INTRODUCTION

In the complex world of residential finance, Uniform Mortgage-Backed Securities (UMBS) are one of the most important — and least understood — forces behind mortgage pricing. Whether you’re a homebuyer trying to understand daily rate changes or an industry professional educating clients, UMBS sit at the center of a $5 trillion market that influences nearly every conforming fixed-rate loan in America. The U.S. government created Fannie Mae in 1938 to establish a liquid secondary market for mortgages, laying the foundation for the modern mortgage-backed securities market. Earlier, in 1934, the Federal Housing Administration (FHA) was established to assist in the construction and rehabilitation of residential properties and to standardize the fixed-rate mortgage. FHA-insured mortgages played a crucial role in supporting the development of the secondary mortgage market by providing lenders with greater confidence and liquidity.

Mortgage-backed securities (MBS) are a type of asset-backed security, which is a broader category that also includes securities backed by vehicle loans, credit card receivables, and other financial assets. The rapid increase in home prices and the growing demand for mortgage-backed securities encouraged banks to lower their lending standards, which contributed to significant market risks. The avalanche of nonpayments from subprime borrowers led to many mortgage-backed securities and collateralized debt obligations being vastly overvalued. The subprime mortgage crisis led to a domino effect of collapsing mortgage-backed securities that wiped out trillions of dollars from the U.S. economy. To address the resulting credit crunch, the U.S. Congress authorized a $700 billion financial system bailout. The Federal Reserve Bank played a significant role in stabilizing the mortgage-backed securities market by implementing policies that increased liquidity and investor confidence.

This guide explains, with accuracy and clarity: In the U.S., MBSs may be issued by government-sponsored enterprises like Fannie Mae or Freddie Mac, or they can be private-label, issued by investment banks. Government agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae facilitate the securitization of mortgages and provide guarantees that help reduce risk for investors.

• How mortgage-backed securities actually work
• Why UMBS were created
• How MBS pricing sets mortgage rates
• Why the 10-year Treasury matters
• How prepayment speeds impact valuation
• Why coupons matter
• How lenders determine intraday rate changes

No fluff. No missing pieces. This is the most complete explanation you’ll find anywhere.

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⭐ PART 1 — EXPLAIN IT LIKE I’M 12

Clear enough for anyone, but still 100% accurate. As of late November 2025, the average 30-year fixed mortgage rate is around 6.0-6.4%, reflecting current market conditions. U.S. mortgage rates generally range from 6% to 6.5%, depending on various factors such as creditworthiness and loan terms. Shorter loan terms generally have lower interest rates but higher monthly payments compared to longer terms.

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What a Mortgage-Backed Security (MBS / UMBS) Really Is

Imagine 5,000 families each borrow $300,000 to buy homes. That’s $1.5 billion in mortgages.

The bank says: For more information about mortgage schedules and guidance, visit Timothy Chase • 719 Lending.

“We don’t want to wait 30 years to get this money back.”

So they:

1. Bundle all 5,000 mortgages into one giant pool (this is called pooling mortgages)
2. Slice that pool into millions of tiny pieces (like a giant pizza)
3. Sell those pieces to investors around the world:

• Pension funds
• Insurance companies
• Banks
• Mutual funds
• Money managers. High home prices combined with higher rates increase monthly mortgage payments, affecting affordability.

Banks and other financial institutions securitize mortgages by pooling mortgages and selling them to a variety of investors, including private entities and private institutions.

Each slice is called a Mortgage-Backed Security (MBS). If it comes from Fannie Mae or Freddie Mac, it’s a UMBS. Freddie Mac was created in 1970 to perform similar functions to those of Fannie Mae in the mortgage market, further supporting the development of the secondary mortgage market. Non-agency MBS typically carry higher credit risk and often have higher yields than agency MBS to compensate for this increased risk.

By purchasing MBS, investors are essentially lending money to homebuyers and receive payments derived from mortgage interest and principal.

Every month, when families make their mortgage payments:

• The money is collected
• A small fee is taken out
• The rest goes to the investors. Mortgage servicers manage the day-to-day administration of the mortgage loans within the pool, collecting payments and ensuring investors receive their scheduled payments.

Most MBS are structured as pass-through MBS, where principal and interest payments are passed directly to investors. These securities allocate cash flows from the underlying pool to the securities holders on a pro rata basis, ensuring equitable distribution.

Investors literally get monthly income from real mortgage payments.

When these MBS slices are sold, institutional investors are major participants in the MBS market.

