Ginnie Mae Pass-Through

What Is Ginnie Mae Pass-Through?

A Ginnie Mae pass-through is an investment issued by the Government National Mortgage Association (GNMA), known as Ginnie Mae, that draws income from pools of Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgages.

Ginnie Mae pass-through securities earn income from the interest and principal payments made on mortgages by mortgage holders. This type of security is backed by the full faith and credit of the United States government. Ginnie Mae pass-through securities are mortgage-backed securities (MBS). 

Key Takeaways

  • Ginnie Mae pass-through securities earn income from the interest and principal payments made by mortgage holders that form pooled investments backed by government agencies.
  • Since this type of security is backed by the full faith and credit of the United States government, it is considered of the highest credit quality, although midgets do pose unique risks specific to all mortgage-backed securities (MBS).
  • A midget is slang for a 15-year GNMA pass-through security with a maturity of 15 years used by dealers or traders and is not an official term used by the Government National Mortgage Association.

How a Ginnie Mae Pass-Through Works

A Ginnie Mae pass-through security is similar to other mortgage-backed securities in that income is dependent on payments that mortgage holders make on their mortgages. The payments and interest are “passed through,” less a fee, to the security holder.

This type of security provides monthly income over a period of time and is generally considered to be safe because it is guaranteed by the government. The mortgages in Ginnie Mae pass-through securities have been guaranteed by the FHA or VA, meaning that the government has insured them. So Ginnie Mae pass-through securities have more layers of protection against a default in payment than a regular MBS. The first is the borrower and his or her own creditworthiness, as with every MBS. In addition to this, Ginnie Mae is the ultimate guarantor of the MBS, and behind its own financial strength is the U.S. government backstopping the whole system. 

Types of Ginnie Mae Pass-Through Pools

There are two pools of Ginnie Mae pass-through securities generating income: Ginnie Mae I and Ginnie Mae II.

Ginnie Mae I, or GNMA I MBS, is composed of mortgages that pay principal and interest on the fifteenth of every month, while the Ginnie Mae II, or GNMA II MBS, does the same on the twentieth of every month. The amount of interest may vary, since different mortgages have different rates that are aggregated into the pools.

Another difference between the two pools is the maturity, with Ginnie Mae I having a maximum of 30 years for single-family and 40 years for multifamily, whereas Ginnie Mae II is 30 years max as it doesn't include multifamily project or construction loans.

"Midgets" is a slang term referring to GNMA agency bonds with 15-year maturities, which are secured by mortgages backed by federal agencies. This informal term is sometimes used by bond traders and dealers, and not by GNMA itself.

Considerations for Ginnie Mae Pass-Through Securities

There are a few things to keep in mind when investing in Ginnie Mae pass-through securities. Most important, security holders run the risk of having the mortgage principal paid back faster than anticipated, especially if interest rates decrease and mortgage holders are able to refinance at lower rates. This risk is known as prepayment risk and it applies to all mortgage-backed securities.

Moreover, income generated from Ginnie Mae pass-through securities is considered taxable on both the state and federal levels. Finally, security holders can sell Ginnie Mae pass-through securities just like any other investment, with the market value of the security calculated at the end of each business day.