About Mortgage and Asset Backed Securities
Mortgage-backed securities (MBS) and asset-backed securities (ABS) represent the largest segment of the global bond market today. In simple terms, investing in MBS means lending your money to hundreds of individual mortgage borrowers across the country. In return for a higher yield than US Treasury notes, investors are subject to added "prepayment" risk, meaning money invested may be repaid much sooner than maturity.

With over $5 trillion worth of mortgage bonds outstanding, the mortgage bond market today is a complex ecosystem of issuers, each with different characteristics and financial structures. At the top of the heap are Agency MBS, bonds guaranteed by a government-sponsored enterprise such as Fannie Mae or Freddie Mac. These securities offer outstanding liquidity, (relative) predictability and as a result, low yields. At the opposite end of the spectrum are Non Agency MBS and ABS, bonds with no guarantee other than the creditworthiness of the loans that comprise them, and any structural credit protection provided by the terms of the bond itself. These securities are less liquid and less predictable, but offer the best combination of risk and return for mortgage investors.

Agency MBS
Mortgage bonds which are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac.

Non Agency MBS
Mortgage bonds which are issued by banks and financial companies not associated with a government agency. These securities have no credit guarantee other than the quality of the loans behind them, and any other structural credit protection provided by the terms of the bond deal they belong to.

Asset Backed Securities
Bonds that represent an investment in a pool of consumer or commercial loans. For example, auto loans or credit card loans are commonly pooled to make asset backed securities. For unknown historical reasons, bonds backed by high quality mortgage loans are considered Mortgage Backed Securities (MBS) despite the fact that technically they fall into the broader definition of Asset Backed Securities (ABS). Bonds backed by home equity loans and other home loans less than high quality are considered Asset Backed Securities.