GNMA

What It Is

Ginnie Mae is the nickname for the Government National Mortgage Association. Ginnie Mae guarantees the timely payment of interest and principal on certain mortgage-backed securities (MBS)

How It Works

Ginnie Mae is an agency of the United States Department of Housing and Urban Development. Congress established Ginnie Mae in 1968. It is also known by the acronym GNMA.

When a GNMA-approved bank makes several mortgages, it may sell the pool of mortgages to a bond dealer. The dealer in turn sells securities backed by the underlying mortgages (hence the name "mortgage-backed securities"). Ginnie Mae guarantees the timely payment of interest and principal on these mortgage-backed securities. It is important to note that Ginnie Mae does not buy or sell mortgages nor does it issue the mortgage-backed securities it guarantees.

In general, Ginnie Mae only guarantees mortgage-backed securities that have underlying mortgages insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service (RHS), or the Office of Public and Indian Housing (PIH).

Here's how it works: The original lenders forward monthly payments received from homeowners to an agent, who passes the payments on to the security holders. A portion of the interest payments is retained by Ginnie Mae as a guarantee fee, and a portion is retained by the original lenders as a servicing fee. If a homeowner defaults on a loan underlying a Ginnie Mae security, Ginnie Mae makes the payments on the mortgage-backed securities until the underlying property is foreclosed.

Why It Matters

Because Ginnie Mae guarantees the MBS and effectively assumes the lending risk involved in the mortgage business, lenders are able to resell Ginnie Mae mortgages easily. The sale of these mortgages provides lenders with funds to make additional mortgage loans. This in turn creates more competition among lenders, which theoretically puts downward pressure on interest rates.  The GNMA guarantee also motivates lenders to provide mortgages to low-income homebuyers who would otherwise not qualify for a mortgage.

Ginnie Mae securities are the only mortgage-backed securities backed by the full faith and credit of the U.S. government. It is important to note that although Ginnie Mae securities are guaranteed by the U.S. government (implying they have no default risk), they are still subject to interest-rate and prepayment risk.

Ginnie Mae securities generally pay monthly interest and principal to investors. This monthly principal payment means investors earn interest on a decreasing principal amount over time. In addition, if a homeowner pays off his mortgage early, a corresponding portion of any related Ginnie Mae mortgage-backed securities are retired early and investors may receive extra payment (prepayment risk).

For more information about Ginnie Mae, go to {ia_ext|http://www.ginniemae.com|http://www.home-loans.org/}.

Source: Investing Answers