Flow of Funds Analysis: Agency Securities and Mortgages
Agency Securities and Mortgages
Debt instruments secured by real estate
The instrument tables for agency securities and total mortgages are grouped together because both classes are associated with loans collateralized by real estate.
Many types of securities in this group are called 'agencies' because, at one time, the issuer was part of or closely associated with the federal government.
Generally, this is no longer the case.
Home mortgages are the largest source of borrowed funds for American households and the basis for an immense home construction industry, active real estate brokerage, and for the mobility of the population.
These loans are usually amortized in monthly payments over twenty to thirty years, with the borrower having the right to prepay the loan under certain conditions.
Residential mortgages account for roughly eighty percent of the total mortgage market.
When interest rates fall, home owners are likely to prepay mortgages, seeking to refinance at lower rates.
Borrowing for the purpose of home ownership is supported by the government, not only by tax breaks on interest and resale for reinvestment, but also by direct intervention in the organization and operation of the mortgage market.
Securitization turns mortgages into securities
Mortgages on individual homes would ordinarily not be tradable securities, since each home and mortgage is different and standardization is necessary for trading securities.
American homes are collateral for agency and mortgage securities.However, by grouping mortgages into pools of similar securities and by attaching third-party guarantees, and a variety of other techniques, generally referred to as 'securitization', a deep market for agency securities and mortgages has come into being in the U.S. in the last quarter of a century.
Securitized mortgages have taken the lion's share of traditional savings and loan business.
Because of the complexity of the market, most investors are institutions, although, from time to time, direct purchases of agency securities by households are substantial.
