Mortgages are typically broken out into two primary categories. Agency and Non-Agency.
An “Agency Mortgage” is one which is guaranteed or insured as to its interest and principal payments by a US agency. The largest of the agencies that issue these guarantees are: Ginnie Mae (Government National Mortgage Association); Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal National Mortgage Association). Because these mortgages carry a U.S. agency guarantee, lenders are very comfortable making the loan to any particular borrower because the lender does not have to worry about whether he will be paid. The Government guarantees that he will be paid. This increases the lender’s willingness to lend funds due to the fact that there’s no credit risk to the lender and makes mortgage money more available to consumers. Basically, Agency mortgages are considered “risk free”.
“Non-Agency Mortgages” do not have a government agency guarantee and are therefore more risky. If a borrower becomes delinquent, then the risks of non payments are experienced by the lending institutions. This is what is known as “credit risk” – there is some element of risk connected to the belief in a person’s ability to pay principal or interest.
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