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Types of Bonds

Agency vs. Private Label

Agency. Many mortgage pass-through securities are guaranteed by Ginnie Mae, an agency of the U.S. government, or by U.S. government-sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac. Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Fannie Mae and Freddie Mac have federal charters and are subject to oversight by the federal government, but are publicly owned by their stockholders*. The term agency is commonly used to refer to all three institutions. Securities guaranteed and/or issued by these entities are known generically as agency mortgage securities. Readers should bear in mind that each agency is a separate entity, and the securities issued by Fannie Mae or Freddie Mac differ from those guaranteed by Ginnie Mae.

Fannie Mae and Freddie Mac issue and guarantee pass-through securities. Ginnie Mae adds its guarantee to already-issued private pass-through securities. The mortgage loans in Ginnie Mae guaranteed securities are government-insured by either the Federal Housing Authority (FHA) or Veterans Administration (VA). A guarantee by one of these agencies enhances credit quality for investors as it ensures payment of interest and principal. Loans underlying Fannie Mae and Freddie Mac securities must meet underwriting criteria prescribed by the GSEs (e.g., loan size, documentation, loan-to-value ratios, etc). Mortgages underlying Ginnie Mae pass-throughs are underwritten in accordance with the rules and regulations of the FHA and the VA.

The extent of these security guarantees depends on the agency. Ginnie Mae, for example, guarantees the timely payment of principal and interest on its mortgage securities, and its guarantee is backed by the “full faith and credit” of the U.S. government. Holders of Ginnie Mae mortgage securities are therefore assured of receiving payments promptly each month, regardless of whether the underlying homeowners make their payments. They are also guaranteed to receive the full return of face-value principal even if the underlying borrowers default on their loans. Mortgage securities issued by the VA also carry the same “full faith and credit” U.S. government guarantee.

Fannie Mae generally guarantees timely payment of both principal and interest on its mortgage securities whether or not the payments have been collected from the borrowers. Freddie Mac also generally guarantees timely payment of both principal and interest. Some older series of Freddie Mac PCs guarantee timely payment of interest, but only the eventual payment of principal. Neither Fannie Mae nor Freddie Mac securities carry the additional “full faith and credit” U.S. government guarantee.

Private Label. Some private institutions, such as subsidiaries of investment banks, financial institutions, and home builders, also issue mortgage securities. When issuing mortgage securities, they may issue either agency or non-agency mortgage passthrough securities; however, their underlying collateral will more often include different or specialized types of mortgage loans or mortgage loan pools that do not qualify for agency securities. The transactions may use alternative credit enhancements such as letters of credit. These non-agency or so-called private-label mortgage securities are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government**. Private-label mortgage securities are assigned credit ratings by independent credit agencies based on their structure, issuer, collateral, and any guarantees or other factors.

As an additional investor protection, the mortgage security issuer typically segregates the collateral or deposits it in the care of a designated trustee, a party who holds and manages the collateral for the exclusive benefit of the mortgage security bondholders.

*As of September 7, 2008, Fannie Mae and Freddie Mac are currently under conservatorship of the Federal Housing Finance Agency, and have received financial assistance from the U.S. Treasury. More information is available at and

**To the extent that private-label mortgage securities use agency mortgage pass-through securities as collateral, that specific agency collateral carries the respective agency’s guarantees, but the entire mortgage security that is issued does not.


All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.