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- Fannie Mae, Freddie Mac and Ginnie Mae: What's the Difference?.
Its original purpose was to buy mortgages from cash-strapped private companies to free up capital that would then encourage lending during the Great Depression. Fannie Mae was later semi-privatized in The primary goal of Fannie Mae, in the past and today, is to make more affordable mortgages available to low- and middle-income buyers. Fannie Mae typically buys loans from lenders of all sizes, from large-national banks to small community lenders and credit unions.
Freddie Mac. Freddie, also semi-privatized, serves as competition for Fannie Mae, and allows for mortgages to be bundled together and sold as investments on the secondary mortgage market. This bundling and selling allows more people to obtain mortgages because the lenders don't have to hold the loans on their balance sheet, thus freeing up their capital to re-lend and make additional loans. Understanding exactly how the secondary mortgage market works can be difficult, particularly because many homebuyers don't know it even exists. Here are the three main steps in the moving a mortgage through the secondary market:.
The past 20 years have seen drastic changes in the US housing market and this volatility has impacted the secondary mortgage market as well. Home prices in the US housing market reached an all-time high in , just before the recession began, which caused home sales as well as home values to begin falling dramatically in As a result of these changes, many private equity investment institutions in the U. Without these investors buying loans, lenders had fewer loans to offer and buyers had fewer options.
In order to bolster the US housing market and the overall economy, Fannie Mae and Freddie Mac became the primary buyers in the secondary market. This kept investors interested, as loans backed by Fannie and Freddie are considered to be safe investments due to their government support.
Who are Freddie Mac, Fannie Mae and Ginnie Mae?
Another layer of protection for investors is offered in the form of the government agency Ginnie Mae The Government National Mortgage Association. A part of the Department of Housing and Urban Development, Ginnie Mae guarantees the timely payment of mortgage bonds that include federally insured or guaranteed loans, such as FHA mortgages.
Fannie and Freddie guarantee loans to secondary market investors, while Ginnie Mae guarantees mortgage-bond payments. For example, if a borrower defaults on their mortgage, Fannie and Freddie are responsible for the losses on the loans they guarantee to investors, while Ginnie Mae is financially responsible for the bond payments to the holders of Ginnie Mae securities.
The relationships may seem complicated, but the ultimate goal of each of these three institutions is clear:. While many consumers never come in direct contact with Fannie Mae and Freddie Mac, these two important GSEs do ultimately provide buyers with important benefits through their local banks and other lenders. The mortgage bond insurance provided by Ginnie Mae and Fannie Mae function differently. Ginnie Mae provides insurance on the timely payment of interest and principal on the entire value of a Ginnie Mae mortgage bond issue. Ginnie Mae is not involved in buying home loans or putting together the pools of mortgages that back a Ginnie Mae bond.
History of Fannie Mae
Ginnie Mae leaves the issuing and managing of mortgage bonds to independent financial companies. Fannie will buy home loans that meet its standards, produce its own MBS, hold securities in its own inventory and handle the repossession and marketing of homes with defaulted loans. The actual federal backing of Ginnie Mae vs. However, the government did come in and bail out Fannie and Freddie when they almost went bankrupt during the financial crisis.
In reality, the yields and returns on Ginnie Mae and Fannie Mae bonds will be very similar. If you buy a government bond fund, the fund will own both types of mortgage securities. You can also find Ginnie Mae only mutual and exchange-traded funds if you prefer the little extra bit of safety.
Another alternative is to buy individual mortgage-backed bonds of either types from any securities broker.
Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch. Plaehn has a bachelor's degree in mathematics from the U. Air Force Academy.
Difference Between Fannie Mae, Freddie Mac and FHA - Income Stacker
Straightening Out the Names For the most part, the government-backed mortgage guarantee companies have assumed the nicknames they picked up many years ago. Types of Loans Guaranteed Ginnie Mae provides a government guarantee on mortgage-backed securities that are backed by pools of home loans originated through a government program. Investment Considerations The actual federal backing of Ginnie Mae vs.
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