Ginnie Mae And Her Role In Mortgages

Many have probably heard the term Ginnie Mae or Freddie Mac, more frequently than ever in the past few years in regards to the housing industry. So what is a Ginnie Mae or Freddie Mac you might ask? They aren’t people, they are acronyms for a government mortgage agency.

Ginnie Mae is an easy to remember term for Government National Mortgage Association or GNMA. By definition, GNMA is wholly owned by the federal government under the branch of the U.S. Department of Housing and Urban Development. This program was created in 1968 and the President of the United States appointed a President of the organization. This person also serves as a key member of the Secretary of Housing and Urban Development’s principal staff.

It is the job of GNMA to guarantee mortgage-backed securities or MBS. These guarantees are backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration (FHA), Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. The securities GNMA create are guaranteed by the United States Government.

The reason Ginnie Mae was created in 1968 was to help attract new sources of capital for residential mortgage loans. This was done by increasing liquidity in the secondary mortgage market. Ginnie Mae guarantees the timely payment of principal and interest on securities backed by pools of mortgages issued by private mortgage institutions.

Ginnie Mae does not assemble or issue mortgage backed securities themselves, instead it assesses a small fee on banks and other mortgage lenders to evaluate and then guarantee the pool of mortgages to be sold. The fee collected by Ginnie Mae is used, if necessary as an advance against mortgage backed security pools that experience defaults. For instance, when a homeowner does not make a mortgage payment, Ginnie Mae uses these fees to fulfill its guarantee of timely payment of principal and interest payments to the MBS security holder.

To break it down even further, a mortgage lender may sign up for instance, 100 home mortgages in which each buyer agrees to pay a fixed interest rate of 6% for a 30-year term. These mortgages are assembled into ‘pools’ and then obtain a guarantee from Ginnie Mae to sell this pool to a bond dealer in the form of a GNMA certificate. This bond dealer then sells the GNMA mortgage-backed securities, paying maybe 5.5% to investors. The original lender continues to collect payments from the homebuyers and forwards the money to a paying agent who pays the holders of the bonds.

The difference between the 5.5% interest and the 6% is then broke down into two components. Part of it is a guarantee fee, which GNMA gets and part is a servicing fee, meaning a fee for collecting the monthly payments and dealing with the homeowner. If the homeowner defaults on payments, GNMA pays the bond coupon as well as the scheduled principal payment each month until the property is foreclosed upon. If there is a loss after a foreclosure, GNMA still makes a full payment to the investor.

GNMA guarantees the following types of securities:

1.    GNMA I securities. A GNMA I (Ginnie Mae one) represents a pool of mortgages all issued by one issuer, all with the same interest rate, and all issued within a three month period. This is a basic pass-through security.
2.    GNMA II securities. A GNMA II (Ginnie Mae two) is also a pass-through security, except that the collateral can have a range of interest rates and can include mortgages issued by more than one issuer. In this case, the service fees (see below) vary, so that the new interest rate being paid to the investor from each mortgage is the same.
3.    GNMA “REMIC” securities. A REMIC (Real Estate Mortgage Investment Conduit), also known as a CMO, is an additional level of securitization. The collateral pool for a REMIC consists not of mortgages, but of mortgage-backed securities (such as GNMA I, GNMA II, or previously issued REMICs).

As of January 2010, GNMA announced it has guaranteed more than $454 billion in the year 2009, compared to $270 billion for the year 2008, a 68% increase. As you can see, old Ginnie contributes quite a lot when it comes to home mortgages.

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