Government Securities - Agency Issues

The federal government has authorized certain agencies and certain quasi agencies to issue debt securities that are collectively referred to as “agency issues”. Revenues generated through taxes, fees, and interest income back these agency securities. Investors who purchase agency securities are offered interest rates that generally fall in between the rates offered by similar term Treasury and corporate securities. Investors who purchase agency issues in the secondary market will be quoted prices for the agency issues that are based on a percentage of par just like corporate issue.

Government National Mortgage Association (GNMA)

The Government National Mortgage Association often referred to as “Ginnie Mae” is a wholly-owned government corporation and is the only agency whose securities are backed by the full faith and credit of the US Government. The purpose of Ginnie Mae is to provide liquidity to the mortgage markets. Ginnie Mae buys up pools of mortgages that have been insured by the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA). The ownership in these pools of mortgages is then sold off to private investors in the form of “pass through” certificates. Investors in Ginnie Mae pass through certificates receive monthly interest and principal payments based on their investment. As people pay down their mortgages, part of each payment is interest and part of each payment is principal and both portions flow through to the investor on a monthly basis. The only real risk in owning a Ginnie Mae is the risk of early refinancing. As the interest rates in the market place fall, people are more likely to refinance their homes and, as a result, the investor will not receive the higher interest rates for as long as they had hoped. Ginnie Mae pass through certificates are issued with a minimum denomination of $1,000 and the interest earned by investors is taxable at all levels: federal, state, and local. Yield quotes on Ginnie Mae’s are based on a 12-year pre- payment assumption because most mortgages are repaid early as a result of refinancing, moving, or a homeowner simply paying off their mortgage.

Federal National Mortgage Association (FNM)

The Federal National Mortgage Association also known as “Fannie Mae” is a public for- profit corporation. Fannie Mae’s stock trades on the OTCBB and is in business to earn a profit by providing mortgage capital. It’s called an agency security because Fannie Mae has a credit facility with the government and receives certain favorable tax considerations. Fannie Mae purchases mortgages and, in turn, packages them to create mortgage- backed securities. These mortgage-backed notes are issued in denominations from $5,000 to $1,000,000 and pay interest semiannually. Fannie Mae also issues debentures with a minimum denomination of $10,000 that mature in 3 to 25 years. Interest is paid semi- annually and the interest earned by investors from “Fannie Mae” securities is taxable at all levels: federal, state, and local.

Federal Home Loan Mortgage Corporation (FHLMC)

The Federal Home Loan Mortgage Corporation also known as “Freddie Mac” is also a publicly traded company in business to earn a profit on its loans. Freddie Mac purchases residential mortgages from lenders and, in turn, packages them into pools and sells off interests in those pools to investors. Interest earned by investors from FHLMC issued securities is taxable at all levels: federal, state, and local.

Take Note!

The Federal Government has placed both Fannie Mae and Freddie Mac in conservatorship and are now operating the companies and explicitly guaranteeing their debt obligations

Introduction


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