A Ginnie Mae security is a type of mortgage-backed security offered by Ginnie Mae. Mortgage-backed securities offered by Ginnie Mae, Fannie Mae, and Freddie Mac are often classified together in what is known as government supported mortgage-backed securities.
- A Ginnie Mae security is a type of mortgage-backed security offered by Ginnie Mae.
- Ginnie Mae securities are often considered together with Fannie Mae and Freddie Mac securities since they all have similar structuring and characteristics.
- Ginnie Mae securities are often a top choice for investors because they are fully backed by the government, lowering their default risk.
Understanding Ginnie Mae Securities
Ginnie Mae, Fannie Mae, and Freddie Mac are all government supported credit agencies that operate within the U.S. credit market. Ginnie Mae is a federal government agency while Fannie Mae and Freddie Mac fall under the label of government-sponsored entity (GSE). All three entities combine to form a substantial position within the U.S. mortgage credit market.
Ginnie Mae, Fannie Mae, and Freddie Mac do not originate loans. Rather, they are involved in the mortgage credit market through the funding and issuance of mortgage-backed securities. While they do not directly originate loans, they do have their own unique requirements and interests for the loans they will buy in their securitized products.
The mortgages bought from banks and financial institutions by Ginnie Mae and other federal agencies are all bundled together, then marketed to investors as a single investment. Money from Ginnie Mae for the purchase of mortgage loans used in securitized products serves as a key source of capital for banks in the funding of more new loans in the future. This allows lenders the flexibility to use the proceeds from loans Ginnie Mae buys to make new mortgage loans available to additional borrowers.
Types of Securities
Ginnie Mae, Fannie Mae, and Freddie Mac all have their own strategies and methodologies for the securities they issue for investment by the open market. Broadly there are two main types of securities they may issue: traditional pass-throughs or collateralized mortgage obligations.
- Pass-through: scheduled principal and interest payments
- Collateralized mortgage obligation: structured product with tranches that segregate prioritization of payments and maturities
Each agency has its own criteria for the loans it will buy from the banks. Ginnie Mae securities typically focus on loans originated through programs sponsored by the Federal Housing Association (FHA), Department of Veterans Affairs (VA), Rural Housing Service (RHS), and Public and Indian Housing (PIH).
Typically the banks themselves will pool loans together from their balance sheet for sale to Ginnie Mae. Ginnie Mae may also diversify an offering with loans from multiple banks. Once loans are securitized in a collectively pooled vehicle, Ginnie Mae becomes the issuer of the pooled security. Ginnie Mae also guarantees the payments of principal and interest to investors.
Like most fixed-income market investing, investing in Ginnie Mae’s is slightly more complex than simply buying stocks. Many investors in Ginnie Mae securities are large institutions buying high denominations. Ginnie Maes are offered through the standard brokerages like Charles Schwab, Vanguard, and Fidelity. However, they can be more difficult to locate with lower liquidity also presenting some challenges.
The minimum investment for most all government supported mortgage-backed securities is usually $10,000. Investors in these securities receive regular monthly payments that may vary each month. Monthly payments consist of principal and interest from the underlying loans within the security.
The high minimum investment for these securities makes alternatives a popular choice as well. Many investors seeking to make smaller investments will choose to invest in Ginnie Mae securities through a mutual fund or a real estate investment trust (REIT).
Overall, Ginnie Maes are a popular type of mortgage-backed security because they are guaranteed by the U.S. government. They are not necessarily risk free but the government will step in to prevent the collapse of Ginnie Mae and its securities.