Ginnie Mae, Fannie Mae, Freddie Mac - Who's the riskiest?
August 02, 2007
A lot of newspaper headlines have covered the topic of the sub-prime mortgage market which has led to more speculation regarding the GSE's (Ginnie Mae, Freddie Mac, and Fannie Mae) and the risk investors who own these pooled-mortgage securities will feel. First the basics though:
Fannie Mae and Freddie Mac are quasi-private firms chartered by Congress to create and provide liquidity in secondary mortgage markets. They are known as government-sponsored enterprises (GSEs), a name that reflects their privately owned but government-chartered and regulated status. Together, they purchase, retain, or guarantee more than 70 percent of the conforming mortgage market. The bad news, potentially very bad news, is that the two entities have under a federate mandate to make housing affordable have purchased and guaranteed billions of dollars of risky loans (which are now defaulting at an accelerating pace) leaving investors and the American taxpayers with losses.
Ginnie Mae buys home mortgages originated under programs run by the Federal Housing Administration, the Veterans Administration and the Rural Housing Service. Ginnie Mae then pools the mortgages and issues securities backed by the payments on the loans. Crucially, Ginnie Mae guarantees the holders of its securities full and timely payment of both interest and principal, even if the underlying borrowers default. And that guarantee is backed by the full faith and credit of the U.S. government, just like Treasury securities are. is the shortened name for Government National Mortgage Association, a government agency within the Department of Housing and Urban Development. It was created to help promote home ownership by building a public market for home mortgages. The difference between Ginnie Mae, and it is crucial, and its two mortgage-packaging cousins is that Ginnie Mae is considered to be backed by the full faith and credit of the U.S. government. By being considered a government entity - Ginnie Mae also is subject to a higher degree of government regulation and control than Freddie Mac and Fannie Mae who have to please shareholders by considering their profit margins and stock prices when making decisions.
The above graph gives some indication of the type of investment that a GNMA purchaser is really buying because the oft-quoted term "pool of mortgages" tells an investor next to nothing. That pool could be from a sub-prime lender, a regional bank, or a predatory bank - three different investments indeed - and subject to different risk of prepayments and foreclosures (which affect the return a GNMA investor will earn). GNMA mutual funds is a common way for individual investors to easily participate in these securities. By purchasing a GNMA mutual fund, investors can enjoy the above-Treasury yields offered by GNMAs and spread the prepayment risk a little thinner by in effect holding a wider variety of mortgages.
SUMMARY: With all the mortgage meltdown hysteria, remember the crucial difference between Ginnie Maes (government-backed), Freddie Macs (private corporation) and Fannie Maes (private corporation) when considering these investments either directly or through a mutual fund. The future of all three GSEs look to be risky with the housing market under attack, but only one of the three can guarantee repayment of principal.
