Agency Securities
Federal agency securities are debt obligations issued by government agencies and government-sponsored enterprises (GSEs). While they carry more credit risk than Treasury securities, they typically offer slightly higher yields.
Government Agency vs. GSE
Understanding the distinction between government agencies and GSEs is critical for the Series 7 exam:
| Feature | Government Agencies | Government-Sponsored Enterprises (GSEs) |
|---|---|---|
| Government Backing | Full faith and credit | Implicit backing only |
| Default Risk | Essentially zero | Very low (but not zero) |
| Example | Ginnie Mae | Fannie Mae, Freddie Mac |
| Regulation | Part of federal government | Privately owned, federally chartered |
Key Issuers
Ginnie Mae (GNMA) - Government National Mortgage Association
Ginnie Mae is the ONLY mortgage-related agency backed by the full faith and credit of the U.S. government.
Key Facts:
- Government-owned corporation within HUD (Dept. of Housing and Urban Development)
- Founded in 1968
- Guarantees timely payment of principal and interest on MBS
- Does NOT issue securities directly—guarantees pools of mortgages
- Securities carry the same credit quality as Treasury securities
Exam Tip: When you see "full faith and credit" and mortgages, think Ginnie Mae.
Fannie Mae (FNMA) - Federal National Mortgage Association
Key Facts:
- Created in 1938 as part of FDR's New Deal
- GSE (NOT a government agency)
- Publicly traded company (under conservatorship since 2008)
- Buys mortgages from lenders and issues MBS
- No explicit government guarantee (implicit backing only)
- Regulated by FHFA (Federal Housing Finance Agency)
Freddie Mac (FHLMC) - Federal Home Loan Mortgage Corporation
Key Facts:
- Created in 1970 to expand secondary mortgage market
- GSE (NOT a government agency)
- Publicly traded company (under conservatorship since 2008)
- Similar function to Fannie Mae
- No explicit government guarantee (implicit backing only)
- Regulated by FHFA
Federal Home Loan Banks (FHLBs)
Key Facts:
- System of 11 regional banks
- GSE (cooperatively owned by member institutions)
- Provides liquidity to member banks for mortgage lending
- Issues consolidated obligations (debt securities)
- Not backed by full faith and credit
Farm Credit System
Key Facts:
- Network of borrower-owned lending institutions
- Provides credit to agricultural sector
- GSE status
- Issues Farm Credit Securities
Comparison: Ginnie Mae vs. Fannie Mae vs. Freddie Mac
| Feature | Ginnie Mae | Fannie Mae | Freddie Mac |
|---|---|---|---|
| Type | Government agency | GSE | GSE |
| Government Backing | Full faith and credit | Implicit only | Implicit only |
| Founded | 1968 | 1938 | 1970 |
| Ownership | Government-owned | Shareholder-owned* | Shareholder-owned* |
| Issues MBS | Guarantees only | Yes | Yes |
| Regulator | HUD | FHFA | FHFA |
*Under FHFA conservatorship since September 2008
Market Size (2024)
The agency MBS market is enormous:
- Fannie Mae + Freddie Mac: $6.6 trillion in guaranteed MBS (50% of all U.S. mortgage debt)
- Ginnie Mae: $2.5 trillion (20% of all U.S. mortgage debt)
Agency Securities Characteristics
Exempted Securities Status
Agency securities are "Exempted Securities" under the Securities Exchange Act of 1934:
- Exempt from SEC registration requirements
- NOT exempt from antifraud provisions
- Can be sold without a prospectus
Tax Treatment
| Tax Level | Agency Securities |
|---|---|
| Federal | Taxable |
| State | Generally taxable (varies by issuer) |
| Local | Generally taxable |
Note: Unlike Treasury securities, most agency securities are NOT exempt from state and local taxes. However, some FHLB and Farm Credit securities may have partial exemptions.
Yield Comparison
Agency securities typically yield slightly more than comparable Treasury securities because:
- GSEs don't have explicit government backing
- Investors require a small premium for the additional (though minimal) credit risk
- This yield difference is called the "agency spread"
Which of the following is backed by the full faith and credit of the U.S. government?
Fannie Mae and Freddie Mac are:
Agency securities are considered "Exempted Securities" under the Securities Exchange Act of 1934. This means they are:
3.3 Mortgage-Backed Securities
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