When you’re involved in the home buying or refinancing process, you hear a lot of names getting thrown around. Fannie Mae, Freddie Mac, Ginnie Mae, and other organizations can all seem the same to non-professionals. One of these, Ginnie Mae, often becomes involved in loans that are backed by the US federal government.
Here, we’ll provide a thorough overview of Ginnie Mae, how it works, and how it interacts with other actors in the lending market. We’ll also discuss how Ginnie Mae compares to Fannie Mae and Freddie Mac, the two major loan backers.
What Is Ginnie Mae (GNMA)?
Ginnie Mae is what most people call the Government National Mortgage Association since it rolls off the tongue easier than “GNMA.” It’s a government-owned and managed corporation that’s administered by the US Department of Urban Development (HUD). It guarantees affordable mortgage loans for first-time and low-income homebuyers, as well as other underserved customers.
Ginnie Mae was founded in 1968 when it was spun off from Fannie Mae with a mission to promote affordable home mortgages. It doesn’t actually originate loans or accept applications directly from homeowners. Instead, it guarantees these loans, encouraging mortgage lenders to continue making loans to people with marginal credit or low income. There’s more competition with more lenders in the market, and lenders keep their interest rates low. As a result, people can afford their monthly mortgage payments.
The process starts when a lender – or a group of lenders – makes enough qualifying loans to pool them into a security. These mortgage-backed securities are then sold to third-party investors, and the mortgage lenders use the cash to make more loans.
Ginnie Mae, in turn, promises to cover a portion of any losses caused by default. This at least partially protects the investment, and as a result, investors are happy. These happy investors keep buying more securities, and the process keeps on going.
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What Does Ginnie Mae Do?
Ginnie Mae was created in 1968, as a part of the new US Department of Housing and Urban Development. Previously, Fannie Mae had been responsible for promoting all types of housing, but the process had become too cumbersome. Per HUD’s mission to promote affordable homeownership, Ginnie Mae took over promotion for affordable loans, while Fannie Mae retained responsibility for promoting loans for the general market.
Ginnie Mae was the first organization of any kind to guarantee mortgage-backed securities, which it has been doing since 1970. Mortgage-backed securities have been sold on the international market since 1983.
As a home buyer, you wouldn’t deal with Ginnie Mae directly. You would take out a loan from a traditional lender. But mortgage lending is a long-term business. For lenders to operate, they need a constant supply of cash. Once they’ve made a large number of loans, they bundle these loans into mortgage-backed securities. Ginnie Mae guarantees these securities and currently has a portfolio balance of more than $2.1 trillion.
Mortgage-backed securities can be a risky investment. As the name implies, they’re only worth as much as the underlying mortgages. If a bunch of borrowers default, the value of the security goes down. A Ginnie Mae guarantee means that GNMA will cover the loss in the event of a missed payment or a default. A GNMA-backed security is backed by the full faith and credit of the US government. This reduces the risk for investors, which encourages them to buy these securities.
Ginnie Mae specifically focuses on backing loans to homeowners who are underserved in the traditional mortgage market. As a result, they primarily focus on Federal Housing Administration (FHA) loans. That said, they do back some other loans, such as Veterans Affairs (VA) and Rural Housing Service (RHS) loans.
When Does The Ginnie Mae Guarantee Apply?
As you might imagine, there are some limitations to when and how the Ginnie Mae guarantee applies. In general, it backs loans from the FHA, which is also a part of HUD. But it also guarantees securities backed by loans from other institutions. In all, it guarantees securities backed by the following loans:
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FHA loans
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Loans issued by the VA
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Loans issued by the Department of Agriculture’s RHS programs
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Loans issued by the Office of Public and Indian Housing
All of these loan programs have their separate guidelines to guarantee money to lenders, but Ginnie Mae doesn’t need to be concerned about that. Since they’re not a part of the lending process, all they have to do is guarantee the securities.
History Of Ginnie Mae
Ginnie Mae has its origins back during the Great Depression. After the initial stock market crash and soaring unemployment, many people could not pay their mortgages. This led to a wave of defaults, which further damaged the financial structure, depressed property values, and pulled down the entire economy.
As part of the New Deal, Congress passed the National Housing Act of 1934 and created the FHA, which has a mandate to protect lenders in the event of a default. This encouraged lenders to continue operating, even in the dismal market. Fannie Mae followed soon after, in 1938, to purchase packages of conventional mortgages.
In 1968, Fannie Mae was thirty years old. But in 1968, with the founding of HUD and the expansion of President Lyndon Johnson’s Great Society programs, there was about to be an influx of government-backed mortgages. While Fannie Mae was experienced at backing loans on the conventional market, they were ill-suited for handling these new, government-backed mortgages. As a result, the agency was split, with Fannie Mae continuing to handle conventional mortgages, and Ginnie Mae handling the government loans.
Later on, Fannie Mae was made into a publicly-traded company. On the other hand, Ginnie Mae remains owned and operated by HUD. As a result, Ginnie Mae is now the only home mortgage investor that’s backed by the full faith and credit of the US government.
What Are Ginnie Mae Bonds?
