Non-Agency MBS, ABS, and the Securitization Waterfall

Not all mortgage-backed securities carry a government or agency guarantee. Non-agency MBS (also called private-label MBS) pool loans that are either too large for agency programs ("jumbo" loans) or that don't meet agency credit standards ("non-conforming" or "subprime" loans). Without a guarantee, the deal must protect investors through internal credit enhancement: structuring the cash flows so that senior tranches absorb losses only after subordinate tranches are wiped out. This subordination hierarchy — the waterfall — is the core of private-label MBS structuring, and the same principles underpin all asset-backed securities (ABS): auto loans, credit-card receivables, student loans, and the collateralised debt obligations (CDOs) that amplified the 2008 financial crisis.