If you’re planning to become a homeowner, you’ve likely started researching mortgages and talking to lenders about how they work. Along the way, you might have heard about Fannie Mae and Freddie Mac — and possibly even Ginnie Mae. While these sound like long-lost cousins, they’re actually nicknames for government-related agencies that help homeowners like you get mortgages. Let’s find out what Ginnie Mae is and the role it might play in your home buying process.
What Is Ginnie Mae (GNMA)?
The Government National Mortgage Association, commonly known by its nickname “Ginnie Mae,” is a federally owned corporation within the U.S. Department of Housing and Urban Development (HUD) that guarantees affordable home loans to underserved customers, such as low-income borrowers or first-time home buyers.
The agency was established in 1968 to promote affordable homeownership. Its role is not to create (or sell or buy) the loans themselves, but rather to guarantee loans for single- and multifamily homes. That backing makes these loans more appealing to investors, which leads to lower interest rates for home buyers, ultimately making home ownership more affordable through lower payments.
Here’s how the backing works: A group of private lenders would originate qualifying loans, pool them into securities, and then issue mortgage-backed securities (MBS), which Ginnie Mae ultimately guarantees.
With that backing, the investors don’t have to worry about whether the loans are being paid back on time (or at all!) because Ginnie Mae will step in and cover any payments, thereby protecting their investment. This decreased risk brings investors to the market to make affordable loans possible.
When Does The Ginnie Mae Guarantee Apply?
Not any loan comes with this airtight guarantee. Ginnie Mae MBSs are insured by the Federal Housing Administration (FHA), which typically provides mortgages for low-income and first-time home buyers, among other underserved groups.
The Ginnie Mae guarantee extends to securities backed by loans covered by a variety of programs:
- The Federal Housing Administration (FHA)’s single and multifamily mortgage insurance programs
- The U.S. Department of Agriculture’s Rural Housing Service loan guarantee programs
- The Department of Veteran Affairs guarantee program
- HUD’s Office of Public and Indian Housing loan guarantee program
Each of these programs has its own set of guidelines to ensure the loans go to the home buyers who most need them.
This role as backer means that Ginnie Mae is several steps removed from the process. As a “bystander,” so to speak, the agency doesn’t originate or sell loans, provide financing for mortgage issuers, provide insurance to lenders, or even set standards for loan issuers.
How Does Ginnie Mae Differ From Freddie Mac And Fannie Mae?
Earlier in the article we mentioned two other well-known mortgage-related entities – Freddie Mac and Fannie Mae. And even though we compared them to cousins, this pair actually has few if any similarities to Ginnie Mae. Here are the main differences between those other two programs and Ginnie Mae:
1. Ginnie Mae Is Fully Backed By The U.S. Government
Ginnie Mae is its own government agency – full stop. By contrast, the other two are “government-sponsored” enterprises, but they are privately owned. Fannie Mae, which is a nickname for the Federal National Mortgage Association (FNMA), began as a public entity in 1938, but was privatized in 1968; that means it is a company like any other that is funded with private capital and owned by shareholders. Similarly Freddie Mac, as the Federal Home Loan Mortgage Corporation is known, was established in 1970 and reorganized into a shareholder-owned company in 1989.
2. Ginnie Mae Doesn’t Hold An Investment Portfolio
As mentioned, Ginnie Mae doesn’t create or sell loans, which means it doesn’t have an investment portfolio. By contrast, Fannie Mae and Freddie Mac each have their own portfolios, whose performance is closely watched by their shareholders.
3. Ginnie Mae Is A Guarantor Of Loans
Ginnie Mae is the “guarantor” for federally backed loans from a select group of agencies mentioned above, which means Ginnie Mae takes responsibility for any missed payments on those loans. The other two are the entities that guarantee loans from a wide pool of lenders; by buying and holding the loans or packaging them into MBS, Fannie Mae and Freddie Mac are able to provide additional funds to lenders to make more loans and continue the cycle.
The Bottom Line
As a home buyer, it’s important to understand how and why loans are made and sold to better grasp your role in continuing the cycle for future home buyers. The government has a keen interest in ensuring that underserved borrowers are able to enjoy the benefits of home ownership, which is where Ginnie Mae steps in to guarantee affordable home loans.
Depending on what type of mortgage you have, you might have more exposure to Freddie Mac and Fannie Mae, but the main thing to know is that they are all part of a system designed to help home buyers like you and keep the U.S. financial system thriving. Want to know more? You can research the process of how mortgages are sold to investors here.