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Government National Mortgage Association
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.
Business
The GNMA, along with the other so-called Government
Sponsored Enterprises (GSEs), sell mortgages in the 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" securities. 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 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 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 totaling over $2 trillion. It guaranteed
$215.8 billion in these securities for the purchase or refinance
of 2.4 million homes in 2003.
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