A:

Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.

To review, an MBS is a security, created through the process of securitization, in which the underlying assets are loans made to individuals and companies who are using the funds to purchase buildings and homes. The mortgages are secured to the lender by the properties purchased by the borrowers, and are often backed by some form of homeowners' insurance. However, this insurance will only protect the issuer of the mortgages (mortgagee), and not the owners of an MBS that is issued using the same underlying mortgage. Therein lies part of the risk to MBS investors.

If a large number of mortgagors begin to default on their mortgages, the lender will have a difficult time passing through mortgage payments to MBS owners. Depending on how diversified the underlying pool of mortgages is across demographic and geographic regions, the risk of a mortgagor defaulting may be mitigated. However, if a significant number of mortgagors begin to default on their loans, the mortgagee may default on its MBS, and investors will suffer, demonstrating the need for some form of insurance or a guarantee.

Depending on the issuer, an MBS may or may not be guaranteed. There are four main MBS issuers:

  1. Fannie Mae (the Federal National Mortgage Association) is sponsored by the U.S. government and can issue and guarantee MBS issues. It's a publicly traded company, and was established to maintain capital liquidity and to ensure that low- to middle-income individuals are able to purchase homes. Note that Fannie Mae's guarantee is based on its own corporate health, and is not backed by the government.
  2. Freddie Mac (the Federal Home Loan Mortgage Corporation), is similar to Fannie Mae in that it is also sponsored by the U.S. government and is owned by stockholders. It was created to provide competition in the secondary mortgage market, which Fannie Mae originally monopolized. Like Fannie Mae, Freddie Mac can issue and guarantee mortgage-backed securities, but its guarantee is not backed by the government.

  3. Ginnie Mae (the Government National Mortgage Association) differs from Fannie Mae and Freddie Mac in that it operates as a government agency. It does not issue mortgage-backed securities and its guarantees are backed by the full faith and credit of the U.S. government. Furthermore, Ginnie Mae guarantees MBS issues from qualified private institutions. Ginnie Mae also has a more stringent guarantee policy in that it mainly guarantees loans that are insured by the Federal Housing Administration (FHA) or other qualified insurers.

  4. Private issuers also issue mortgage-backed securities. If a private issuer is qualified by Ginnie Mae, its issue is guaranteed by that governmental agency. If, on the other hand, it is not qualified by Ginnie Mae, then the MBS issue is not guaranteed. (To learn more, see Profit From Mortgage Debt With MBS and Behind The Scenes Of Your Mortgage.)

For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.


RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
  2. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
  3. Can I buy a house directly from Fannie Mae (FNMA)?

    Yes; you can buy homes directly from Fannie Mae. Fannie Mae (the Federal National Mortgage Association, or FNMA) is a government-sponsored ... Read Answer >>
  4. What's the difference between a collateralized mortgage obligation (CMO) and a mortgage-backed ...

    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  5. What are some historical examples of debt securitization?

    Find out how debt securitization started, how it works and why the government facilitated the mortgage-backed security market ... Read Answer >>
  6. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Related Articles
  1. Home & Auto

    What Happened To The MBS Market?

    Find out how the fall of mortgage-backed securities has changed the financial landscape.
  2. Investing News

    Should You Invest In Fannie Mae Stock?

    If you're risk-adverse, you might want to avoid investing in Fannie Mae. But if you're up for it, high risk could translate to high reward.
  3. Stock Analysis

    Bill Gross Bets Big On Mortgage Bonds

    Bond King, Bill Gross’ recent return to the MBS market could signal a revival in the bond type.
  4. Insurance

    Fannie Mae and Freddie Mac, Boon Or Boom?

    These two companies are crucial to the mortgage market, but are they ticking timebombs?
  5. Insurance

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  6. Investing Basics

    What You Need To Know About Fannie Mae Mortgages

    Considering a Fannie Mae mortgage loan? Here's what you should know, from size limits and rates, to required documents.
  7. Home & Auto

    Remodeling The Housing Finance Industry

    The meltdown in mortgage-backed securities is bringing about reform in home financing.
  8. Stock Analysis

    Fannie And Freddie Show Severity Of Mortgage Woes (FNM, FRE)

    Both companies are known for buying only the safest mortgages, but that hasn't mattered recently. They are seeing big losses.
  9. Credit & Loans

    Why Fannie Mae And Freddie Mac Might Be In Trouble

    Fannie Mae and Freddie Mac are under increased scrutiny as debates continue about conservatorship, share price, and profit allocations.
  10. Stock Analysis

    Ginnie Mae To Big Banks: Show Us Your Mortgages. But Can They?

    The Government National Mortgage Association (Ginnie Mae) recently discovered that Bank of America (NYSE: National Mortgage News. Because Bank of America is missing so many documents, Ginnie ...
RELATED TERMS
  1. Mortgage Excess Servicing

    The percentage of the monthly cash flow that remains after the ...
  2. Ginnie Mae - Government National Mortgage Association - GNMA

    A U.S. government corporation within the U.S. Department of Housing ...
  3. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  4. Current Face

    The current par value of a mortgage-backed security (MBS). Current ...
  5. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  6. Pass-Through Rate

    The rate on a securitized asset pool - such as a mortgage-backed ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center