Overview of Ginnie Mae (Government National Mortgage Association)

Ginnie Mae (officially known as the Government National Mortgage Association) is a government-owned enterprise that was established to help private mortgage lenders generate more funds for their mortgage loans. It does so by guaranteeing mortgage-backed securities made up of the lenders' existing loans. This ensures that investors will be paid even if the underlying mortgages succumb to default. This helps to attract investors and encourages lenders to put their mortgages in mortgage pools. In order to be secured, mortgage pools must meet certain requirements, and they must follow those requirements until the underlying mortgages are repaid.

Understanding Mortgage-Backed Securities

When a private lender issues a loan, it loses some of its money until the loan is fully repaid. So long as those losses are on its balance sheet, its ability to lend suffers. It has to lend less and impose stricter financial requirements to ensure the losses don't become too large.

However, private lenders can sidestep this problem by taking the unpaid mortgages and putting them into mortgage pools. Those pools are used as collateral for securities that are sold to investors on secondary mortgage-backed security markets. When an investor buys a mortgage-backed security, he or she essentially buys a portion of all of the mortgages that make up the mortgage pool. When the borrowers make monthly payments, the lenders subtract their monthly fees and pass on the rest to investors. Until the loans are fully repaid, the investors will receive those monthly payments, earning quite a bit of profit in the process. They can also sell their mortgage-backed securities to other investors if they so choose.

Because the mortgage pools are made up of several mortgages, the investors will earn profits even if some of the borrowers default on their mortgages. Usually, this is enough to make mortgage-backed securities fairly safe investments. However, if there is a housing bubble that collapses, the defaults grow exponentially until the mortgage-backed securities became completely worthless. This has happened several times during American history--the fallout from the latest housing bubble is only the latest example of the trend. Since then, investors have become more reluctant to invest in mortgage-backed securities without some sort of a guarantee.

Mortgage-Backed Securities and Ginnie Mae

Ginnie Mae was originally created to combat the housing shortage and homelessness during the Great Depression. While it operated as a private company does, it was wholly owned and financed by the US government. Because of this, it was able to offer something private lenders couldn't--a guarantee that no matter how bad the economy became, the investors would be repaid. It serves the same role in the current climate, allowing investors to invest in something they would otherwise hesitate to touch.

Ginnie Mae Mortgage Pool Requirements

While Ginnie Mae offers security private investors can't match, it is still accountable to the federal government. This means that it cannot back just any mortgage pool. There are two basic types of mortgage-backed securities Ginnie Mae will guarantee. They include the following:

  • Ginnie Mae I Mortgage-Backed Securities--All underlying mortgages must be for the same type of property. They must all have the same monthly rates, and they must all be issued by the same lender. Each mortgage must be insured by the Federal Housing Authority, Department of Veteran Affairs or another branch of the US government with power to provide housing aid. The pool must be worth no less than $1 million, and payments must be made on the 15th day of the month.
  • Ginnie Mae II Mortgage-Backed Securities--These are similar to the above, except they can include more than one lender. The minimum pool size decreases in proportion to the number of lenders involved, but it can't be below $250,000. The payments must be made on 20th day of each month.

In both cases, the lenders involved must be approved by Ginnie Mae. Their eligibility is re-evaluated every tax year. Ginnie Mae also places caps on service fees, and those fees have to remain the same across the entire mortgage pool.

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