||Ask the Dollar Diva
Ginnie Mae -- a simple name
for a complex investment
Dear Dollar Diva,
What is a Ginnie Mae?
Ginnie Mae, or the Government National Mortgage Association,
is a pool of home mortgages offered to investors as a conservative,
U.S. Government-backed security.
What's good about a Ginnie Mae?
It is the highest yielding security backed by the
federal government with estimated yields about 1 percent higher
than Treasury notes or bonds.
You receive a check every month rather than twice
a year, as you would if you invested in a bond.
Although they are offered in denominations of $25,000,
which is pricey for the average investor, you can buy pre-owned
Ginnie Maes for much less. The price will depend upon how much principal
remains to be paid on the loans -- the less outstanding principal,
the lower the cost. But you need to trust your broker when buying
the pre-owned variety -- it's too hard to estimate the actual yield
on these, and brokers have been known to twist the truth when selling
There are also Ginnie Mae mutual funds that make this
investment more accessible, but returns can plunge when interest
What's bad about GNMA?
Your monthly checks are made up of interest and principal.
If you spend the whole check, you eat into your principal, which
is usually not what investors like to do. Also, the amount of the
check is different each month. If a homeowner makes an additional
principal payment on his mortgage, your check will be higher in
the month he does it. It will be lower in the following month because
you have less principal in the pool.
It's too complicated an investment for the average
investor. The government guarantees the loans against default, but
it does not guarantee the return on your investment. Yields can
only be estimated based on the interest rate and years remaining
on the loans in the pool. If the higher interest loans in the pool
are paid off early, the yield will be reduced.
Mortgage refinancing is generally a function of interest
rates (when they go down, more people refinance), demographics (retirees
are more likely to pay off their mortgages than generation Xer's
) and other economic events (changes in tax laws, the health of
the economy). No one knows how many homeowners will pay off their
mortgages early, and it's not something the investor has any control
Ginnie Maes behave like bonds: When interest rates
go up, the value of the security goes down. Ginnie Maes generally
rise very little in an up market and crash in a down market. So
if you have to sell your Ginnie Mae before its maturity, you will
probably lose a lot of money.
-- Posted: Dec. 15, 1999