Investing in any type of market can be a tricky prospect these days because of recent history of unexpected crashes. However, for those who have been thinking about investing in mortgage-backed securities, the prospect is even scarier because of the downfall of the housing market in 2008 and the struggles associated with both Fannie Mae and Freddie Mac.
Despite the suffering economy, some experts say Ginnie Mae’s mortgage-backed securities are safe to invest in and still offer a good chance for growth. So is investing in Ginnie Mae really a good idea considering the volatility of the housing market?
What is Ginnie Mae?
The Government National Mortgage Association (Ginnie Mae) is a government organization that was created after Fannie Mae was split into two separate entities. Like Fannie Mae, it was chartered as a private-shareholder-owned corporation. Its main purpose was to back up Fannie Mae as a company that would authorize the purchase of FHA loans, as well as non-FHA insured mortgages.
Now, Ginnie Mae stands as the only quasi-governmental organization that receives financial backing explicitly. Since it plays the primary role of guaranteeing a loan if a borrower (buyer of a home) defaults or goes bankrupt, it gets full financial support from the government.
Ginnie Mae’s Mortgage-Backed Securities
For some time now, Ginnie Mae has purchased mortgages from lenders (banks and other financial institutions) then packaged them as mortgage-backed securities. These securities are similar to bonds because they’re debt securities (investment options available to those who want to purchase already-existing debts).
In the case of mortgage securities, the debt is the mortgage loan taken out by the borrower that was purchased from the lender.
This is how it works: A person decides she wants to purchase a home. Unable to pay for it in cash, she visits a lender to have the house financed. The lender agrees to finance the home for the prospective homeowner, meaning the lender provides the cash for the house with the agreement that the homeowner (now borrower) will pay back the loan over a certain number of years with interest.
In order for the lender to be able to give that money to another borrower, it needs to free up cash. This is where Ginnie Mae steps in. Ginnie Mae agrees to purchase the mortgage loan from the lender and become the new owner. However, in order to make its money back, Ginnie Mae offers a mortgage-backed security as an investment opportunity.
The investment is known as a GNMA mutual fund and is the result of numerous mortgage loans (securities) being bundled together and packaged to sell. Usually, numerous investors are able to invest in a portion of the bundle and can make money when borrowers pay their mortgages.
Should People Invest in Ginnie Mae?
Ginnie Mae mutual funds are considered a good investment despite the housing crash and downfall of Fannie Mae and Freddie Mac. The main reason is because the company is fully backed by the government. Since Ginnie Mae’s securities are packages of mortgage loans are typically insured by the Federal Housing Administration or the Department of Veterans Affairs, payment of interest and principal are guaranteed.
In other words, the investment is considered as a safe as a government bond. No matter how much the market suffers and how few people pay their mortgages, investors won’t lose.
Fannie Mae and Freddie Mac mutual funds were a different story because they were not fully backed by the government until after they’d already lost a ton of money. When the market lost money, so did they. Ginnie Mae, on the other hand, did not have this problem. It was then and continues to be a relatively safe investment option.
In addition to safety, another benefit experts find with Ginnie Mae is that its securities typically yield more than Treasuries. For instance, a five-year Treasury might yield 1.49 percent, while a GNMA certificate could yield a higher 3.3 percent. The higher the yield, the lower price you will pay and the higher your return will be, so this is a good thing for GNMA investors.
If you have been wondering whether investing in Ginnie Mae is a good idea, it’s good to know that no matter how low home prices drop, how few people pay their mortgages, or how few people even buy houses, the messed up market is not expected to have an effect on these securities. Since they are viewed to be as safe as government bonds and produce better yields, they’re still considered a good investment.
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