What Is Ginnie Mae And How Does It Work?

Ginnie Mae plays an important role in the affordability of certain loan programs involved with the Federal Housing Administration (FHA), Veterans Affairs (VA), and US Department of Agriculture (USDA). Without it, these agencies wouldn’t be able to offer the flexible guidelines they have, making it much more difficult to find affordable housing.

You may notice government-backed loans can be a little more flexible than many conventional loan guidelines. This is thanks to the guarantee offered by government agencies, such as Ginnie Mae. The guarantee reduces a lender's risk and allows them to have more flexible guidelines.

What Is Ginnie Mae (GNMA)?

Ginnie Mae, or the Government National Mortgage Association (GNMA), is a federally owned corporation that helps guarantee homes for low-income borrowers and first-time home buyers. Founded from the privatizing of Fannie Mae, Ginnie Mae doesn’t originate or underwrite loans. Instead, it guarantees mortgages on single-family and multi-family properties, making it more affordable for low-income families to secure financing.

Those with limited credit history or a few hiccups on their credit report need not worry. They may still qualify for a Ginnie Mae-guaranteed loan. When Ginnie Mae guarantees loans, lenders and investors take a lower risk, which allows them to offer more appealing pricing to homebuyers and more flexible qualifying factors. In addition, because Ginnie Mae guarantees the loans, there is less risk for mortgage investors, creating more liquidity in the mortgage market.

When lenders don’t have to hold onto mortgages and can instead sell them on the secondary market, it frees up more capital, allowing them to write more mortgages.

What Does Ginnie Mae Do?

Ginnie Mae helps keep liquidity in the mortgage market by guaranteeing certain mortgage-backed securities (MBSs). These are a pool of similar mortgages sold on the secondary market to free up a lender’s capital and allow them to underwrite and fund more loans.

Ginnie Mae operates under the blanket of the Department of Housing and Urban Development (HUD), along with other government agencies, such as the FHA, VA and USDA.

What Are The Advantages Of Ginnie Mae Loans?

The guarantee Ginnie Mae offers gives banks more liquidity, allowing them to be more flexible with their underwriting guidelines. They can accept loans from borrowers with less-than-perfect credit and still offer lower interest rates because of the guarantee.

The more relaxed guidelines ensure borrowers can secure financing without large down payments, perfect credit or low debt-to-income ratios.

The guarantee helps first-time home buyers by providing them with a more affordable mortgage payment. Buying your first home can be overwhelming at times. However, home buyers using FHA or other government-backed loans can secure more affordable rates and terms to make owning their first home achievable.  

How Is Ginnie Mae Different From Fannie Mae And Freddie Mac?

Ginnie Mae, Fannie Mae and Freddie Mac have some similarities. They’re all important pieces of the puzzle in the mortgage industry by increasing the mortgage market’s liquidity. Home affordability decreases when any of the three agencies decline, making it much harder for low-income families to buy homes. 

Despite their similarities, Ginnie Mae, Fannie Mae and Freddie Mac have many differences too.

Federally Owned Vs. GSEs

HUD, a government organization, owns Ginnie Mae. Fannie Mae and Freddie Mac are private organizations. Shareholders own Fannie Mae and Freddie Mac, whereas the government owns and runs Ginnie Mae. 

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that create guidelines for the loans they guarantee. Loans that meet their guidelines become bundled and bought by Fannie Mae or Freddie Mac to provide more liquidity for lenders.

Ginnie Mae guarantees certain mortgages from organizations like the FHA and USDA, but they don’t buy the MBSs like GSEs do.

Profits Vs. Guarantees

Fannie Me and Freddie Mac are heavily monitored and regulated by the government, but they aren’t government agencies. On the other hand, Ginnie Mae is a government branch and simply guarantees MBSs for investors to make the mortgage market more accessible.

Loan Securitization

Ginnie Mae’s securitization model guarantees mortgage-backed securities. This means Ginnie Mae covers the losses if a borrower stops making payments. This guarantee entices more investors, making the mortgage market more liquid. 

Unlike Ginnie Mae, Fannie Mae and Freddie Mac take it a step further. They buy the loans lenders underwrite that meet their guidelines. Ginnie Mae only guarantees a portion of the payments, whereas Fannie and Freddie purchase the loans.

Are GNMA Bonds A Good Investment?

As investors look for a more diversified investment option that pays higher rates than CDs or money market funds, GNMA bonds become popular.

GNMA bonds are a type of government bond with higher returns than most. For example, Morningstar reports that the Vanguard GNMA fund has had a 6.3% return over the last ten years, making it a great fixed-income asset.

Of course, like any investment, there is always interest rate risk. As the Fed increases rates, Ginnie Mae's rates of return fall, and vice versa. There is also a small risk of default, as is the case for almost any investment; however, the risk is so small that it’s not something most investors consider.

Another downside, however, is the high minimum investment requirement. For example, most GNMA bonds require a minimum investment of $25,000. So it might not be worth it if you don't have enough money to invest in GNMA bonds.

To determine whether these are a good investment based on your situation and financial goals, it’s best to speak to a financial advisor.

Ginnie Mae FAQs

Ginnie Mae loans have many benefits. Here are some of the most common questions about them.

Is Ginnie Mae a Government Agency?

Ginnie Mae is a government corporation that operates under HUD. It’s the primary company behind the guarantee on certain loans, including FHA, USDA and VA loans. Its guarantee helps keeps interest rates down on government-backed loans. 

What is a GNMA Loan?

Ginnie Mae doesn’t write or originate loans. Instead, it guarantees loans for organizations such as the FHA, USDA and VA. These organizations have underwriting guidelines for each loan program, and GNMA guarantees the payments for investors to provide more liquidity in the mortgage market.

Who Regulates Ginnie Mae And Freddie Mac?

The Federal Housing Finance Agency (FHFA) regulates Ginnie Mae and Freddie Mac. 

The Bottom Line

Ginnie Mae is an important part of the mortgage market. Without their guarantee, there would be much less demand for mortgage-backed securities, decreasing lenders’ liquidity and making it much harder to secure a mortgage.

Even though seeing how or why mortgages are sold to investors isn’t necessary for you to get a mortgage, understanding how the process works can help you understand why there are strict requirements when borrowing a mortgage.