The Government National Mortgage Association is a federally related institution that participates in the United States secondary residential mortgage market. It is commonly known as Ginnie Mae. The association, along with two other institutions, issues mortgage-backed securities that enhance the liquidity of the mortgage market. It guarantees the securities under the authority of the United States government.
There are three associations that facilitate the functioning of the residential mortgage market in the United States. These are Fannie Mae, Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) and the Government National Mortgage Association. Of the three, the Government National Mortgage Association is the only federally related institution. Fannie Mae and Freddie Mac are government-sponsored enterprises, which means they were created by the federal government for a specific purpose, but they are publicly owned.
Fannie Mae and the Government National Mortgage Association were originally one entity, the Federal National Mortgage Association (FNMA), called Fannie Mae because of the acronym of its name. This association, which was formed in the 1930s, split in two in 1968. One part became Fannie Mae, a corporation that takes its formal name from the nickname of the original association. The other became the Government National Mortgage Association.
As part of their goal to support the secondary mortgage market, all three entities issue mortgage-backed securities. They create these securities by purchasing a number of mortgages and pooling them together. Then, they issue securities that entitle the holder to a portion of the interest and principal payments on the underlying mortgages.
Investors prefer to purchase mortgage-backed securities instead of directly purchasing mortgages for several reasons. First, mortgage-backed securities are sold by a central entity, so they do not require extensive work to locate investment opportunities. Second, the credit risk that comes from the possibility that the homeowner will default on the loan is mitigated by the guarantee of the security payments that the issuing agency provides. Third, the popularity of mortgage-backed securities fuels itself because a large trading volume increases the liquidity of the investments, which investors find attractive.
The agencies that issue mortgage-backed securities guarantee the payment of interest and principal on time to investors in exchange for a guaranty fee. The primary difference between the agencies is the type of guarantee which they can provide. Fannie Mae and Freddie Mac are corporations that are owned by shareholders. They can offer only corporate guarantees that depend on their viability as companies. In contrast, the Government National Mortgage Association’s guarantee is ensured by the United States government, which is considered more reliable than a corporate guarantee.