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First developed in the 1970s, mortgage-backed securities were created by pooling together groups of whole mortgage loans with similar characteristics to form one security. Corporates have invested in MBSs almost since their inception. Why? Because until a few years ago, MBS structures were relatively simple and risk-free. They largely consisted of conforming, fixed-rate loans, guaranteed by government-sponsored entities like Fannie Mae and Freddie Mac.

The GSEs provide a secondary market from which mortgage loans can be traded and securitized, packaging loans together to form pass-throughs and marketing them through a primary broker-dealer network. The principal and interest payments are then passed to the investor, but the credit risk exposure is retained by the GSE. Investors are not exposed to credit losses on agency securities. All GSE-issued MBSs are AAA rated, which is how they pass high corporate standards.

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