Ginnie Mae: What Is The GNMA And How Does It Work?
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 agencies or government-sponsored enterprises (GSEs) 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 originate – take the application and underwrite – the mortgages themselves, but rather to guarantee loans for single- and multifamily homes. That backing makes these loans more appealing to mortgage lenders, which leads to lower interest rates for home buyers, ultimately making homeownership 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 mortgage investors don’t have to worry as much about risk because Ginnie Mae will partially cover losses caused by default, thereby protecting their investment somewhat. This decreased risk brings investors to the market to make affordable mortgage loans possible.
When Does The Ginnie Mae Guarantee Apply?
Not just 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 loan 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 loans, provide financing for mortgage issuers, or even set standards for loan issuers.
Other FAQs About Ginnie Mae
Here are a few of the most common questions home buyers have about securing a Ginnie Mae home loan.
Is Ginnie Mae fully backed by the U.S. Government?
Yes. Ginnie Mae is actually its own government agency. By contrast, the other two are government-sponsored enterprises, but they are privately owned. Fannie Mae, 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 (FHLMC) is known, was established in 1970 and reorganized into a shareholder-owned company in 1989.
It should be noted that while Fannie Mae and Freddie Mac are privately run, the federal government did use a conservatorship of the Federal Housing Finance Committee to exercise more control over them during the 2008 housing market crisis.
Does Ginnie Mae have an investment portfolio?
As mentioned, Ginnie Mae doesn’t create loans, but it does so MBS made up of government-backed mortgages, so there is an investment portfolio with a prospectus. O Fannie Mae and Freddie Mac each have their own portfolios, whose performance is closely watched by their shareholders.
Is Ginnie Mae a guarantor of loans?
Yes. Ginnie Mae is the “guarantor” for federally backed loans from a select group of agencies mentioned above, which means Ginnie Mae takes at least partial responsibility for any default on those loans. Like Fannie Mae and Freddie Mac, Ginnie Mae guarantees loans from a wide pool of lenders. By buying and holding the loans or packaging them into MBS, Fannie Mae and Freddie Mac can provide additional funds to lenders to make more loans and continue the cycle.
The Bottom Line: Ginnie Mae Loans Can Make Homeownership More Affordable
As a home buyer, it’s important to know how and why loans are made and sold to better understand your role in continuing the cycle for future home buyers. The government has a keen interest in ensuring that underserved borrowers can enjoy the benefits of owning a piece of real estate 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.