The Government National Mortgage Association (GNMA, also known as Ginnie Mae) was created by the United States Federal Government 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 credit.
The GNMA, along with the other so-called Government Sponsored Enterprises (GSEs), sell mortgages in their secondary market. This lets investors put money in the mortgage securities market, which increases the price of the mortgage bonds and lowers their rates, which in turn lowers the rates on mortgages in the primary market so that more people are able to buy and mortgage a home. The GNMA does this by guaranteeing the timely payment of the principal and interest payments on mortgage backed securities.
There are several types of GNMA securities that are active in the institutional fixed income markets:
- GNMA I securities. A GNMA I (the "I" is a roman numeral one) represents a pool of mortgages all issued by one issuer, all with the same interest rate, and all issued at around the same time (within a few months).
- GNMA II securities. A GNMA II is similar to a GNMA I, except that the mortgages 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.
- GNMA "REMIC" securites. A REMIC (Real Estate Mortgage Investment Conduit) 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).
Pools are created by lenders. 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 (who must be an approved issuers of GNMA certificates) obtains a guarantee from the GNMA and then sells the entire pool of mortgages to a bond dealer in the form of a "GNMA certificate". The bond dealer then sells GNMA mortgage backed securities, paying 5.5% 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 a paying agent who pays the holders of the bonds. As these payments come in, the paying agent pays the principal which the home owners pay (or the amount that they are scheduled to pay, if some home owners fail to make the scheduled payment), and the 5.5% bond coupon payments to the investors. The difference between the 6% interest rate paid by the home owner and the 5.5% interest rate received by the investors consists of 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 a home buyer defaults on payments, GNMA pays the bond coupon, as well as the scheduled principal payment each month, until the property is foreclosed. If (as is often the case) there is a shortfall (meaning a loss) after a foreclosure, GNMA still makes a full payment to the investor. 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 seemingly 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 rates 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 if massive defaults were 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 being callable every month, meaning that, unlike other bonds, all or part of 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. This is called prepayment risk. As a practical matter, many institutional investors find it very inconvenient to own bonds which get small principal payments every month.
The GNMA said in its 2003 annual report that over its history, it had guaranteed securities on the mortgages for over 30 million homes totalling over $2 trillion. It guaranteed $215.8 billion in these securities for the purchase or refinance of 2.4 million homes in 2003.
The "big 3" GSEs (government sponsored enterprises) of Fannie Mae, Ginnie Mae and Freddie Mac own or securitize upwards of 70% of the residential mortages in the United States. Only GNMA has the explicit backing of the full faith and credit of the United States government, although there is a perception (and a political reality) that all three are "too large to fail", and therefore will be bailed out by the government should they get into financial trouble.
These GSEs have driven many other mortage companies out of business due to GSEs being able to issue bonds at very low interest rates. A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk.
Companies competing with these GSEs generally only securitize mortgages which the GSEs will not securitize. GNMA does not issue gurantees which increase the risk to the government, therefore they only securitize mortgages which are already guaranteed by the government. As a practical matter, these are either mortgages issued to veterans and guranteed by the Department of Veterans Affairs, or mortgages guaranteed by the Federal Housing Administration (FHA). Because their bonds have a higher risk than the GSEs, their bonds (and therefore their mortgages) have a higher interest rate.
The debate about limiting the growth and enforcing additional regulations on the GSEs has been ongoing and increasing. There have also been news reports of various financial irregularities at these GSEs in 2003 and 2004. If the GSEs either mismanage their funds, or there is a large rise in interest rates that the GSEs have not hedged, the government guarantee means the taxpayers would have to pay off their debts. Since they are corporations, some view the existence and growth of the GSEs as a government takeover of a large private industry with all the risks typically associated with doing so.
The GSEs are also known for having made large investments in the lobbying of Congress to keep them regulated in a "friendly" manner. This lobbying has mostly worked because the benefits (listed above) seem to outweigh the risks. This debate will probably continue unless and until there is a large taxpayer bailout to force the US Congress to reconsider its stand on the issue.
- Ginnie Mae homepage (http://www.ginniemae.gov/)
The following links are non-neutral, strongly critical takes on U.S. national mortgage policy. Read with a large grain of salt.
- FHA, HUD & the Mortgage Market Bubble (http://www.solari.com/gideon/articles/q301.pdf)
- Where is the Collateral? (http://www.whereisthemoney.org/S00223_collateral.htm)