Agency

Definition: An organization, set up by the U.S. Government, to meet the borrowing needs of what the government believes is a vital part of the economy. These organizations obtain the money they want to lend out primarily by issuing bonds, known as agency bonds or agency securities, to investors.

Example: Agencies of the U.S. Government include the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Federal Farm Credit Banks, the Tennessee Valley Authority, and the World Bank.

As you might expect, the Federal Farm Credit Banks make loans of different lengths to farmers. GNMA and the FHLMC help low- to moderate-income famillies obtain home mortgages.

Investeach explains: Of all the agencies, only the bonds of GNMA are directly and explicitly guaranteed by the U.S. Government. The debts of the other agencies have an implied guarantee. This means that nowhere does the Government state that it will pay off the bonds of an agency that’s unable to pay. We say the guarantee is implied because it widely believed that the U.S. Government wouldn’t allow the bonds of the very agencies it created to go bad, leaving bond investors high and dry.

The marketplace has come up with catchy names for the agencies. If you throw a few vowels into GNMA, you may come up with the name Ginnie Mae. For FNMA, Fannie Mae. FHLMC is known as Freddie Mac. How the FHL in FHLMC inspired the name Freddie is anyone’s guess.

The Student Loan Marketing Association (Sallie Mae), created in 1972 as a U.S. Government agency, is no longer connected to the Government. It began privatizing (ie, separating from the Government) in 1997 and completed the process in 2004. It is now a publicly-held corporation that trades under the symbol SLM.

Fannie Mae and Freddie Mac have a unique status in the investing world. They are publicly held, with their stocks trading under the ticker symbols FNM and FRE, respectively. However, they have one advantage that other public companies don’t: the bonds they issue are implicitly guaranteed by the U.S. Government. This allows them to issue bonds that have a lower interest rate because their bonds are less risky than those of all other corporations which don’t have this guarantee.

Finally, and perhaps most significantly, in September of 2008, Fannie Mae and Freddie Mac, on the verge of collapse, were taken over by the U.S. Government. Over the course of several years prior these agencies made the unwise decision to accumulate and/or guarantee trillions of dollars of mortgages, too many of which were risky and going bad.

2017-08-30T21:34:11+00:00