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What is Ginnie Mae
Ginnie Mae (short for the Government National Mortgage
Association or GNMA) was created in 1968 as a wholly owned corporation
within the Department of Housing and Urban Development (HUD.) Its purpose
is to serve low-to moderate-income homebuyers. As an investment tool,
it is a little hard to understand but well worth the effort. Ginnie
Mae Mortgage-Backed Securities (MBS) are a popular and reliable investment.
Ginnie Mae MBS are backed by the full faith and credit of the United States
Government, which ensures a steady return on investment. Over the past
five years, Ginnie Mae MBS rates have averaged from 6.68% to 7.83%.
How Does It Work
Basically, Securities are created from Home Mortgage Loans.
More than half of all home mortgages originated each year are sold
to investors as pass-through securities. Here is how it happens:
In other words, Ginnie Mae is an agency that buys home loans from lenders,
pools them with other loans and sells shares to investors. Ginnie Mae differs
from its cousin Fannie Mae in that it only purchases loans backed by the
A mortgage lender (e.g. your local bank) makes a mortgage loan commitment
to a homebuyer, to finance or refinance a home mortgage loan.
The mortgage lender obtains a guarantee from Ginnie Mae.
The buyer (or refinancer) settles and the mortgage is obtained.
The lender pools similar mortgages and delivers the pool of loans to a
securities dealer. The lender still is responsible for servicing the loans
(i.e., collecting payments from the borrowers).
Securities dealers then sell mortgage-backed securities, guaranteed by
Ginnie Mae, to investors. The securities dealer advises Ginnie Mae of the
The lender continues to collect monthly principal and interest payments
from the borrower and forwards the funds to Ginnie Mae.
Ginnie Mae disburses payments to investors. Ginnie Mae disbursements occur
even if the payments have not been received from the borrower.
Pros and Cons of Ginnie Maes
(from Bob Brinker's Money Talk)
The nice thing about having Ginnie Maes in your portfolio is that they’re
continually throwing off cash flow. Right now, if you buy a low-cost no-load
Ginnie Mae, you’ll get a yield of close to 6% at current rates. On $100,000,
that’s $6000 flowing through your account that you can use for withdrawals
without going into the principal.
The one risk that you run with Ginnie Maes is fluctuation in share prices,
which can fluctuate by about 5 – 10%. You need to figure out your tolerance
for interest rate risk. Before investing, you should ask yourself if you’re
the kind of investor who will get upset if your share price comes down
Bonds and Interest Rates
(from Vanguard's Plain Talk)
As a rule, when interest rates rise, bond prices fall. The opposite
is also true: Bond prices go up when interest rates fall. Why do bond prices
and interest rates move in opposite directions? Let’s assume that you hold
a bond offering a 5% yield. A year later, interest rates are on the rise
and bonds of comparable quality and maturity are offered with a 6% yield.
With higher-yielding bonds available, you would have trouble selling your
5% bond for the price you paid—you would probably have to lower your asking
price. On the other hand, if interest rates were falling and 4% bonds were
being offered, you should be able to sell your 5% bond for more than you
How mortgage-backed bonds (Ginnie Maes) are different: In general, declining
interest rates will not lift the prices of mortgage-backed bonds—such as
GNMAs—as much as the prices of comparable bonds. Why? Because when interest
rates fall, the bond market tends to discount the prices of mortgage-backed
bonds for prepayment risk—the possibility that homeowners will refinance
their mortgages at lower rates and cause the bonds to be paid off prior
to maturity. In part to compensate for this “drag” on price, mortgage-backed
bonds tend to offer higher yields than other bonds of comparable credit
quality and maturity.
To Learn more about Ginnie Mae investing, visit these links:
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Last updated: 7/22/02