Government National Mortgage Association

Most pass-through securities are issued by three government agencies, the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. Also a marked growth has taken place in the number of mortgage pass-through securities issued by private issuers since the mid-80s. The Government National Mortgage Association, or “Ginnie Mae”, is in its whole property of the Department of Housing, and Urban Development (HUD). Hence the timely interest and principal payments of Ginnie Mae pass-through securities are guaranteed by the full faith and credit of the US Government. They have zero-credit risk, therefore which is appealing to investors.

The agency does not issue pass-through securities, but instead insures them. These securities are issued by mortgage bankers and thrift institutions. Many of these institutions join their mortgages in pools of about $1 million. These mortgages bankers apply to the Government National Mortgage Association for their back up and if accepted get a pool number.

Shares of these pools are sold to investors, which in the majority of cases are formed by banks, pension funds, and insurance companies. The minimum purchasing amount is $25000 which explains why most investors of these pools are institutions. After all pool shares from GNMA are sold securities of the GNMA are negotiated in security markets.

There are a number of Ginnie Mae pools. The most important pools are GNMA I and GNMA II. GNMA I has fixed-rate 20-to-30 years mortgages with a resulting minimum face value of $1 million, all with the same interest rates. GNMA II pools are larger than GNMA I pools and have mortgages with a variety of interest rates and maturities. There are many different GNMA pools, such as Midgets (mortgages with 15-year terms), GNMA graduated-payment mortgages (GPMs), GNMA buy-downs, and GNMA Federal Housing Authority (FHA) projects.

The different type of mortgages, periods of maturity, rates of interests, and sizes of pools make it difficult to analyze the different types of pools. Generally, pools are larger, own liquid payments and are les affected by prepayments.

While the shorter the terms of mortgages, less the average of life and half life of pass-through security pools. Average life, defined as the weight-average time that each dollar of principal is outstanding, is a measure of the investment life of mortgage-backed securities in a pool.

The life average of a pool depends on the prepayment rates. While larger the number of prepayments in a pool, shorter is the average life and the weighted-average life, and less the volatility of prices of the GNMA securities.

The GNMA and other types of mortgage securities are negotiated on their assumed average life, against their maturity dates, as with other bonds. Half-life is the time it takes to return half the principal in a pool. The average life and half-life are useful measures for comparison purposes because you would use these concepts not the length of time to maturity, to compare GNMA securities with other fixed income investments.

For example, if you want to compare the yield on GNMA security with a 5-year half-life and a maturity of 12 years with a Treasury note, you compare it with Treasury notes with a 5-year maturity.

Investing in GNMA are much more complex than other investments of fixed-income due to uncertainties of not only maturity time periods of such investments, but because also the historical amounts paid by each GNMA pool. But these statistics are not written in rock so they can vary. Therefore estimated payments are reviewed continuously.