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Ginnie Mae Investing
 
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What is Ginnie Mae
Ginnie Mae (short for the Government National Mortgage Association or GNMA) was created in 1968 as a wholly owned corporation within the Department of Housing and Urban Development (HUD.) Its purpose is to serve low-to moderate-income homebuyers.  As an investment tool, it is a little hard to understand but well worth the effort.  Ginnie Mae Mortgage-Backed Securities (MBS) are a popular and reliable investment. Ginnie Mae MBS are backed by the full faith and credit of the United States Government, which ensures a steady return on investment. Over the past five years, Ginnie Mae MBS rates have averaged from 6.68% to 7.83%.
 
How Does It Work
Basically, Securities are created from Home Mortgage Loans.  More than half of all home mortgages originated each year are sold to investors as pass-through securities. Here is how it happens: In other words, Ginnie Mae is an agency that buys home loans from lenders, pools them with other loans and sells shares to investors. Ginnie Mae differs from its cousin Fannie Mae in that it only purchases loans backed by the federal government.
 
Pros and Cons of Ginnie Maes (from Bob Brinker's Money Talk)
The nice thing about having Ginnie Maes in your portfolio is that they’re continually throwing off cash flow. Right now, if you buy a low-cost no-load Ginnie Mae, you’ll get a yield of close to 6% at current rates. On $100,000, that’s $6000 flowing through your account that you can use for withdrawals without going into the principal.

The one risk that you run with Ginnie Maes is fluctuation in share prices, which can fluctuate by about 5 – 10%. You need to figure out your tolerance for interest rate risk. Before investing, you should ask yourself if you’re the kind of investor who will get upset if your share price comes down by 5%.

Bonds and Interest Rates (from Vanguard's Plain Talk)
As a rule, when interest rates rise, bond prices fall. The opposite is also true: Bond prices go up when interest rates fall. Why do bond prices and interest rates move in opposite directions? Let’s assume that you hold a bond offering a 5% yield. A year later, interest rates are on the rise and bonds of comparable quality and maturity are offered with a 6% yield. With higher-yielding bonds available, you would have trouble selling your 5% bond for the price you paid—you would probably have to lower your asking price. On the other hand, if interest rates were falling and 4% bonds were being offered, you should be able to sell your 5% bond for more than you paid.

How mortgage-backed bonds (Ginnie Maes) are different: In general, declining interest rates will not lift the prices of mortgage-backed bonds—such as GNMAs—as much as the prices of comparable bonds. Why? Because when interest rates fall, the bond market tends to discount the prices of mortgage-backed bonds for prepayment risk—the possibility that homeowners will refinance their mortgages at lower rates and cause the bonds to be paid off prior to maturity. In part to compensate for this “drag” on price, mortgage-backed bonds tend to offer higher yields than other bonds of comparable credit quality and maturity.
 



Links
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Last updated: 7/22/02