Government National Mortgage Association
The Government National Mortgage Association
, also known as Ginnie Mae
) was created through a 1968 partition of the Federal National Mortgage Association
. The GNMA is a wholly owned corporation within the United States
, Department of Housing and Urban Development
(HUD). Its main purpose is to provide financial assistance to low- to moderate-income homebuyers, by promoting mortgage
The GNMA serves a major purpose in the U.S. financial arena by making investors' money easily available to finance the purchase of homes in the United States by any buyer. It does this by guaranteeing the "securitizing" of large numbers of home mortgages. For example, a mortgage lender may sign up 100 home mortgages in which each buyer agreed to pay a fixed interest rate of 6% for a 30-year term. The lender obtains a guarantee from the GNMA and then sells the entire pool of mortgages to an approved bond dealer. The bond dealer then sells so-called "GNMA bonds", paying perhaps 5% in this case, and backed by these mortgages, to investors. The original lender continues to collect payments from the home buyers, and forwards the money to the GNMA, and as these payments come in, the GNMA pays the 5% bond coupon payments to the investors. If a home buyer defaults on payments, the GNMA still pays the bond coupons, and if a home buyer prematurely pays off all or part of his loan, that portion of the bond is retired, or "called", the investor is paid accordingly, and no longer earns interest on that proportion of his bond.
The arrangement benefits everyone involved:
- The mortgage lender has offloaded all risk to the GNMA, and has very quickly received a reimbursement of the money lent to home buyers from the bond dealer, and can immediately use this money to offer another pool of loans to the public.
- The home-buying public benefits from lower mortgage prices caused by the large amount of lender competition, in turn caused by a large supply of lenders, which is enabled by this quick reimbursement of money.
- The lower-income home-buying public benefits from a greater willingness by lenders to risk making loans to that group.
- The investors, whose money makes all of this work in the first place, benefit from the "full faith and credit" of the United States government; GNMA bonds are backed by the pool of mortgages, and even were massive defaults to occur, the U.S. government would make good on all payments. GNMA bonds also feature higher returns than other U.S. government issued bonds.
GNMA bonds themselves are considered risk-free from the standpoint of total default, but they are subject to risks that all other bonds
have, including interest rate risk. They also have the undesirable attribute of an infinite number of "call dates", meaning that, unlike other bonds, a GNMA bond might suddenly "mature" next month, if all the homeowners decided to pay off or refinance their mortgages. This does not involve a risk of loss to the investor, but rather a premature payment of the principal, and now the investor has to go look for another investment for his money.
The GNMA says it has guaranteed securities on the mortgages for 28 million homes totalling over $2 trillion in its history, and guaranteed $175 billion in these securities in 2002. The GNMA is not taxpayer-funded, although ultimately its guarantees certainly would be if massive defaults were to occur and the government were left with the tab.