⭐ Why This System Exists

Banks don’t want money tied up for 30 years. Rates tend to rise during periods of economic expansion and fall during contractions or recessions, reflecting broader economic cycles. A strong economy often leads to higher mortgage rates due to increased consumer spending and demand for homes. High inflation typically leads to higher interest rates as lenders try to protect future repayment value. A higher credit score indicates a lower risk to lenders, often resulting in a lower interest rate.

By selling mortgages as MBS:

• Banks get cash back immediately
• They can use the proceeds to originate new loans
• More loans = more competition
• More competition = lower mortgage rates

It’s a giant “mortgage money recycling machine.”

⭐ The TBA Market — The Wildest Part

TBA = To Be Announced

Investors trade huge bundles of mortgages before the loans even exist.

Example:

“I’ll deliver $1 billion of 6.0% mortgages in 45 days.”

The price is set today — even though loans aren’t finished.

Your lender, Patty Galceran at 719 Lending, watches these prices constantly:

• 6.0% UMBS price goes up → your rate may go down
• 6.0% UMBS price goes down → your rate may go up

When you lock your rate, you’re locking TODAY’S market price for the future mortgage pool your loan will go into.

It’s like buying a plane ticket for a plane that hasn’t been built yet — but the price is already known.

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⭐ Why UMBS Are Considered Safe

Fannie Mae & Freddie Mac guarantee that investors get paid even if the homeowner stops paying. These are government-sponsored enterprises (GSEs), also known as government agencies, such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, also known as the Home Loan Mortgage Corporation), and Ginnie Mae. Fannie Mae and Freddie Mac buy large numbers of mortgages to sell to investors and guarantee timely payments of principal and interest on these mortgage-backed securities.

Ginnie Mae, as a government-sponsored enterprise, guarantees timely payments to investors, backed by the full faith and credit of the U.S. federal government. Freddie Mac guarantees also ensure that investors receive timely payments, reducing credit risk and making these securities attractive to investors. These government-sponsored and government-sponsored enterprise guarantees are a key reason why UMBS are considered safe. However, unlike Fannie Mae and Freddie Mac, Ginnie Mae does not purchase mortgage-backed securities but focuses solely on guaranteeing timely payments.

And because the U.S. government supports them, UMBS behave almost like super-safe government bonds.

Safe assets = HUGE global demand. Geopolitical events and global financial instability can push mortgage rates down by causing investors to seek safety in U.S. bonds.

Huge demand = lower mortgage rates.

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⭐ One-Sentence Summary

“MBS are slices of thousands of home loans bundled together; investors buy the slices to get monthly payments, and because so many investors want them, banks can charge lower interest rates — and the TBA market lets you lock your rate today based on what those slices trade for right now.”

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⭐ The 10 Most Common Questions a 7th Grader Would Ask

1. Why buy tiny pieces instead of one big mortgage?

Because it’s safer.
If one family pays late, thousands of others are still paying.

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2. What if a lot of families stop paying?

Fannie & Freddie still pay investors.
They handle the foreclosures later.

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3. How do Fannie & Freddie get money?

They’re under U.S. government supervision.
The Treasury can support them (like in 2008).

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4. Why do mortgage rates change every day?

Because MBS prices change every day
— reacting to inflation, jobs data, the Fed, global events, etc.

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5. How does my tiny loan matter inside a billion-dollar pool?

Your loan is just one slice.
The market doesn’t follow YOU — your rate follows MARKET PRICES.

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6. Who decides my mortgage rate?

Your rate is mostly set by UMBS prices, plus your credit, property, and LLPAs.
Lenders just translate market prices into a rate. Personal factors affecting an individual’s mortgage rate include credit score, down payment size, loan type, and loan term.

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7. Where does my monthly payment go?

A small piece goes to the servicer & GSE.
The rest goes to the investors who bought the UMBS slices.

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8. Why do banks sell mortgages instead of keeping them?

They’d run out of money and could only help a few people.
Selling loans gives them fresh capital to lend again.

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9. What happens if investors stop buying MBS?

UMBS prices fall → mortgage rates rise.
This happened in 2022. MBS prices are inversely related to interest rates, meaning that existing MBS become less valuable when rates rise.

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10. Can regular people buy MBS?

Yes — usually through mutual funds, ETFs, and retirement accounts.

