Table of Contents
- What Is the Government National Mortgage Association?
- What Does Ginnie Mae Do?
- Ginnie Mae Guarantees
- History of Ginnie Mae
- Ginnie Mae vs. Fannie Mae and Freddie Mac
- Does Ginnie Mae Provide Mortgage Financing?
- How Does Ginnie Mae Help Make Mortgages More Affordable?
- Why Are Ginnie Mae Securities Considered a Safe Investment?
- The Bottom Line
What Is the Government National Mortgage Association?
Let me explain what the Government National Mortgage Association, or Ginnie Mae, really is. It's a federal government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities, or MBS, issued by approved lenders. You should know that Ginnie Mae connects the United States housing market directly to capital markets, which provides low-cost financing for federal housing programs through agencies like the Federal Housing Administration (FHA), Veterans Affairs (VA), the Department of Agriculture, and HUD's Public and Indian Housing.
Key Takeaways
- The Government National Mortgage Association (GNMA) is a federal corporation that guarantees principal and interest payments on mortgage-backed securities issued by approved lenders.
- Ginnie Mae was established in 1968 as part of the U.S. Department of Housing and Urban Development (HUD) to promote affordable homeownership.
- The GNMA is backed by the full faith and credit of the federal government, unlike Fannie Mae or Freddie Mac.
What Does Ginnie Mae Do?
Ginnie Mae was set up in 1968 as part of HUD to push for affordable homeownership. It doesn't create mortgages itself but guarantees them for single and multifamily homes. Since these loans are backed by the government, homeowners get lower interest rates, which cuts their borrowing costs. I recommend using a mortgage calculator to budget these costs effectively.
Ginnie Mae works behind the scenes in the mortgage market. It doesn't issue, sell, or buy pass-through mortgage-backed securities, and it doesn't purchase mortgage loans. Instead, approved private lenders originate eligible loans, pool them into securities, and issue MBS guaranteed by Ginnie Mae. As of fiscal year 2024, Ginnie Mae's MBS portfolio balance stands at $2.6 trillion.
Here's something important: Ginnie Mae guarantees mortgage-backed securities to open up the home mortgage market to first-time homebuyers, low-income borrowers, and other underserved groups.
Ginnie Mae Guarantees
Ginnie Mae guarantees the timely payment of principal and interest from approved issuers, such as mortgage bankers, savings and loans, and commercial banks, for qualifying loans. As an investor in a GNMA security, you won't know who the underlying issuer of the mortgages is, but you can be sure the security is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. government, similar to U.S. Treasury instruments.
This GNMA guarantee ensures that investors with shares in Ginnie Mae funds don't have to worry about late payments or mortgage defaults affecting their investment. If mortgage borrowers fail to make payments, Ginnie Mae covers them.
Ginnie Mae's work helps those who are traditionally underserved in the mortgage market. Most mortgages securitized as Ginnie Mae MBS are insured by the FHA, which typically covers mortgages for first-time home buyers and low-income borrowers.
History of Ginnie Mae
After the Great Depression, with high unemployment leading to massive loan defaults, Congress passed the National Housing Act of 1934 as part of the New Deal to revive the U.S. housing market and protect lenders from defaults.
In 1968, thirty years after its establishment, the Federal National Mortgage Association (FNMA), known as Fannie Mae, split into two entities with separate functions. Fannie Mae would handle conventional loans, while Ginnie Mae would manage government-backed mortgages.
Fannie Mae became a publicly traded company from a government-sponsored enterprise (GSE). Ginnie Mae was established as a GSE within the Department of Housing and Urban Development, or HUD. Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government.
Ginnie Mae vs. Fannie Mae and Freddie Mac
There are several organizations similar to Ginnie Mae, like Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae are government-sponsored enterprises (GSEs), which are federally chartered corporations owned by private shareholders.
Ginnie Mae guarantees only securities that include mortgages backed by federal agencies such as the FHA and VA, while its counterparts may back securities with mortgages not insured by the government. Fannie Mae maintains a portfolio that invests in its own and other institutions' mortgage-backed securities.
The GNMA is the only one among them backed by the full faith and credit of the federal government. During the 2008 housing crisis, Fannie Mae and Freddie Mac came under government conservatorship through the Federal Housing Finance Agency. Some argue this bailout blurred Ginnie Mae's unique distinction as the sole federal agency with government protection against failure for its mortgage securities guarantees.
Does Ginnie Mae Provide Mortgage Financing?
Ginnie Mae does not originate any loans or provide financing for mortgage issuers. The GNMA doesn't offer insurance to lenders against credit risks from borrowers. Also, Ginnie Mae doesn't set standards for loan issuers, such as underwriting or credit requirements.
How Does Ginnie Mae Help Make Mortgages More Affordable?
When mortgages are guaranteed by Ginnie Mae, lenders get better prices for their loans in the secondary mortgage market and can use those proceeds to fund new mortgage loans.
Why Are Ginnie Mae Securities Considered a Safe Investment?
Ginnie Mae does not buy or sell loans or issue mortgage-backed securities (MBS), and its balance sheet avoids derivatives for hedging or carrying long-term debt.
The Bottom Line
The Government National Mortgage Association (GNMA), or Ginnie Mae, guarantees principal and interest payments on mortgage-backed securities issued by approved lenders. The GNMA is backed by the full faith and credit of the federal government, unlike Fannie Mae or Freddie Mac. Ginnie Mae was established in 1968 to promote affordable homeownership.
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