The Difference Between GNMA & FNMA

For the most part, the government-backed mortgage guarantee companies have assumed the nicknames they picked up many years ago. Ginnie Mae is a corporation entirely owned by the Federal Housing Administration. The GNMA is in all respects a federal government agency. Fannie Mae and Freddie Mac are nongovernment owned companies set up by federal charter. Fannie and Freddie are publicly traded and investors can buy shares in these two companies. Freddie Mac functions in basically the same manner as Fannie Mae, so any discussion of Fannie can be applied to Freddie.

Ginnie Mae provides a government guarantee on mortgage-backed securities that are backed by pools of home loans originated through a government program. The home loans behind a GNMA MBS bond will be FHA, VA, Public and Indian Housing and Rural Development Agency program home loans. Fannie Mae mortgage securities are backed by pools of conventional loans, which are home loans originated by a bank or lender and not under any specific government program. The loans in a Fannie Mae pool must meet the lending standards set by Fannie.

The mortgage bond insurance provided by Ginnie Mae and Fannie Mae function differently. Ginnie Mae provides insurance on the timely payment of interest and principal on the entire value of a Ginnie Mae mortgage bond issue. Ginnie Mae is not involved in buying home loans or putting together the pools of mortgages that back a Ginnie Mae bond. Ginnie Mae leaves the issuing and managing of mortgage bonds to independent financial companies. In contrast, Fannie Mae provides insurance and a guarantee on the individual home loans that make up a Fannie Mae MBS. Fannie will buy home loans that meet its standards, produce its own MBS, hold securities in its own inventory and handle the repossession and marketing of homes with defaulted loans.

The actual federal backing of Ginnie Mae vs. the implied support of Fannie indicates that Ginnie Mae bonds should have a higher level of safety. However, the government did come in and bail out Fannie and Freddie when they almost went bankrupt during the 2007-2008 financial crisis. In reality, the yields and returns on Ginnie Mae and Fannie Mae bonds will be very similar. If you buy a government bond fund, the fund will own both types of mortgage securities. You can also find Ginnie Mae only mutual and exchange-traded funds if you prefer the little extra bit of safety. Another alternative is to buy individual mortgage-backed bonds of either types from any securities broker.