Ginnie Mae bonds are the mortgage backed securities that they sell. These securities are technically bonds, and are sometimes simply called GNMAs.
Lenders create a pool of loans. For example, they might create a package of 1,000 loans with an average credit score of 625 and down payments of at least 5%. Ginnie Mae purchases this package, and issues a bond, which will be paid out when the mortgage terms are over. They guarantee to cover any defaults, up to a maximum number.
Are Ginnie Mae Bonds Safe To Invest In?
Mortgage-backed securities are generally considered one of the safer types of investment. Even in times of financial distress, people do their best to pay their mortgage, and they’ll fall behind on just about anything else before they risk their homes. Unless there’s a major financial downturn in the broader market, you’re usually safe to begin with. And because Ginnie Mae bonds are guaranteed, investors are protected from anything short of a catastrophic market downturn.
That said, like any other bonds, Ginnie Mae bonds can be worth more or less depending on the interest rate. And in the case of a mortgage-backed security, this interest rate will be the average interest rate of the mortgage pool. The lower the interest rates in the market, the less you can expect you can receive from your bond.
One important thing to remember is that as part of their response to the COVID-19 pandemic, the Federal Reserve purchased tens of billions of dollar of mortgage-backed securities, including Ginnie Mae bonds. This has kept interest low for consumers, encouraging borrowing and keeping the economy running, but it’s also made returns lower for investors. With interest rates expected to rise over the coming year, returns are liable to be higher in the near future.
Ginnie Mae Secured Mortgage Loans
We’ve already mentioned that Ginnie Mae secures a variety of types of loans. Let’s take a closer look at all four of them:
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RHS Loans
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FHA Loans
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VA Loans
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Native American Mortgage Programs
RHS Loans
The US Department of Agriculture’s (USDA) RHS program is designed to provide affordable lending to home buyers in rural areas. Sometimes known as USDA loans, these loans have a number of advantages when compared to conventional loans.
To begin with, no down payment is required, and a buyer can move in with just the closing costs and the first month’s mortgage payment. Moreover, there are fewer upfront fees than for most other loan types.
To qualify, you need to live in a rural area, as defined by the USDA’s guidelines. You’ll also have to have an income of 115% or less of the median regional income, as will everyone in your household.
FHA Loans
FHA loans make up the majority of Ginnie Mae’s portfolio. These loans are targeted towards people with short credit histories, or who have some credit issues. The standard program provides loans with a 10% down payment to individuals with a score of 500 or higher.
That said, many lenders will offer lower down payments to individuals with credit scores of 580 or better. If your score is 620 or higher, you could qualify for a higher debt-to-income ratio, or even get a lower interest rate.
One important thing to be aware of is that FHA loans require you to pay mortgage insurance for the life of the loan. On the other hand, most conventional loans will let you drop your insurance after you own 20% of your home’s equity. As a result, many FHA borrowers refinance with a conventional loan once they’ve reached this milestone.
VA Loans
VA loans are some of the most flexible loans on the market. They have no minimum down payment, low interest rates, and a generous debt-to-income ratio. If that’s not enough, you can even convert 100% of your equity to cash, provided you have a high enough credit score.
Most lenders require a score of 620 to obtain a VA loan, although the VA itself does not have any specific requirements. Another thing to consider is that while there’s no mortgage insurance, there’s a VA funding fee. This depends on your down payment, whether or not you’re on active duty, and any previous history with other VA loans.
The main requirement of a VA loan is that you have to be a service member or a surviving spouse receiving dependency and indemnity compensation. “Service member” applies not just to active-duty troops, but also to National Guard members, reservists, and veterans.
Native American Mortgage Programs
HUD offers special low-down payment, low-interest loans for qualifying Native Americans through the Section 184 Loan Program. For loans of less than $50,000, the minimum down payment is only 1.25%. And even for a larger loan, it’s only 2.25%. You also need to pay a 1% guarantee fee, but this doesn’t have to be paid up front. It can instead be bundled into the loan and paid off over time.
The nice thing about these loans is that they’re manually underwritten. Since you’re dealing with a real human being, you’ll have a little more flexibility during the application process.
Ginnie Mae Vs. Freddie Mac & Fannie Mae
So, what is it that separates Ginnie Mae from Freddie Mac and Fannie Mae? The main difference is ownership. While Ginnie Mae is federally owned and operated, the two other institutions are private enterprises, with a government charter and government sponsorship.
This has important implications for investors. To be fair, there’s a general expectation that the federal government will bail Fannie Mae and Freddie Mac out if they get into trouble, just as they were bailed out in 2008 and 2019; but that’s not a guarantee. On the other hand, Ginnie Mae bonds are backed by the full faith and credit of the government.
Another important difference is their charter. Ginnie Mae only guarantees federally-backed loans, while Freddie Mac and Fannie Mae invest in the private market. Fannie Mae eve has its own investment portfolio, consisting of mortgage-backed securities from the open market in addition to its own.
Summary
Ginnie Mae is a crucial part of the modern housing market. By guaranteeing mortgage-backed securities from low-income and first time homebuyers, it ensures the ready availability of affordable home loans. Without Ginnie Mae, many people would have a hard time finding a mortgage, and some would be locked out of the market altogether.
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