What Are Mortgage-backed Securities?
When you take out a mortgage, your lender typically doesn't hold it for 30 years. Instead, they sell it into the secondary market — where it is pooled with thousands of similar mortgages and issued as a bond (MBS) to investors seeking fixed income. This securitization process allows lenders to recycle capital, dramatically expanding mortgage availability.
The GSEs — Fannie, Freddie & Ginnie
| Agency | Type | Loans Backed | Government Status | MBS Share |
|---|---|---|---|---|
| Fannie Mae (FNMA) | GSE (conservatorship) | Conventional conforming | Implicit guarantee | ~38% |
| Freddie Mac (FHLMC) | GSE (conservatorship) | Conventional conforming | Implicit guarantee | ~22% |
| Ginnie Mae (GNMA) | Government agency | FHA, VA, USDA | Full guarantee | ~22% |
MBS Spreads & Mortgage Rates
MBS trade at a yield spread above comparable US Treasury notes to compensate for prepayment risk — the risk that homeowners refinance or sell early, returning principal sooner than expected and disrupting cash flow to investors.
Why Spreads Move Rates Without Treasury Yields Moving
In Q4 2022, the 10-year Treasury yield was ~3.8%, but 30-year mortgage rates hit 7.1% — a spread of over 3% vs the historical 1.5–1.7%. The Fed's MBS balance sheet reduction (quantitative tightening) removed a major buyer from the market, pushing spreads wide. The spread is as important as the Treasury yield itself for mortgage pricing.
