Government National Mortgage Association (Ginnie Mae): Definition

What Is the Government National Mortgage Association?

The term Government National Mortgage Association refers to a federal government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) issued by approved lenders. The association is commonly known as Ginnie Mae and is abbreviated to GNMA. Ginnie Mae's assurance allows mortgage lenders to obtain a better price for MBSs in the capital markets.

Key Takeaways

  • The Government National Mortgage Association is a federal corporation that guarantees principal and interest payments on mortgage-backed securities issued by approved lenders.
  • The association is commonly known as Ginnie Mae or GNMA and is part of the U.S. Department of Housing and Urban Development.
  • Its goal is to guarantee affordable home loans for underserved consumers in the mortgage market.
  • Approved private lenders originate eligible loans, pool them into securities, and issue mortgage-backed securities guaranteed by Ginnie Mae.

What Does Ginnie Mae Do?

The Government National Mortgage Association was established in 1968 as part of the U.S Department of Housing and Urban Development (HUD) to promote affordable homeownership. Ginnie Mae doesn't create or advance mortgages but guarantees them for single and multifamily homes. Since these loans are backed by the government, homeowners are able to secure lower interest rates, therefore lowering their borrowing costs.

Using a mortgage calculator is a good resource to budget these costs.

It was the first organization to create and guarantee mortgage-backed securities in 1970 and has continued to back these instruments ever since. Securities were first sold on the international market on the Luxembourg Stock Exchange in 1983. Ginnie Mae essentially stands a few steps behind the mortgage market neither issuing, selling, or buying pass-through mortgage-backed securities, nor purchasing mortgage loans. Instead, approved private lenders originate eligible loans, pool them into securities, and issue mortgage-backed securities guaranteed by Ginnie Mae. According to the association's website, Ginnie Mae's MBS portfolio balance is worth $2.1 trillion.

Ginnie Mae has guaranteed mortgage-backed securities since 1970 to help open the home mortgage market to first-time homemakers, low-income borrowers, and other underserved groups.

By doing this, 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 doesn't know who the underlying issuer of the mortgages is, but merely that the security is guaranteed by Ginnie Mae. This means it 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's efforts serve to expand the pool of homeowners by mostly aiding lending to homeowners who are traditionally underserved in the mortgage market. Most mortgages securitized as Ginnie Mae 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 made up of mortgages insured by the Veterans Administration (VA) and the Rural Housing Service (RHS).

History of Ginnie Mae

Thirty years after it was established, the Federal National Mortgage Association (FNMA), better known as Fannie Mae, had grown so large that it in 1968 it was split into two separate entities with two separate functions. Fannie Mae would purchase conventional loans, and Ginnie Mae would purchase government-backed mortgages, such as FHA and VA (Veterans Administration) loans.

The genesis of Ginnie Mae can be traced back to the Great Depression, when historically high unemployment rates led to an unprecedented wave of loan defaults. When the surge in home foreclosures further depressed housing values and the nation’s overall economy, Congress passed the National Housing Act of 1934, a key component of the New Deal, which created the Federal Housing Administration (FHA) to help resuscitate the U.S. housing market and protect lenders from mortgage default. As a national mortgage loan insurance program, it gave greater incentive to banks, building and loan associations, and other institutions to make loans to everyday A​​mericans. 

When the split took place, Fannie Mae was converted from a government-sponsored enterprise (GSE) to a publicly traded company. Ginnie Mae was established as a GSE and remains so today as part of the Department of Housing and Urban development, or HUD. Currently, Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government.

Special Considerations

As a government guaranteeing agency, there are some things that Ginnie Mae doesn't do. As noted above, the agency doesn't originate any loans itself and doesn't provide any financing for mortgage issuers. The GNMA also doesn't provide any insurance to lenders against any credit risks that stem from borrowers. Furthermore, Ginnie Mae doesn't set any standards for loan issuers such as underwriting or credit standards.

Ginnie Mae vs. the Other Maes and Freddie Mac

There are several organizations that are similar to Ginnie Mae, notably its cousins Freddie Mac, Fannie Mae, and Sallie Mae. Like Ginnie Mae, Freddie Mac and Fannie Mae involve mortgage and home loans, while Sallie Mae deals primarily with education loans. The key difference between Ginnie Mae and the others is that Ginnie Mae is a federally owned corporation. Freddie Mac and Fannie Mae are government-sponsored enterprises (GSEs) or federally chartered corporations that are owned by private shareholders. Sallie Mae once was a GSE but is now a privately held corporation following its privatization in 2004.

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 over $190 billion as of 2019, 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.

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