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⭐ PART 2 — THE GROWN-UP, PROFESSIONAL, FULL TECHNICAL GUIDE

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1. What Are UMBS? (Technical Definition)

UMBS (Uniform Mortgage-Backed Securities) are standardized, fungible MBS issued by Fannie Mae or Freddie Mac, designed to trade interchangeably in the TBA market. UMBS are a type of agency MBS, which are the most common and liquid securities in the MBS market. Residential mortgage-backed securities are backed by pools of residential mortgages and represent a prominent segment of the investment-grade bond market. Most mortgage-backed securities in the U.S. are agency MBS, known for their high credit quality and low credit risk due to government guarantees. In the MBS market, liquidity risk and average daily trading volume are important factors—agency MBS typically have high trading volumes and are considered highly liquid. The liquidity of mortgage-backed securities varies significantly, with agency MBS benefiting from a highly liquid market. Commercial mortgage-backed securities (CMBS) are another major category, tracked by indexes such as the Bloomberg US CMBS Index.

Key Attributes

• Backed by fixed-rate 1–4 unit residential mortgages
• Single-class pass-through structure
• Standardized 55-day payment delay
• Identical pooling rules under FHFA oversight
• Eligible for TBA “good delivery”
• Backed by GSE guarantees

Launched June 3, 2019, UMBS solved decades of fragmentation between Fannie MBS and Freddie Gold PCs.

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2. MBS Basics (Professional Summary)

A mortgage-backed security (MBS) is a fixed income security and a type of fixed income investment backed by a pool of amortizing home loans, providing investors with predictable streams of principal and interest payments. MBS are a key component of fixed income investments, offering yield advantages and diversification benefits compared to traditional government bonds. As with other fixed income securities, MBS are valued for their income-generating potential and relative stability, but they are also sensitive to interest rate changes and prepayment risks. Investors receive periodic payments consisting of both principal payments and interest payments, typically collected as monthly mortgage payments from homeowners. MBS typically pay a fixed interest rate that is usually higher than U.S. government bonds. When evaluating MBS, investors should carefully consider their investment objectives and overall investment strategy to ensure these securities align with their financial goals and risk tolerance.

Mortgages Are Bonds

• Mortgage → borrower is the issuer
• Investor → buys the bond by funding the loan
• Homeowner repays principal + interest monthly. A larger down payment reduces the loan-to-value ratio, potentially leading to a lower mortgage rate. Additionally, a lower debt-to-income (DTI) ratio indicates a lower risk borrower and can help secure a better mortgage rate.

Example: investor pays $104,000 for a $100,000 mortgage (a premium), expecting to earn that back through interest.

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3. Why Investors Don’t Buy Single Mortgages

Buying one mortgage exposes an investor to concentrated, unpredictable risk. A single loan carries three major risks: default risk (also known as credit risk, which is the chance the borrower will fail to make payments, potentially resulting in a loss for the investor), prepayment risk, and interest rate risk. Agency guarantees on mortgage-backed securities help improve the credit quality of these investments by reducing the likelihood of loss from borrower default. However, the lack of regulation of mortgage-backed securities in the past meant that investors were not protected if borrowers defaulted on their loans.

1. Default Risk

The borrower can’t pay.
(Agency guarantees eliminate MOST of this risk, but it still matters for timing and cash-flow distortions. For estimating how these events affect your monthly expenses, try our mortgage calculators.)

2. Extension Risk

Rates rise → borrower keeps their low-rate mortgage indefinitely → the investor is stuck holding below-market yield for longer than expected.

3. Prepayment Risk (Dominant Risk)

Rates fall → borrower refinances or sells → the loan pays off early → investor loses expected interest and potential premium.

Prepayment risk is the single most important driver of MBS pricing, because MBS investors almost always pay premiums and depend on predictable interest streams.

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4. Why Pooling Reduces Risk (Technical “Orange Juice” Analogy)

Pooling thousands of mortgages spreads risk across a large statistical base. Pooling mortgages involves combining many underlying mortgages into a single security, which forms the basis for mortgage-backed securities (MBS).

• 1 bad loan → huge loss
• 1 bad loan in a pool of 5,000 → noise

Investors prefer pools because:

• Individual risk becomes diversified risk
• Default timing becomes predictable
• Prepayment behavior becomes statistically modelable
• Cash flows become smoother
• MBS represent claims on the cash flows generated by the underlying mortgages in the pool. Mortgage-backed securities allow investors to diversify their portfolios by investing in the housing market and choosing from a variety of structures to meet their goals. Investors should consider the potential for reinvestment risk when investing in MBS, as principal payments come in gradually rather than as a lump sum at maturity.

Pooling creates the stability and predictability that global fixed-income investors require.

