What Is the Government National Mortgage Association?
The Government National Mortgage Association (commonly referred to as Ginnie Mae and abbreviated to GNMA) is a U.S. government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) issued by approved Ginnie Mae lenders. That assurance allows the mortgage lenders to obtain a better price for these offerings in the capital markets. Those improved proceeds, in turn, allow the lenders to make additional mortgage loans, and at lower costs to finance.
Indeed, Ginnie Mae's efforts serve to expand the pool of homeowners by mostly aiding lending to homeowners who are traditionally underserved in the mortgage marketplace. Most mortgages securitized as Ginnie Mae mortgage-backed securities (MBSs) are insured by the Federal Housing Administration (FHA), which typically insures mortgages to first-time home buyers and low-income borrowers. Other frequent beneficiaries of Ginnie Mae guarantees are securities comprising mortgages insured by the Veterans Administration (VA) and the Rural Housing Administration (RHA).
Understanding Ginnie Mae
Part of the U.S. Department of Housing and Urban Development (HUD), Ginnie Mae was established in 1968 to promote home ownership. It was the first organization to create and guarantee mortgage-backed securities in 1970 and has continued to back these instruments ever since.
Since 1970, Ginnie Mae has guaranteed mortgage-backed securities to help open the home mortgage market to first-time homemakers, low-income borrowers, and other underserved groups.
In doing so, Ginnie Mae stands a few steps behind the mortgage market. It neither issues sells or buys pass-through mortgage-backed securities, nor does it purchase mortgage loans. Instead, private lending institutions approved by Ginnie Mae originate eligible loans, pool them into securities, and issue mortgage-backed securities that are guaranteed by Ginnie Mae.
In this way, Ginnie Mae guarantees the timely payment of principal and interest from approved issuers (such as mortgage bankers, savings and loans, and commercial banks) of qualifying loans. An investor in a GNMA security will not know who the underlying issuer of the mortgages is, but merely that the security is guaranteed by Ginnie Mae, and so is backed by the full faith and credit of the U.S government, just like the instruments issued by the U.S.Treasury. The GNMA guarantee means that Investors with shares in Ginnie Mae funds never have to worry about the impact of late payments or mortgage defaults on their investment: when mortgage borrowers fail to make a payment, Ginnie Mae steps in to honor those missed payments.
Ginnie Mae vs. the Other Maes and Freddie Mac
Ginnie Mae's cousins Freddie Mac, Fannie Mae, and Sallie Mae differ from their relative in being not federally owned corporations but "government-sponsored enterprises" (GSEs), which are federally chartered corporations that are privately owned by shareholders.
And where Ginnie Mae guarantees only securities that comprise mortgages guaranteed by federal agencies, such as the FHA and VA, its relatives may back securities whose mortgages are not insured by those federal bodies. Fannie Mae also has its own portfolio, commonly referred to as a retained portfolio, which invests in its own and other institutions' mortgage-backed securities.
The GNMA is also ostensibly the only Mae or Mac backed by the "full faith and credit" of the federal government. However, In the latter half of 2008, during the housing crisis, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee. Both were bailed out to the tune of $187.4 billion, which saved them from collapse. Some argue that the bailout all but erased Ginnie Mae's distinction as the only federal agency guaranteeing mortgage securities that enjoy government protection against failure.