Ginnie Mae (GNMA)
The Government National Mortgage Association (GNMA, also known as Ginnie Mae) was created by the United States Federal Government through a 1968 partition of the Federal National Mortgage Association. The GNMA is a wholly owned corporation within the United States, Department of Housing and Urban Development (HUD). Its main purpose is to provide financial assistance to low- to moderate-income homebuyers, by promoting mortgage credit.
The GNMA serves a major purpose in the U.S. financial arena by making investors' money easily available to finance the purchase of homes in the United States by any buyer. It does this by guaranteeing the "securitizing" of large numbers of home mortgages. For example, a mortgage lender may sign up 100 home mortgages in which each buyer agreed to pay a fixed interest rate of 6% for a 30-year term. The lender obtains a guarantee from the GNMA and then sells the entire pool of mortgages to an approved bond dealer. The bond dealer then sells so-called "GNMA bonds", paying perhaps 5% in this case, and backed by these mortgages, to investors. The original lender continues to collect payments from the home buyers, and forwards the money to the GNMA, and as these payments come in, the GNMA pays the 5% bond bonds have, including interest rate risk. They also have the undesirable attribute of an infinite number of "call dates", meaning that, unlike other bonds, a GNMA bond might suddenly "mature" next month, if all the homeowners decided to pay off or refinance their mortgages. This does not involve a risk of loss to the investor, but rather a premature payment of the principal, and now the investor has to go look for another investment for his money.
The GNMA says it has guaranteed securities on the mortgages for 28 million homes totalling over $2 trillion in its history, and guaranteed $175 billion in these securities in 2002.
Controversies
The 'big 3' GSEs (government sponsored enterprises) of Fannie Mae, Ginnie Mae and Freddie Mac own upwards of 70% of the residential mortages in the United States. None of these organizations have the explicit backing of the government, although there is a perception (and a political reality) is that they are too large to fail and therefore will be bailed out by the government should they get into financial trouble.
These GSEs have driven many other mortage companies out of business due to GSEs being able to issue bonds at very low interest rates. A GSE bond is perceived to have the same risk as a government bond, which is essentially near zero risk.
A company attempting to compete with these GSEs would want to issue bonds and buy mortgates with the proceeds. Because their bonds would have a higher risk than the GSEs, they would have a higher interest rate. In order to make money, they would need a bigger income stream (a greater mortgage interest rate). Mortgates are highly liquid investments and few people would choose to pay higher interest rates on their mortgages. This prices the company out of the market.
The debate about limiting the growth and enforcing additional regulations on the GSEs has been ongoing and increasing. There have also been news reports of various financial irregularities at these GSEs in 2003 and 2004. If the GSEs either mismanage their funds, or there is a large rise in interest rates that the GSEs have not hedged, the government guarantee means the taxpayers would have to pay off their debts. Since they are corporations, some view the existence and growth of the GSEs as a government takeover of a large private industry with all the risks typically associated with doing so.
The GSEs are also known for having made large investments in lobbying congress to keep them regulated in a 'friendly' manner. This lobbying has mostly worked due to the benefits (listed above) outweighing any risks. This debate will probably continue unless / until there is a large taxpayer bailout to force the U.S. Congress to reconsider its stand on the issue.
See Also