5. The TBA Market (Technical Explanation)

The To-Be-Announced (TBA) market is the engine of U.S. mortgage finance.

It allows investors and lenders to trade forward commitments for future MBS pools without knowing the specific loans upfront. This structure:

• Creates enormous liquidity
• Standardizes pricing
• Allows lenders to hedge interest-rate risk
• Enables borrowers to lock rates before the loan exists
• Makes execution predictable and scalable

The TBA market is a major segment of the overall MBS market, known for its high market liquidity and large average daily trading volume. The total value of outstanding securities in the MBS market exceeds $10 trillion, highlighting its massive scale and importance in the financial system.

With hundreds of billions in daily volume, TBA MBS are the second-largest fixed-income market in the world after U.S. Treasuries. The MBS market has more than $11 trillion in outstanding securities and almost $300 billion in average daily trading volume in the U.S., underscoring its critical role in the global financial system.

6. The History of UMBS

Before June 2019, Fannie Mae and Freddie Mac issued separate MBS products with:

• Different payment delays
• Different prepayment characteristics
• Different liquidity profiles
• Different price levels

Freddie Mac securities often traded at a liquidity discount due to higher liquidity risk, which affected pricing and market efficiency.

The Single Security Initiative (2013–2019) unified these markets, creating UMBS — a standardized, fungible, highly liquid security backed by either GSE.

7. Why UMBS Matter

UMBS fundamentally transformed the mortgage market by creating:

• A single unified TBA market
• Consistent, predictable cash flows
• Fully fungible collateral between Fannie and Freddie
• Lower execution costs for lenders
• More liquid trading and better price discovery
• Lower mortgage rates for borrowers (5–10 bps in spread savings)

UMBS are now the backbone of the conforming mortgage ecosystem and a core instrument for global fixed-income investors.

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⭐ 8. Why Mortgage Pros Watch the 10-Year Treasury (Full Technical Explanation)

Even though UMBS directly determine mortgage pricing, the 10-year Treasury yield is the market’s primary interest-rate benchmark. When interest rates rise, mortgage rates typically increase, and when interest rates fall, mortgage rates tend to decrease. This close relationship means that movements in Treasury yields often signal changes in mortgage rates. The average yield of MBS is often considered relative to the 10-year Treasury yield, with MBS typically offering a yield advantage.

Crises Break the Correlation

However, during periods of market stress, this correlation can break down. For example, during the financial crisis of 2008, the normal relationship between Treasuries and mortgage rates was disrupted due to the collapse of mortgage-backed securities markets and widespread uncertainty.

Why:

1. UMBS trade at a spread to Treasuries

Mortgage rates =
10-year Treasury yield + mortgage spread.

2. Treasuries trade globally, 24/7

They react instantly to:

• Inflation data
• Fed statements
• Geopolitical shocks
• Market stress

UMBS follow after U.S. markets open.

3. Treasuries have NO prepayment risk

UMBS do.
Treasuries give a clean signal of rate direction; UMBS add complexity.

4. Safe-haven flows move Treasuries first

Risk → money floods into Treasuries → yields fall → mortgage rates follow.

5. A 30-year mortgage behaves like a 7–10 year bond

Because borrowers refinance or move long before 30 years.

6. Mortgage-Treasury spread widens during stress

But direction still follows Treasuries over time.

7. The Master-Dog Analogy (Accurate)

Treasuries = master
MBS = dog
The dog wanders, but always follows the master.

Crises Break the Correlation

• 2008
• QE/QT
• 2020 COVID crash
• 2022 liquidity shocks. Low-quality mortgage-backed securities backed by subprime mortgages in the United States caused a crisis that played a major role in the 2008 financial crisis. The financial crisis that began in 2007 wiped out trillions of dollars in wealth and brought down major financial institutions like Lehman Brothers.

But the relationship always snaps back.

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⭐ 9. Prepayment Risk: The Real Driver of MBS Valuation

Borrowers can prepay mortgages ANY time. Mortgage prepayments, including refinancing and early payoffs, are a key factor affecting the valuation, interest rate risk, and pricing of mortgage-backed securities (MBS).
This flexibility creates both:

• Prepayment risk (rates fall)
• Extension risk (rates rise)

This “negative convexity” is why MBS behave differently from Treasuries.

⭐ 10. Prepayment Speeds (Why MBS Values Change — FULL TECHNICAL DETAIL)

Treasuries have fixed maturities. MBS do not.

