What is a Guaranteed Mortgage Certificate - GMC
A guaranteed mortgage certificate, also known as a guaranteed mortgage pass-through certificate, is a bond backed by a pool of mortgages.
BREAKING DOWN Guaranteed Mortgage Certificate - GMC
Guaranteed Mortgage Certificates are issued by either the Federal Home Loan Mortgage Corporation, popularly known as Freddie Mac, the Federal National Mortgage Association, popularly known as Fannie Mae, or the Government National Mortgage Association, popularly known as Ginnie Mae. Following the 2008 financial crisis and the federal government's takeover of Fannie Mae and Freddie Mac, all three of these housing finance companies are fully owned by the U.S. government. Because of this backing, guaranteed mortgage certificates are seen as very safe investments.
Guaranteed mortgage certificates are a type of mortgage-backed security, a financial instrument created in 1968, so that a broader population of investors could earn money in the residential real-estate finance market. Mortgages that conform to the standards of Fannie Mae, Freddie Mac or Ginnie Mae are called conforming mortgages, and ones that are not are called nonconforming mortgages. Guaranteed mortgage certificates are backed only by conforming mortgages. To create a guaranteed mortgage pass-through certificate, one of these mortgage finance companies will buy several dozen individual mortgages and use the interest rate proceeds from those mortgages to pay interest on the guaranteed mortgage pass through certificate.
The federal government has supported this process of mortgage securitization through Fannie Mae, Freddie Mac, and Ginnie Mae under the theory that government support of the mortgage finance market helps make mortgage finance more available to prospective homebuyers.
Pros and Cons of Guaranteed Mortgage Certificates
Guaranteed mortgage certificates are appealing to investors because they often pay a higher rate than government and corporate debt, but remain relatively safe investments. Nevertheless, investors need to be aware of risks of investing in guaranteed mortgage certificates, like inflation risk, whereby the value of these bonds may erode if inflation rises. There is also the risk that you may not recover your entire principal investment, if enough of the underlying mortgages fail. These certificates also risk falling in value if too many of the mortgage borrowers prepay their loans, which may reduce the value of the certificate in an environment of falling interest rates. Furthermore, investors can’t assume that the federal government’s support of Fannie Mae and Freddie Mac will continue indefinitely, and if the companies are privatized, buyers of securities they issue should beware of the risk of failure for these firms. If the firm you purchase a guaranteed mortgage certificate from fails, you may not receive all the payments you are owed.