Why do ABS have credit risk and MBS don't?

CFA Level II Fixed Income
#1

Dear friends

I am unable to understand why ABS have credit risk (and thus enhanced) and agency MBS considered credit risk free? Are the residential mortgages and their MBS - agency MBS or non agency MBS? What are some of the examples of agency MBS? How does the government guarantee agency MBS?

Please share your thoughts and views on this matter.

Thank you

#2

Agency MBSs would be GNMAs. They’re backed by the full faith and credit of the US government, so there’s no credit risk.

FNMA and FHLMC aren’t government agencies, they’re government-sponsored enterprises, and are not strictly backed by the full faith and credit of the US government. However, as a practical matter, they have essentially no credit risk. (OK, they have a little. Very little.)

#3

How exactly does GNMA function?

Do the banks pool the mortgages into GNMA which is a government agency?

What I am trying to understand is how the MBS become risk free?

Is GNMA a Special Purpose Vehicle?

#4

http://en.wikipedia.org/wiki/Gnma

#5

Thanks a ton!

#6

You’re welcome.