“Through Vanguard, I have the GNMA fund. I’m concerned about maintaining it because interest rates appear to have nowhere to go except up, and the basic rule is that bonds fall when interest rates rise. But does the same hold true for GNMA bonds?”
What Are GNMA Bonds (GNMAs)?
The Government National Mortgage Association (a.k.a. Ginnie Mae) issues mortgage-backed securities that are insured by the federal government. For individuals unfamiliar with mortgage-backed securities, Vanguard offers the following explanation:
“MBS are investments in a pool of mortgage loans, which serve as the underlying asset and provide the securities with cash flow. Because the principal and interest of the underlying mortgage loans “passes through” to the investor, MBS are usually referred to as “pass-through” instruments. Over the life of the security, all bondholders receive a monthly pro-rata distribution of principal and interest.”
The fact that GNMAs (and other mortgage-backed bonds) behave differently than other bonds is vital to understand.
When interest rates rise, GNMAs behave similarly to other bonds in that their prices fall.
When interest rates fall, GNMAs behave differently. People tend to payback their mortgages as interest rates drop (via refinancing). This forces the fund to reinvest its cash in new (lower-yielding) bonds because (a portion of) the principal of GNMAs gets returned before maturity.
This indicates that the price appreciation of GNMA funds is limited in comparison to the price appreciation of other bond funds during periods of dropping interest rates. Note that this does not imply that when interest rates fall, the price of a GNMA fund will fall as well. Simply put, the price will most likely not rise at the same rate as the prices of other similar-duration bond funds.
To put it another way, GNMAs have the same downside as regular bonds, but they have a limited potential. GNMAs have higher yields than Treasury bonds of equal term in return for this limited upside.
Do GNMAs Have a Role in a Portfolio?
When it comes to bonds, the market is generally efficient, which means that most bonds generate returns that are proportional to their amount of risk over time. That is, it is difficult to discover anything that is very cheap in comparison to other bonds.
As a result, I don’t have strong thoughts about which bonds to employ unless you have a special aim in mind other than the conventional goal of decreasing the volatility of an otherwise-stock portfolio*. To put it another way, the most important thing, in my opinion, is to ensure that the portfolio’s overall risk profile is acceptable for your needs (e.g., by using a lower overall allocation to stocks if you decide to use higher-risk bonds).
- Given a 5-year average term and a reasonable amount of interest rate risk (approximately similar to Vanguard’s “total bond” fund),
- Prepayment risk (albeit, as previously stated, this isn’t actually a risk of loss, but rather a risk in the sense that the fund’s upside is limited and the fund’s SEC yield isn’t always a strong indicator of future returns).
GNMAs operate differently than regular bonds, but I believe they can be a good addition to a portfolio. However, I can’t conceive of a single financial purpose for which GNMAs would be a better fit than other bonds.
*Inflation risk can be reduced by using TIPS, or tax efficiency can be improved in a taxable brokerage account by using muni bonds and/or Treasury bonds.
What is the meaning of a Ginnie Mae bond?
The Government National Mortgage Association (GNMA or Ginnie Mae) produces agency bonds that are backed by the United States government’s full faith and credit. Mortgage-backed securities (MBS) backed by loans insured by the Federal Housing Administration and the Department of Veterans Affairs are guaranteed by the GNMA. The minimum denomination of new GNMAs is $25,000.
MBS are investments in a pool of mortgage loans that serve as the underlying asset and provide the securities with cash flow. Because the principal and interest of the underlying mortgage loans “passes through” to the investor, MBS are usually referred to as “pass-through” instruments. Over the life of the bond, all bondholders get a monthly pro-rata distribution of principal and interest. MBS are issued with maturities ranging from one to thirty years, however the majority mature sooner.
Each MBS has a “average life,” which is a calculation of how much time is left until the final principal payment. Changes in principle payments, which are influenced by interest rates and the speed with which mortgage holders prepay their loans, will affect the average life.
- GNMA securities, like US Treasuries, are guaranteed and backed by the US government’s full faith and credit, and are typically regarded as having the greatest credit grade.
- When GNMA securities are sold or redeemed, investors may be subject to capital gains taxes.
- For more information, investors should speak with a tax professional.
- GNMA bonds are not traded by Vanguard Brokerage Services. Vanguard Brokerage can help you sell your GNMAs before they mature by connecting you to a secondary over-the-counter market. Liquidity for GNMA bonds is normally provided by the secondary market, however it varies depending on the attributes of the bond, the lot size, and other market factors. It may be difficult to sell GNMAs that have had a large principal reduction.
- In both the primary and secondary markets, Vanguard Brokerage charges a commission for GNMA transactions.
