Ginnie Mae (or Government National Mortgage Association) allows mortgage lenders to obtain a better price for their loans in the capital markets. This allows lenders the flexibility to use the proceeds to make new mortgage loans available to additional borrowers.
How Ginnie Mae Securities Work
A Ginnie Mae security functions similarly to the process of lending someone money to purchase a house or business. Home mortgages from banks and financial institutions are bundled together, and then marketed to investors. Even in uncertain times, investors are guaranteed payment of interest and payment, in full and on time.
Ginnie Mae does not directly issue, sell or buy pass-through mortgage-backed securities, nor does it purchase mortgage loans. Instead, private lenders approved by Ginnie Mae originate loans that are eligible, pool them into securities, and issue the instruments.
For example, if you invest $100,000 in a Ginnie Mae, you are essentially lending someone money to buy a house or business with the help and the guarantee of a government organization. You would receive monthly payments consisting of interest on the loan and perhaps also a portion of the principal. These are similar to the payments a bank receives when it lends money to a home or business buyer. If it isn't included in the monthly payment, the principal is paid back at the end of a specified time period.
Ginnie Maes are the most popular type of mortgage-backed securities because they are guaranteed by the U.S. government. They are not impervious to risk, but the government will step in to prevent the collapse of Ginnie Mae and its securities.