Securities & Investments
Agency Mortgage-Backed Securities
Also known as Agency MBS
Agency MBS are mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. They carry minimal credit risk (US government or GSE backing) but full interest-rate and prepayment risk.
How is Agency Mortgage-Backed Securities calculated?
Banks report Agency MBS holdings on Schedule RC-B in three subcategories: GNMA pass-throughs (full US government guarantee), FNMA/FHLMC pass-throughs (GSE guarantee, market-implied government backing post-2008 conservatorship), and CMOs / stripped MBS issued or guaranteed by the same entities.
Why does Agency Mortgage-Backed Securities matter?
Agency MBS is the single largest holding in most US bank securities portfolios, the market exceeds $9T outstanding. Minimal credit risk and low risk weights (20% for Fannie Mae and Freddie Mac MBS, 0% for Ginnie Mae) make agency MBS the default reach-for-yield trade above cash. The same securities drove the AOCI losses that helped sink SVB in 2023 because their duration was longer than banks modeled.
How do you interpret Agency Mortgage-Backed Securities?
Agency MBS / Securities Portfolio above 60% signals heavy duration concentration. Above 80% (rare) indicates a securities book run as a rate-spread trade. The right comparison is not absolute share but unrealized loss/gain. Agency MBS shares of 70% are fine if portfolio duration is short.
What do Agency Mortgage-Backed Securities levels indicate?
| Range | Label | Interpretation |
|---|---|---|
| < 30% | Light | Diversified portfolio across security types. |
| 30–60% | Typical | Standard US bank securities composition. |
| 60–80% | Heavy | High prepayment & duration concentration. |
| > 80% | Concentrated | Securities book operates as a rate-spread trade. |
Worked example
Frequently asked
Are agency MBS truly credit-risk-free?
Practically yes. GNMA carries full faith and credit of the US government. FNMA and FHLMC are in federal conservatorship since 2008; market pricing treats their guarantees as government-backed, supported by the Treasury's preferred stock purchase agreements, though they do not carry the full faith and credit of the United States.
Why is prepayment risk material on agency MBS?
When mortgage rates fall, borrowers refinance, returning principal to investors who must reinvest at lower yields. When rates rise, prepayments slow and the bank holds longer-than-modeled assets when the bank needs duration to be short. Both directions are bank-unfriendly.
How did agency MBS contribute to the 2023 bank failures?
Many small and regional banks loaded up on long-dated agency MBS during 2020-2021 at sub-2% yields. When rates rose to 5%+, mark-to-market losses ranged from 15% to 25% of the portfolio. At SVB, the March 8, 2023 sale of about $21B of AFS securities at a $1.8B loss set off the depositor run. First Republic's losses sat mainly in fixed-rate jumbo mortgages, and Signature's run followed its concentration in crypto-sector deposits.
Sources
- FFIEC Call Report Schedule RC-B (Securities)
- SIFMA US Mortgage-Backed Securities Statistics
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