What is Generic Securities
A generic security is backed by recently issued loans or mortgages. Its value is less than that of a security whose backing is over one year old. Securities over a year old are called seasoned securities.
BREAKING DOWN Generic Securities
A generic security does not yet have a history that potential investors can look to for past performance rating as a seasoned security does. However, as they are valued less by investors, generic securities are less expensive to purchase. While their value is lower than the older investment options, their pricing may make them more attractive to some types of investors.
A mortgage-backed security (MBS) is secured by a mortgage or a collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that packages the loans together into a security that investors can buy. The mortgages of an MBS may be residential or commercial, depending on whether it is an Agency MBS or a Non-Agency MBS. In the United States, they may be issued by structures set up by government-sponsored enterprises like Fannie Mae or Freddie Mac, or they can be "private-label," issued by structures set up by investment banks.
Why Rates are Lower on Generic Securities
One possible reason for the lower rates on generic securities is that the underlying mortgages or loans backing the security are too new to be considered stable. The incidence of default on these types of debt obligations is traditionally understood to be higher during the first twelve months after issuance. Once payments on the debts have remained current during that first year, confidence increases. This will turn a generic security into a seasoned security.
It's important for investors to look closely at the nature of the debt obligations that provide the support for any generic security. Once someone understands the nature of those loans and mortgages and get an idea of the risks one way or another that those debts would be settled in a timely manner, it will be easier to focus attention on investments that are more likely to earn a return. At the same time, this type of activity will also increase the chances of identifying generic securities that carry a higher degree of risk than is comfortable for the investor. Assuming the investor is correct, the effort to carefully evaluate the viability of an investment can prevent losses while also allowing an investor to move on to a more promising investment.