What Is An Agency Mortgage-Backed Security (MBS)?

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Updated Dec. 22, 2023
Written By
Jamie Johnson
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MBS investments can affect mortgage rates, and these investments have been an important tool used during the 2008 financial crisis and the COVID-19 pandemic. This article will examine how an agency MBS works and how the Fed can help mortgage rates by purchasing them. Understanding the different factors affecting the housing market can help you better prepare for the home buying process.

What Is An Agency MBS?

A mortgage-backed security (MBS) is a pool of home loans sold on the open market to companies and investors. Investors buying these securities are paid monthly when homeowners make their principal and interest payments. MBS are one of the most important asset classes within the fixed-income sector.

Agency mortgage-backed securities are mortgage-backed securities issued by a government-sponsored enterprise (GSE), like Fannie Mae, Freddie Mac or Ginnie Mae. This term also refers to the Federal Reserve’s $1.25 trillion program to purchase agency MBS during the 2008 financial crisis.

Agency MBS Vs. Non-Agency MBS

There are two types of mortgage-backed securities — agency and non-agency MBS. Agency MBS are created by government entities, while non-agency MBS are made by private entities.

Ginnie Mae bonds are backed by the federal government, so there’s no risk of default. Private shareholders own Fannie Mae and Freddie Mac, but these bonds still have a low default risk.

In comparison, non-agency MBS are typically pooled by banks or private corporations and sold on the secondary mortgage market. These bonds aren’t guaranteed by the federal government or any government-sponsored enterprise. So these bonds come with a higher risk of default.

Examples of non-agency MBS would be jumbo loans or interest-only mortgages. These loans have different guidelines from anything Fannie Mae, Freddie Mac or the government would back. In economic downturns, the Federal Reserve buys agency MBS since they are held to strict standards and are less risky.

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How Can Agency MBS Purchases Affect Mortgage Rates?

Agency MBS purchases can impact long-term interest rates. When government entities purchase a significant amount of bonds, it increases the demand for these securities.


Bonds tend to have an inverse relationship with long-term interest rates, like the 10-year treasury yield. As the price increases for agency MBS, rates will start to decrease, which can improve liquidity and help stimulate the overall economy. In particular, these purchases can significantly affect mortgage rates since lenders will typically lower rates when the price of MBS goes up.

The Historical Impact Of Agency MBS Purchases

Historically, purchase programs have supported the U.S. housing market and the overall economy. The two best examples of this occurred during the 2008 financial crisis and the COVID-19 pandemic.


2008 Financial Crisis


When the financial crisis began in 2007, the Federal Reserve implemented a number of programs to improve conditions in the financial markets. In November 2008, the Fed announced it would start purchasing agency MBS and housing debt related to U.S. government agencies.


Initially, the Fed bought up to $500 billion in agency MBS and up to $100 billion in agency debt. The program was expanded in March 2009, and in total, the Fed purchased $1.25 trillion in agency MBS.


COVID-19 Pandemic


When the COVID-19 pandemic caused a widespread government-ordered lockdown, the Fed took measures to support the economy. It announced that the Federal Open Market Committee (FOMC) would purchase Treasury securities and agency MBS. Initially, the FOMC said it would buy at least $500 billion of Treasury securities and $200 billion of agency MBS.

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The Bottom Line

An agency MBS is a mortgage-backed security issued by Fannie Mae, Freddie Mac or Ginnie Mae. When the government buys up agency MBS, it increases the price of these bonds. Since bonds and interest rates tend to have an inverse relationship, this causes mortgage rates to drop.

Now that you understand how the Fed’s bond buying impacts the housing and mortgage markets, you may be ready to start the home buying process. It’s a good idea to and see what rates and terms you could qualify for.