Realty Times: What Effect Would a Privatized Ginnie Mae Have on Mortgage Costs?

November 29, 1999

What Effect Would a Privatized Ginnie Mae Have on Mortgage Costs?
by Lew Sichelman

Of course you've heard of Fannie Mae and Freddie Mac, the two government-chartered financial institutions which provide funds for housing by purchasing loans from local lenders, packaging them into securities and selling them to investors throughout the world. But how about Ginnie Mae?

Formerly known as the Government National Mortgage Association, Ginnie Mae also is a government sponsored enterprise, or GSE. But unlike Fannie and Freddie, which are now semi-private companies that answer to Uncle Sam but whose stock in owned and traded publicly, Ginnie is a wholly owned corporation of the United States government.

The company is a little different from its two older siblings in other ways, too:

For one thing, Ginnie Mae deals only in government-backed loans; that is, loans insured by the Federal Housing Administration, guaranteed by the Veterans Administration or backed by the Department of Agriculture's Rural Housing Service. This type of financing is aimed at those who cannot afford or otherwise qualify for conventional mortgages made without any government backing.

Fannie Mae and Freddie Mac purchase those loans, too. But they also buy conventional loans, and Ginnie Mae does not.

While it was created by Congress in 1968 with the mission to support expanded affordable housing which is roughly the same as Fannie and Freddie's charters -- Ginnie is the only one of the three that provides a guarantee that's backed by the full faith and credit of the federal government.

Because Fannie Mae and Freddie Mac are GSEs, most investors assume that their securities are also backed by the government. And the truth be told, if there ever was an economic calamity, Congress would probably rush to bail out the two companies and their stockholders because otherwise the effect on the housing market would be disastrous. But lawmakers don't have to. They can let Fannie and Freddie blow in the wind if they want. So there is no warranty, only a presumed one.

The Ginnie Mae guaranty, on the other hand, is real. It provides for the time payment to investors of both principal and interest irrespective of local market conditions. It is the only way to invest in the mortgage market with the government's full backing, period.

And here's another important difference: Ginnie Mae is profitable. Yes, so are Fannie and Freddie immensely so. But their profits go to stockholders, while Ginnie Mae's $674 million last year alone, $2.786 billion over the last five years are returned to the government's coffers.

I tell you all this because there has been a move afoot to sell Ginnie Mae to the private sector to generate additional funding for the federal budget. Housing Sec. Andrew Cuomo is dead-set against the idea, but the Office of Management and Budget and the Treasury Department are still actively discussing it.

And where do lenders stand on the issue? Glad you asked. The Mortgage Bankers Association, whose members originate the lion's share of government loans, says privatization is irresponsible public policy. And so do a number of other trade groups.

Here are some quotes:

"The proposed privatization of Ginnie Mae would be detrimental to the market and result in higher priced mortgages," says the MBA. "Any structural changes...could damage its ability to provide financing options to those borrowers who need it most...In addition, privatization could adversely impact the value of Ginnie Mae mortgage-backed securities in the full faith and credit of the federal government is reduced or eliminated."
If Ginnie Mae is sold, its affordable housing mission may be lost," says the National Low-Income Housing Coalition.
"Without the guarantee, Ginnie Mae mortgage-backed securities, instead of trading at a better price that Fannie Mae or Freddie Mac MBS, would like trade at a worse price," says the Mortgage-Backed Securities Letter. "This price would translate into higher priced mortgage for consumers."

Also See:

Who Are Fannie Mae and Freddie Mac?

Will Fannie or Freddie Be Your Next Lender?

Wall Street Money Fuels Lower Mortgage Rates

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