Government National Mortgage Association (Ginnie Mae) bonds are a type of mortgage-backed security issued by the U.S. government. Purchasing a Ginnie Mae bond provides the funding for the various mortgage loans available from the government such as FHA loans and loans guaranteed by the VA. Returns from investments in Ginnie Mae bonds come from the repayment of the mortgage loans. Ginnie Mae is completely owned by the U.S. government. Two similar entities, Fannie Mae and Freddie Mac (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation), used to be independently operated corporations, but were placed under conservatorship by the federal government during the financial crisis of 2008.
Ginnie Mae bonds are considered nearly as safe as Treasury bonds because the government guarantees the loans they are funding. With typical bond funds, if the borrowers default on the loans, the bond investors do not receive a return on their investment. While the investment does not have a guarantee of a specific return, investors do receive the guarantee of receiving payment of the loan's principal and interest in a timely manner.
Prepayments Lower Returns
When interest rates fall, many borrowers refinance their mortgages to save money. This causes them to pay off their current mortgages early, lessening the interest earned on the loans. Not only do bondholders lose money from the repayment, they also receive smaller returns if they reinvest in more bonds because their new bonds will yield lower interest rates.
Typically, to account for the risk of early repayment Ginnie Mae bonds provide a higher return on investments than other investment opportunities guaranteed by the government such as savings bonds. Purchasers receive essentially the same interest rate as the mortgage holders are paying. While it is possible for your investment to receive a lower return than expected, it is less likely than with investments that are not backed by the government.
High Initial Investment Cost
Typically, you must make an initial investment of $25,000 into a Ginnie Mae bond if you are buying the bond directly. While the secondary market, available through some brokerages, does allow investors to purchase bonds for less than $25,000, and mutual funds that specialize in Ginnie Mae bonds exist, the return may be less if they have lower interest rates than bonds available through the primary market or, in the case of mutual funds, they charge management expenses. However, the availability of secondary markets do provide greater liquidity to your investment than savings and other Treasury bonds because they provide a place for you to sell your shares in a bond fund.
Before making any investment, talk with a financial planner to help you decide if the investment fits in with your overall financial strategy. All investments carry an element or risk and you should only invest after careful consideration and research.
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