Talking Credit

Improving the Investors Prospective on Credit Risk
by Kyle Lundstedt, PhD

Investors in the secondary mortgage market historically worried most about interest rate and prepayment risks. The vast majority of issued securities came from the agencies - Fannie Mae, Freddie Mac, and Ginnie Mae - and the agency guarantees transformed all credit risk into a minor part of prepayment risk.

As the chart below indicates, however, the non-agency market in the last few years actually exceeded the agency market in terms of new issuance. Investors in non-agency securities have added credit risk to their list of concerns.

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