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Fannie Mae, Freddie Mac, Ginnie Mae -
What's the Difference?

Many people think that Fannie Mae, Freddie Mac and Ginnie Mae are all the same because they all pool and securitize mortgage loans as mortgage-backed securities that are sold on the secondary mortgage market, also known as the secondary market. But, that's where the similarity ends. Fannie Mae and Freddie Mac were initially created by the U.S. Congress with the goal of expanding the residential mortgage market. For this reason, they are referred to as "government-sponsored enterprises" (GSEs), even though both eventually were converted into private companies.

Government National Mortgage Association (GNMA), also known as Ginnie Mae, is a government-owned corporation within the Department of Housing and Urban Development (HUD). It performs a similar function to Fannie and Freddie. But, it has the explicit backing of the full faith and credit of the United States government.

"Ginnie Mae accounts for about 10 percent of the mortgage-backed securities market," says Dan Newhall, a principal with Vanguard Group. Fannie and Freddie are much bigger and more diversified. They own and/or securitize upwards of 70% of the residential mortgage loans in the United States.

Fannie and Freddie buy mortgages from primary market mortgage lenders such as banks, thrifts (which include savings and loan associations and savings banks), mortgage companies, credit unions, and online lenders that are not government-insured but meet certain standards. Then, they package these loans into mortgage-backed bonds and sell them to investors. Fannie and Freddie also guarantee bonds that are packaged and sold by others, as long as the mortgages meet their standards. Unlike Ginnie, Fannie and Freddie keep some bonds on their own books. They also buy and hold some mortgage securities packaged by others.

Ginnie Mae does not buy or sell mortgage loans, nor does it issue mortgage-backed securities (MBS). Therefore, Ginnie Mae's balance sheet doesn't use derivatives to hedge or carry long-term debt. It simply guarantees (insures) the timely payment of principal and interest from approved issuers (such as mortgage bankers, savings and loans, and commercial banks) of qualifying government-insured mortgages, such as those issued to veterans and guaranteed by the Department of Veterans Affairs (VA) or mortgages guaranteed by the Federal Housing Administration (FHA), Rural Housing Service (RHS) and Office of Public and Indian Housing (PIH).

Ginnie Mae MBS are created when eligible mortgage loans (those insured or guaranteed by FHA, the VA, RHS or PIH) are pooled by approved issuers and securitized. Securitizing involves pooling a large number of these loans and selling interests in the pool to investors. For the primary mortgage lenders, this raises capital and gets the loans off its balance sheet, so it can issue new loans. For investors, it creates a liquid investment in a diversified pool of mortgage loans.

The Ginnie Mae website defines mortgage-backed securities as pools of mortgages used as collateral for the issuance of securities in the secondary market. MBS are commonly referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors. The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees.

Ginnie Maes are the most popular type of mortgage-backed securities because they are the only ones guaranteed by the U.S. government, and they typically provide higher returns than U.S. Treasury bills. And, because the market for these securities is highly liquid, you can sell your investment in a relatively short period of time.

Historically, Ginnie Mae MBS have been considered safer than Fannie and Freddie securities. "You don't have to worry about credit risk with Ginnie Maes," says Morningstar analyst Paul Herbert. "They are backed by the full faith and credit of the U.S. government, just like a Treasury bond. That's not the case with Fannie and Freddie, although recent steps suggest that if they don't have the full faith and credit, they're pretty close."

The passage of the new legislation could blur the lines of distinction among these entities even more. But, you'll still be able to distinguish the difference because Ginnie Mae is the government-owned corporation that only guarantees government-insured mortgage loans. Loans issued to veterans and guaranteed by the Department of Veterans Affairs (VA) or mortgages guaranteed by the Federal Housing Administration (FHA), Rural Housing Service (RHS) and Office of Public and Indian Housing (PIH) are all backed by Ginnie Mae. Fannie Mae and Freddie Mac, unless the government takes them over, are still private companies with diversified mortgage portfolios that are not insured or guaranteed by the government.


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