How to Buy FHA Bonds

by Ciaran John

The Federal Housing Administration (FHA) guarantees mortgages that are written by banks and other financial institutions which means that the FHA covers some of the lender's losses if the mortgage borrower defaults on the loan. Many lenders create pools of FHA backed mortgages and the Government National Mortgage Association or Ginnie Mae, issues bonds or mortgage backed securities that are tied to these FHA mortgage pools. Ginnie Mae and the FHA are both agencies of the U.S. Department of Housing and Urban Development. If you buy these bonds then you are buying securities that are both issued and backed by the federal government.

Review your bank balance and your brokerage account to see how much cash you afford to spend on federally backed mortgage bonds. You have to spend at least $25,000, to buy a newly issued Ginnie Mae bond although minimum purchase requirements only pertain to your initial investment. You can sometimes buy previously issued bonds on the secondary market for less than $25,000, or you can buy shares in a Ginnie Mae mutual fund for an initial investment of $1,000.

Contact your investment broker and ask for quotes on Ginnie Mae bonds that are available on the secondary market. Ask for the price and the yield. The market value of a bond can drop if newly issued bonds have a higher yield because no one wants to pay $25,000, for an old bond with a 3 percent yield if Ginnie Mae are issuing new $25,000, bonds with a 4 percent yield. Conversely, the prices of previously issued bonds can rise if the yield's on those bonds are higher than on newly issued bonds.

Ask your investment adviser to provide you with prospectuses for at least three mutual funds that contain Ginnie Mae mortgage backed securities. In many instances you have to pay a commission known as a load when you buy or sell a mutual fund and you also have to pay annual operating fees that deplete your earnings. Shareholders in bond funds receive dividend payment that are comprised of the interest payments made on the underlying bonds. Compare the dividends on the funds with the yields available on individual bonds.

Instruct your adviser to provide you with quotes detailing the minimum investment, terms and yields available on newly issued Ginnie Mae bonds. Compare the newly issued bonds with the secondary market bonds and the mutual funds.

Write a check to your broker for the total sum that you intend to invest as well as any fees and commissions that you must pay. Having made your investment decisions you must instruct your broker to buy the particular bonds or shares that you want to purchase. Retain a copy of your receipt for your records.

Tip

  • Ginnie Mae only issue mortgage backed securities that are tied to FHA guaranteed loans or other types of federally backed mortgages such as Veteran's loans. Freddie Mac and Fannie Mae are government sponsored enterprises that also convert some FHA loans in mortgage backed securities but the mortgage pools that these firms create also contain other types of mortgages. Unlike Ginnie Mae and the FHA, Freddie Mac and Fannie Mae are technically corporations and are not therefore backed by the full faith of the federal government.

Warning

  • While many people view Ginnie Mae bonds as a safe investment, you are exposed to refinance risk when you buy these bonds. Homeowners with FHA backed loans have the right to refinance at any time. When homeowner's refinance, Ginnie Mae recalls your bond and you receive a return of premium. Therefore, the income stream that your bond generates could end at any time.

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