Borrowers can:

• Refinance
• Sell
• Pay down
• Default (GSE still pays)
• Modify
• Pay off early

When homeowners refinance at lower rates, it results in early loan payoffs, which directly impact the cash flows and valuation of mortgage-backed securities (MBS).

These all count as prepayments.

Why This Matters

Investors usually pay premiums for UMBS:

• Face value: $300,000
• Price paid: $310,000
• Premium: $10,000

They expect to recover that premium via interest over YEARS.

If the borrower refinances after 90 days:

• Investor gets only $300k
• Loses the $10k premium
• Yield collapses

This is why CPR/PSA modeling is the foundation of UMBS pricing.

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🔹 CPR — Conditional Prepayment Rate

Annualized percentage of remaining loans expected to prepay.

• CPR 5 = very slow
• CPR 10 = moderate
• CPR 20 = fast
• CPR 40+ = refinance boom

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🔹 PSA — Public Securities Association Model

Baseline model to compare CPR:

• 100 PSA = normal
• 200 PSA = twice as fast
• 50 PSA = half as fast

PSA assumes prepayments ramp for 30 months then level off.

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🔹 EPO Penalties (Early Payoff Penalties)

Loans paying off within 4–6 months trigger investor/servicer penalties.
This protects against premium loss.

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⭐ How Prepayment Speeds Affect Mortgage Rates

Fast prepayments → lower UMBS prices → higher rates
Slow prepayments → higher UMBS prices → lower rates

Prepayment speeds impact:

• Rate forecasting
• Coupon pricing
• Duration/convexity
• TBA valuations
• Servicing values
• Hedge costs

This is why CPR/PSA modeling is central to the entire secondary market. To further understand the financial implications, you can use a simple mortgage calculator to estimate payments based on different scenarios.

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⭐ 11. Understanding UMBS Coupons (Technical)

UMBS coupon =
Borrower Rate – Servicing Fee – G-Fee

Typical deduction: 0.75%–0.90%

Coupons come in 0.50% increments:

• 4.0
• 4.5
• 5.0
• 5.5
• 6.0
• 6.5

⭐ Critical Rule

Weighted Average Coupon (WAC) must be 0.25% to 1.125% above the UMBS coupon.

This prevents:

• High-WAC pollution
• Cash-flow distortion
• Prepayment misalignment
• Investor mismatch

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⭐ 12. Which UMBS Coupon Should You Watch? (Professional Guide)

Rule #1: Watch the MOST LIQUID coupon — NOT the one your loans deliver into.

The most liquid coupon:

• Reacts fastest
• Drives intraday repricing
• Sets TBA direction
• Reflects momentum
• Provides price discovery

Example: 2022

Rates hit 7–8%.
6.0–6.5 coupons were illiquid.
5.0 coupon was still the best predictor.

Detective Tip

If 3.625% is priced better than 3.75%, the 2.5 coupon is in control.

Watching the wrong coupon leads to terrible market read.

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⭐ 13. UMBS Structure & Features

UMBS include:

• Fully amortizing fixed-rate loans
• Single-class pass-through
• Standard 55-day delay
• TBA eligibility
• Resecretizations (“Supers”)
• FHFA-mandated prepayment alignment
• Distinct from CMOs and private-label MBS

An asset-backed security is a financial instrument collateralized by pools of assets, including mortgages, loans, or receivables.

UMBS are distinct from other types of mortgage securities, such as collateralized mortgage obligations (CMOs), which are multi-tranche securities that divide mortgage pools into different classes with varying maturities, risk levels, and payment priorities. CMOs provide investors with tailored options based on their risk and return preferences. Private-label MBS are created by private label issuers, which are private institutions that securitize mortgages outside the scope of government-sponsored enterprises.

UMBS remain one of the most liquid fixed-income markets in the world.

Third-party providers play a key role in supplying accurate data and analytics for the securitized products market.

⭐ CONCLUSION — UMBS ARE THE INVISIBLE ENGINE OF MORTGAGE RATES

Since June 3, 2019, UMBS have unified the mortgage market into one standardized, highly liquid system.

UMBS drive:

• Daily rate changes
• Intraday repricing
• TBA hedging
• Refinance behavior
• Borrower affordability
• Secondary-market liquidity
• GSE stability

Most consumers never hear the term “UMBS.”
But it affects every rate quote they receive.

If you understand UMBS, you understand how mortgage rates truly work.

The post 🏆 MORTGAGE RATES & MORTGAGE-BACKED SECURITIES (UMBS) appeared first on 719 Lending.