- Interest rates can cause GNMA prices to rise or fall. The market price of outstanding GNMA bonds will normally fall when interest rates rise. Interest rate changes have a secondary impact on MBS since they influence mortgage prepayment rates. The average life and yield of a mortgage pool are affected by the prepayment rate. Because mortgage holders can refinance at cheaper rates, prepayments generally accelerate when interest rates fall. Prepayments tend to be slowed as interest rates rise.
- If mortgage holders pay off their debts early, the principal may be refunded to bondholders sooner than expected. Bondholders may therefore be forced to reinvest the recovered principle at a lower rate of interest.
- If mortgage holders postpone prepayment of their loans, principal may be refunded to bondholders later than intended. Bondholders may thus miss out on the chance to reinvest the refunded principal at a higher rate.
- All bonds entail the risk of the issuer defaulting or being unable to make timely interest and principal payments. GNMAs, on the other hand, have a low credit risk because they are backed by the US government.
- Prior to maturity, GNMAs can be sold for a significant profit or loss. The secondary market may be restricted as well.
What’s the deal with Ginnie Mae?
Increases the availability of affordable housing in the United States by connecting global financing markets to the country’s housing market.
Program Description: Ginnie Mae assures investors (security holders) that securities issued by private lenders are backed by pools of Federal Housing Administration (FHA), Veterans Affairs (VA), Rural Housing Service (RHS), and Public and Indian Housing (PIH) mortgage loans will be paid on time. Ginnie Mae’s full confidence and credit guarantee on mortgage-backed securities decreases the cost of mortgage financing for government-backed loans while also ensuring a steady supply.
All mortgages in a pool in the Ginnie Mae I program are fixed-rate, single-family mortgages with the same interest rate. The interest rates on the mortgages must all be the identical, and the securities must be issued by the same lender. Ginnie Mae I securities have a servicing and guarantee charge of 50 basis points, and the minimum pool size is $1 million, with the exception of Ginnie Mae I pools used as collateral for state or municipal bond financing programs (BFP), for which Ginnie Mae grants special consideration.
An approved lender must first get a commitment from Ginnie Mae for the guaranty of securities before issuing a Ginnie Mae I security. The lender creates a pool of mortgages by originating or acquiring mortgage loans. The Ginnie Mae I program allows lenders to sell securities backed by pools of single-family, multifamily, and prefabricated housing loans with the same interest rate across the board. The lender selects a buyer for the security before sending the documentation to Ginnie Mae’s pool processing agent. The agent prepares the Ginnie Mae guaranteed security and delivers it to the lender’s specified investors. The securities must be sold and the underlying mortgages must be serviced by the lender. The issuers of Ginnie Mae I securities must also pay security holders on the 15th day of each month.
Applicant Eligibility: Capital requirements, staffing, experience standards, and infrastructure must all be met before a company can be accepted as an issuer. In addition, the company must be an FHA-approved lender in good standing.
Section 306(g) of the National Housing Act (12 U.S.C. 1721(g)) provides legal authority.
Ginnie Mae, U.S. Department of Housing and Urban Development, Washington, DC20410-9000, is the administering office.
Administering office; Office of Mortgage-Backed Securities are two sources of information. On the internet
What is the frequency of GNMA bond interest payments?
Ginnie Mae I, or GNMA I MBS, is made up of mortgages that pay principle and interest on the fifteenth of each month, while Ginnie Mae II, or GNMA II MBS, pays principal and interest on the twentieth.
Are GNMA bonds a safe investment?
Any privately issued mortgage-backed product that is insured by the Government National Mortgage Association (GNMA) for timely principle and interest payments is referred to as a GNMA bond. They are the only mortgage-backed securities backed by the US government’s full faith and credit. The Government National Mortgage Association (GNMA), usually known as Ginnie Mae, is a wholly owned government corporation that was founded in 1968 to guarantee mortgage-backed securities for single-family and multi-family loans insured by various government agencies.
How does a CMO function?
A collateralized mortgage obligation (CMO) is a mortgage-backed asset that consists of a group of mortgages that have been packaged together and sold as an investment. CMOs get cash flows as borrowers return the mortgages that serve as collateral on these securities, which are organized by maturity and risk category. CMOs, in turn, pay principle and interest to their investors according to preset regulations and agreements.
Is a Ginnie Mae mortgage an FHA loan?
Ginnie Mae purchases government-backed mortgages in order to provide new cash to the mortgage industry, allowing it to make additional loans and further the affordable housing mission. After purchasing the mortgages, similar loans are bundled into MBSs and sold to investors on the bond market. Even if the loans default, the GNMA agrees to support the bonds.
