Why Are GNMA Mutual Funds Unusual?
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The Government National Mortgage Association (known also affectionately as Ginnie Mae) is an organization that provides backing to mortgages with government money. Unlike its sibling Fannie Mae, it receives explicit, written support from the Federal government in the event of default of underlying loans.
Ginnie Mae does not purchase mortgage loans from people who are buying homes but instead provides a guarantee against default or nonpayment. Think of four parties that must work together in this scenario. A bank or other lending institution gives money to an individual who wants to buy a house. The individual gives the money to a seller. Afterward, the seller must give monthly payments with interest to the original lender. Ginnie Mae guarantees the full amount of the loan at every stage of the process.
Lenders who issue the mortgages expect to be paid back the principal plus interest. These mortgages can be securitized and resold to investors. Such securities, if aggregated from multiple sources, becomes the foundation for GNMA mutual funds. Their attractiveness lies in the fact that the returns are stable, and the principals are backed by government money.
GNMA mutual funds can be compared to a few other government-related financial products.
Government bonds are perhaps the most famous government-backed security. When the government conducts its operations it is required to in some way finance the operations until tax returns is received to pay the workers. This financing has no hope of being accomplished with a regular bank, but needs to involve the sale of bonds that are promises of payment. People buy into bonds for hitherto has been a very reliable promise of repayment and lack of default risk.
One kind of fund which remains poorly understood is the Fannie Mae mutual fund. As mentioned above, Fannie Mae lends to property consumers and reaps the interest payments. During the home loan collapse of 2007-2008, Fannie Mae was lambasted due to its part in lending to risky mortgage seekers. In contrast Ginnie Mae emerged relatively undamaged because of extremely low-risk investments.
Article Source: Articlelogy.com
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