What is GNMA?
GNMA is an agency of the United States government that guarantees certain mortgages. It is also known as “Ginnie Mae”.
History of GNMA
The Government National Mortgage Association (GNMA), also known as “Ginnie Mae”, was established in 1968 as a government corporation within the Department of Housing and Urban Development (HUD). GNMA’s mission is to expand affordable housing finance in America by issuing mortgage-backed securities (MBS) on residential loans made by private lenders.
Ginnie Mae MBS are created when a pool of loans is securitized and sold to institutional investors in the form of a standardized MBS. The cash flows from the underlying loan payments are used to make timely payment of principal and interest to MBS holders.
The principal objective of GNMA MBS is to ensure that mortgage lenders have adequate liquidity so that they can continue to make new home loans even during periods of economic stress. By providing this critical liquidity, GNMA plays an important role in ensuring the stability of America’s housing finance system.
In addition to promoting stability in the housing market, GNMA MBS also serve another important purpose: they help make financing for home mortgages more widely available and less expensive for borrowers. This is because the risk of default on a Ginnie Mae MBS is lower than on a comparable unsecured loan, such as a corporate bond. As a result, investors are willing to accept a lower rate of return on GNMA MBS than on other types of investments. This “risk premium” savings is passed on to borrowers in the form of lower mortgage rates.
GNMA’s role in the mortgage industry
The Government National Mortgage Association or GNMA, commonly known as Ginnie Mae, is a government-owned corporation within the United States Department of Housing and Urban Development (HUD). It was created in 1968 to promote homeownership.
Ginnie Mae’s mission is to expand affordable housing finance in America by linking domestic and global capital markets. To fulfil its mission, Ginnie Mae:
-Issues mortgage-backed securities (MBS) on behalf of HUD-approved lending institutions, which include banks, savings associations, credit unions, and mortgage companies;
-Ensures timely payment of principal and interest payments on MBS to investors worldwide;
-Answers investor inquiries and provides information about Ginnie Mae programs;
-Monitors servicing of loans underlying MBS to protect the interest of homeowners and investors; and
-Works with HUD to take action against approved lending institutions that violate program rules or otherwise put at risk the timely payment of principal and interest to MBS investors.
See related articles on gnma junk bond funds here, or this article regarding multi-sector bond funds.
Advantages of GNMA
The GNMA, or Government National Mortgage Association, is a government-sponsored enterprise that guarantees the payment of principal and interest on certain mortgage-backed securities. The GNMA was created in 1968 to promote homeownership and better access to mortgage financing.
One advantage of GNMA securities is that they are backed by the full faith and credit of the U.S. government, which makes them virtually risk-free. This guarantee makes GNMA securities an attractive investment for conservative investors who are looking for a safe place to park their money.
Another advantage of GNMA securities is that they offer competitive yields relative to other government-backed investments, such as Treasury bonds. For example, as of June 2020, the yield on the 10-year Treasury bond was 0.70%, while the yield on the GNMA 30-year bond was 2.21%.
Lastly, GNMA securities can be owned in either physical or electronic form, which gives investors flexibility in how they hold these investments.
Disadvantages of GNMA
One disadvantage of GNMA securities is that because they are backed by the full faith and credit of the U.S. government, they are not as risky as other types of investments. This also means that they offer investors less potential for gain than other types of investments.
How to invest in GNMA
GNMA or “plain vanilla” GNMA securities are issued by Ginnie Mae. The name “plain vanilla” comes from the fact that there are no special features or terms associated with these securities, as opposed to other types of GNMA securities such as CMOs or IO strips.
Investors in GNMA securities receive periodic interest payments, as well as a return of principal when the security matures. GNMA securities are backed by the full faith and credit of the United States government, making them exceptionally safe investments.
GNMA securities can be purchased directly from Ginnie Mae through a broker, or from a secondary market dealer.**