FHA loans, VA loans, USDA loans, and the Section 184 loan program are all guaranteed by Ginnie Mae to aid Native American homeownership. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), but they are not government agencies. They purchase traditional loans.
What distinguishes Ginnie Mae from Fannie Mae?
The Government National Mortgage Association (GNMA), sometimes known as Ginnie Mae, is a government-owned organization that operates under the Department of Housing and Urban Development in the United States (HUD). It was created in 1968 with the goal of increasing access to affordable housing by guaranteeing housing loans (mortgages) and thereby lowering financing expenses such as interest rates. It does so by assuring investors that mortgage-backed securities (MBS) would be paid on time, even if homeowners default on their underlying mortgages and their homes are foreclosed on.
Only single-family and multifamily loans insured by government agencies, such as the Federal Housing Authority, the Department of Veterans Affairs, the Department of Housing and Urban Development’s Office of Public and Indian Housing, and the Department of Agriculture’s Rural Development, are guaranteed by Ginnie Mae.
Ginnie Mae does not originate or buy mortgage loans, nor does it buy, sell, or issue securities.
Other insuring government entities bear the majority of the credit risk on the mortgage collateral that underpins its mortgage-backed securities.
Ginnie Mae is similar to Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), with the exception that Ginnie Mae is a wholly owned government corporation, whereas Fannie Mae and Freddie Mac are “government-sponsored enterprises” (GSEs), which are privately owned federally chartered corporations.
Although some have argued that Fannie Mae and Freddie Mac securities are de facto or “effective” beneficiaries of this guarantee after the Federal Government rescued them from insolvency and placed them under government conservatorship in September 2008 during the Great Recession, Ginnie Mae securities are the only mortgage-backed securities that are backed by the “full faith and credit” guaranty of the United States Federal Government.
Who can apply for Ginnie Mae?
Issuers must have a minimum net worth of $2,500,000 to participate in the Single-Family Program. Issuers must have a minimum net worth of $5,000,000.00 to participate in the HMBS programs. Issuers in the multifamily program must have a net worth of at least $1,000,000.
What exactly is a G fee?
The guarantee charge (g-fee) is used to cover expected credit losses from borrower defaults over the life of the loan, as well as administrative costs and a return on capital.
Is it possible to lose money on GNMA?
There is, however, a technique to avoid this. If you’re offered a GNMA fund with an abnormally high current yield, it’s likely to have a portfolio full of high-cost mortgage securities. Van Kampen U.S. Mortgage A shares, for example, were recently distributing at a 5.39 percent annual rate. The fund’s 30-day SEC yield was only 2.73 percent at the time, indicating the amortization of premiums paid. For years, Van Kampen U.S. Mortgage has followed this strategy. As a result, the fund’s overall return has been lower than funds that do not follow this approach.
For example, Vanguard GNMA was distributing at a much lower rate of 4.67 percent, which was extremely near to its 30-day SEC yield of 4.57 percent.
Q. We have around $60,000 in the Vanguard GNMA fund and are automatically investing $1,000 each month. This is a cash reserve fund for us, thus it needs to be kept as liquid as possible. The Vanguard Inflation Protected Securities mutual fund recently sent me a prospectus. Please compare the advantages and disadvantages of each in a rising interest rate environment, bearing in mind our short-term goal.
A. The well-managed GNMA funds are distinguished from normal bond funds by their greater yield relative to their effective maturity. The Vanguard GNMA fund is the largest of the intermediate-term government bond funds, with about $19 billion in assets. Over the last 12 months, 3 years, 5 years, 10 years, and 15 years, it has performed in the top 17, 13, 15, 6, and 3 percentiles of its intermediate maturity class, respectively. As a result, it is a suitable option for consumers looking for a higher return on money they may require access to. It has generated an annualized return of 6.81 percent over the last five years, for example.
However, it is possible to lose money in a GNMA fund, even if it is as good as Vanguard GNMA. The fund lost 0.95 percent in 1994, one of the worst years for fixed income investment in history. The portfolio only returned 2.49 percent in 2003, a year marked by mortgage angst. It was still in the top 25% of its category in both years.
Over the last 12 months and three years, the Vanguard Inflation Protected Securities fund (ticker: VIPSX) has delivered a better total return (7.28 and 9.83 percent, respectively, compared to 4.16 and 5.03 percent for Vanguard GNMA). Those impressive returns should not be considered long-term. The initial issues of Treasury Inflation Protected Securities were met with skepticism by the investment community. As a result, they had to be priced at a 3.5 percent inflation premium. Because investors now have a better understanding of the bonds, the premium has been significantly lowered. As a result, future returns are expected to be lower.
Neither of these funds is a good choice for a cash reserve. The GNMA fund will most likely be more beneficial to you.