What is Ginnie Mae (GNMA)?
Batman and Robin. Bonnie and Clyde. Tango and Cash. All famous duos, but perhaps none can hold a candle to Freddie and Fannie. Freddie Mac and Fannie Mae are synonymous with the mortgage lending industry — and for good reason. But these two giants often overshadow a third member: Government National Mortgage Association (GNMA, commonly called "Ginnie Mae").
Freddie and Fannie encourage homeownership by directing more capital into home financing and creating an environment that’s more conducive for mortgage lending, but Ginnie does things a bit differently. Ginnie Mae supports types of home loans that appeal to a distinctly different group of potential homeowners.
How does Ginnie Mae work and what does it mean for you as a homebuyer? We’ve got all the answers you’ve been looking for, so let’s dig in.
Catching up with Fannie, Freddie and Ginnie
Ginnie Mae vs. Fannie Mae vs. Freddie Mac
That's the short version. Here's the longer take on how government-backed enterprises like Freddie Mac and Fannie Mae operate:
During the Great Depression, securing financing for mortgages wasn’t easy because banks and lenders needed to put up the money for those loans themselves. In 1938, FDR’s administration created the Federal National Mortgage Association — shortened to FNMA or Fannie Mae — giving it the authority to buy homeowners’ loans from qualified lenders and then bundle them into mortgage-backed securities (MBS). Fannie Mae could then, in turn, sell those securities to investors. This monumental event created liquidity and made it easier for lenders to extend mortgages to potential homebuyers because they no longer needed to directly fund those loans with their own money.
Fast forward 30 or so years, and the government brought the Federal Home Loan Mortgage Corporation — FHLMC or Freddie Mac — into existence. While Fannie Mae focuses on large commercial banks and lenders, Freddie Mac buys home loans from smaller institutions.
So where does that leave Ginnie Mae? Although Ginnie Mae may seem like the new kid on the block, it actually predates Freddie Mac by a couple of years. Since it was created in 1968, the Government National Mortgage Association — GNMA or Ginnie Mae — has served as an extension of the U.S. Department of Housing and Urban Development. Unlike Fannie and Freddie, which work with conventional home loans, Ginnie Mae focuses exclusively on government loans like FHA loans, VA loans and USDA loans.
While all three government-sponsored enterprises (GSE) try to remove lending barriers and make it easier for people to buy a home, Ginnie Mae arguably impacts a more diverse range of borrowers.
What does Ginnie Mae do, exactly?
Arguably Ginnie Mae’s biggest impact on the lending industry is putting the U.S. government’s stamp of approval on certain mortgage-backed securities — namely, those bundling FHA, VA and USDA loans. GNMA guarantees that both the principal and interest will be paid in full and on time by government-approved loan issuers. That doesn’t mean Ginnie Mae will just make up the difference anytime a borrower misses a payment on their mortgage, though. There are a lot of complicated regulatory and legal steps that must happen before GNMA makes a payment on a government home loan. Ginnie Mae only gets involved if the issuer of the MBS can’t advance the payment themselves.
The intent here is to build investor confidence in mortgage-backed securities by reducing financial risk. Anyone who misses a payment will still need to make good on their financial commitments, although there are forbearance options that offer extensions on mortgage payments.
Unlike Freddie and Fannie, Ginnie Mae focuses exclusively on government loans that appeal to people with somewhat disparate loan application credentials. FHA loans, VA loans and USDA loans all facilitate financing for home purchases even when borrowers have low or no credit.
What doesn’t Ginnie Mae do?
Freddie, Fannie and Ginnie’s respective roles in the lending world can be confusing, so it’s no wonder that people often misconstrue the part each has to play. Here’s a quick rundown of what GNMA doesn’t do with home loans:
- Ginnie Mae doesn’t extend loans itself.
- Ginnie Mae doesn’t finance home loans.
- Ginnie Mae doesn’t set lending standards regarding underwriting.
- Ginnie Mae doesn’t offer mortgage insurance to lenders.
As you may have gathered, GNMA acts more as a facilitator within the home lending ecosystem, mitigating risk so investors feel more confident about purchasing certain types of mortgage-backed securities. And as a result of that increased investment activity, lenders are encouraged to extend more government home loans.
What is a Ginnie Mae Loan? How do GNMA loans work?
If GNMA doesn’t issue, finance or insure loans itself, then why should homebuyers like yourself care about Ginnie Mae? Let’s take a look at the mortgage lending process and see where your paths might cross:
- Your mortgage lender approves your application for an FHA loan.
- Your mortgage lender packages your home loan along with other mortgages into mortgage-backed securities to sell on the secondary market.
- Third parties (hedge funds, mutual funds, pensions plans, etc.) purchase those mortgage-backed securities as investments, which provides more capital to your lender.
- Investors receive monthly payments on the principal and interest of those home loans.
- Your lender uses the proceeds from MBS sales to extend loans to more homebuyers.
All else being equal, investors might view mortgage-backed securities built on FHA loans with a good deal of skepticism. Consider that in many cases, borrowers only have to put up 3.5% of the principal as a down payment. FHA loan borrowers may also have low or no credit, creating even more uncertainty in the eyes of investors.
So, where does Ginnie Mae come into play? GNMA gives issuers of those securities — not the lenders or the borrowers, mind you — a guarantee that if they are unable to advance payments themselves, Ginnie Mae will cover those costs, reducing the financial risk associated with MBS sales.
Less risk means investors are more likely to purchase mortgage-backed securities on government home loans. Without that assurance, it’s possible investors would stay away from FHA loans or VA loans. And that, in turn, could make it more difficult for lenders to finance these types of home loans, leading to more selective loan approval qualifications.
Comparing GNMA home loan options
Ginnie Mae supports several government-insured or government-backed home loans. Not all lenders will offer these mortgage products, so be ready to check out all of your options before making a final decision:
- FHA loans: FHA loans are insured by the Federal Housing Administration, encouraging lenders to extend to loans to homebuyers with varying levels of credit, funding and debt.
- VA loans: The Department of Veterans Affairs either directly finances or guarantees home loans extended to active or retired service members, as well as qualified surviving spouses.
- USDA loans: The Rural Development Guaranteed Housing Program issues USDA loans to qualified applications in designated rural and suburban areas without requiring a down payment.
Freddie and Fannie may get all the attention, but Ginnie Mae plays an equally crucial role in the broader mortgage lending universe. GNMA guarantees that principal and interest payments will be made on time for all mortgage-backed securities involving government home loans. As a result, investors are more likely to buy these securities from lenders, who can then use proceeds from those sales to finance even more mortgages.
We’ve covered just the tip of the iceberg when it comes to these government-backed enterprises and their impact on the housing market. As a prospective homebuyer, you should educate yourself as much as possible about mortgage lending — and in particular, which factors affect market conditions such as interest rates, home values and housing inventory. A little research can go a long way toward optimizing your upcoming home purchase or refinance.
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