Why would there be both types of tranching in a nonagency deal but only one type of tranching in an agency deal?

What will be an ideal response?

Consider the distribution of credit risk in a nonagency MBS with what is done in an agency CMO. In an agency CMO, there is no credit risk for Ginnie Mae-issued structures and the credit risk of the loan pool for Fannie Mae and Freddie Mac issued structure is viewed until recent years as small. What is being done in creating the different bond classes in an agency CMO is the redistribution of prepayment risk. In contrast, in a nonagency MBS, there is both credit risk and prepayment risk. By creating the senior-subordinated bond classes, credit risk is being redistributed among the bond classes in the structure. Hence, what is being done is credit tranching. Prepayment risk can also be redistributed. This is typically done in nonagency MBS but only at the senior bond class level. That is, the senior bond classes in a nonagency CMO structure can be carved up to create senior bond classes with different exposure to prepayment risk.