpha or restructuring opportunities. The presence or absence of a guarantee also affects prepayment assumptions—agency pools tend to be more sensitive to rate changes due to uniform borrower refinancing behavior, whereas non-agency pools may exhibit more stable repayment patterns if borrowers have less refinancing flexibility or higher origination costs.