Government National Mortgage Association
The Government National Mortgage Association (GNMA, also known as Ginnie Mae) is a U.S. government-owned corporation within the
Department of Housing and Urban Development (HUD).
Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the
Federal Housing Administration,
Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government.
The GNMA was created by the United States Federal Government through a 1968 partition of the
Federal National Mortgage Association. As with other government sponsored enterprises, Ginnie Mae uses a creative acronym of the company's full name, adopted officially for ease of identification.
GNMA securities provide a connection between the capital markets and mortgage borrowers; investors purchase mortgage-backed securities (MBS also called RMBS), and borrowers gain access to investor funds. Capital market funding through MBS is much more efficient and provides a much larger funding base than traditional deposit-funding (e.g., Savings and Loan model circa pre-1989 savings and loan crisis).
GNMA primarily does two things. First, it provides a computer platform that efficiently pools
mortgages into bonds from pre-approved lenders. Second, GNMA provides, for 6 basis points of the outstanding principal balance of a bond, a guarantee of timely payment of principal and interest; this is essentially a guarantee that the United States government will continue to pay investors even if the underlying collateral (government insured mortgages) defaults. GNMA securities thus have the same credit rating as the government of the United States and for capital purposes have risk-weighting of zero.
GNMA guarantees the following types of securities:
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 issuer 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 forward the money to a paying agent who pays the holders of the bonds.
- 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.
- 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.
- 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 these payments come in, the paying agent pays the principal that the home owners pay (or, if some home owners fail to make the scheduled payment, the amount that they are scheduled to pay) 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 GNMA said in its 2003 annual report that, over its history, it had guaranteed securities on the mortgages for over 30 million homes totaling over $2 trillion. It guaranteed $215.8 billion in these securities for the purchase or refinance of 2.4 million homes in 2003.
Real Estate Finance