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Government Agencies and Related Securities

 - The Main Issuers

 - Background of the main GSE

 - Types of Securities

 

 


Background of the main GSE

Ginnie Mae (GNMA) - The Government National Mortgage Association was created in 1968 and is a wholly-owned corporation of the U.S. Department of Housing and Urban Development (HUD). Ginnie Mae provides insurance programs, which insure the repayment of principle and interest on federally-insured mortgage-backed securities issued by FHA, VA, RHS and PIH. Ginnie Mae is the only MBS backed by the full faith and credit of the U.S. Treasury. Because of this written guarantee, Ginnie Mae’s debt securities yield slightly less than other non-guaranteed agency securities.  Ginnie Mae has insured over $2 trillion in MBS, helping more than 30 million American families gain access to affordable housing. Ginnie Mae insures the repayment of certain debt securities.

Fannie Mae (FNMA) – The Federal National Mortgage Association, rated AAA by the credit rating agencies, was chartered by congress in 1938 and is a by-product of the 1929 depression. Their logo describes their mission: “Our Business is the American Dream.” They help low, moderate and middle income people obtain mortgages to buy homes. Normally mortgage applications are approved by lenders, on a case by case basis, and a determination is made if the borrower’s loan is eligible to be sold to Fannie Mae (or Freddie Mac). Fannie Mae purchases mortgages loans from lenders, packages them as securities, and sells them to investors, acting, in essence as a bridge between savers and potential homeowners.  In 1968 Fannie Mae became a public company. Investors can participate in Fannie Mae, either by purchasing equity shares, or through their numerous debt offerings.  One can purchase their shares, bonds, notes and MBS through brokerage firms.    

Freddie Mac (FHLMC) – The Federal Home Loan Mortgage Corporation, a triple A rated company, was established by congress in 1970 and became a fully public company in 1989.  It purchases residential mortgages from lenders and packages them in collateralized MBS. Freddie Mac either holds the paper or sells it to investors. It tries to provide a stable supply of money for lenders to make new loans. Freddie Mac, like Fannie Mae, offers a broad range of equity and debt offerings that investors can participate in.

(The author recognizes the fact that Fannie Mae and Freddie Mac have serious accounting issues. Bookkeeping aside, as long as homeowners continue to pay their mortgage payments, and the government doesn't go ballistic, these organizations are solid.)

Tennessee Valley Authority (TVA) – Established in 1933 to improve the economic and social well-being of the people living by the Tennessee River Basin, TVA supplies power to the region, promotes development, and acts as a steward over the valley’s natural resources.  TVA is not a public corporation, and therefore has no public common stock. It does, however, have extensive capital requirements to fund its power programs. Investors can participate in its various debt offerings. They carry the highest triple A credit ratings and are backed by the revenues generated by the TVA Power System. TVA bonds are not guaranteed by the U.S. Government. Interest income is normally tax exempt at the state and local levels; always double check, however, with the IRS for the most recent tax status.

Farm Credit System (FCS) – A system of banks and associations created in 1916 that provides mortgage loans and related services to farmers, ranchers, rural homeowners, agricultural cooperates, rural utilities, and agribusinesses. Loans are financed by the sale of bonds and notes in the capital markets, and interest income on bonds is normally exempt from state and local taxes, but not federal taxes. Always check with the IRS for the most recent tax rulings.

Sallie Mae (SLM Corporation) – Established by Congress in 1972, to provide liquidity to the student loan marketplace. Since 1996, SLM Corporation has been shedding its GSE status. Sally Mae, with over 7 million borrowers, is the largest provider of educational loans in the United States. It is a finance company, whose business model centers on purchasing student loans from lenders. Sallie Mae’s debt is not guaranteed by the U.S. Government. In several states, the interest earned on Sally Mae’s bonds is tax exempt. Always check with a tax advisor for the most recent rulings.

 

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