Agency Pass-Through Security refers to a financial instrument that pools together mortgage loans and issues securities backed by these loans. Typically issued by government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac, these securities allow multiple investors to receive payments derived from the underlying mortgages.
The principal characteristic of Agency Pass-Through Securities is that they “pass through” the monthly principal and interest payments made by borrowers to the investors. This arrangement ensures that investors receive a share of the cash flows in proportion to their investment in the security. Importantly, these securities come with a guarantee from the issuing agency, reducing credit risk for investors.
These securities play a significant role in the housing finance market by providing liquidity. They enable lenders to convert illiquid mortgage loans into tradable securities, thereby supporting broader access to mortgage financing. Investors, on the other hand, gain exposure to the real estate market while benefiting from the stability typically associated with agency-backed securities.
