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From: CNNMoney, August 31, 2011, Ginnie Mae president Ted Tozer discusses how the government-owned corporation differs from troubled mortgage-backers Fannie and Freddie Mac.

What is Ginnie Mae and how does it differ from Fannie & Freddie?

Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.

Ginnie Mae-insured bonds have always had the explicit backing of the federal government.

Fannie and Freddie guarantee bonds backed by mortgages that have no government guarantee. Although Fannie and Freddie were set up by the government, they are not owned or explicitly backed by the government. They are publicly traded companies owned by their shareholders.

However, Fannie and Freddie have become so big and important that everyone assumed that if they ran into trouble, the government would back them up. Here’s a look at what Ginnie Mae does:

What Ginnie does

A borrower goes to a bank and asks for a loan. If he qualifies, he might be offered a loan guaranteed by the FHA. (The FHA was created, long before subprime loans became widely available, to help borrowers who couldn’t get conventional home loans because they had low credit scores or limited resources.)

A bank or other institution bundles a group of FHA mortgages and sells a bond backed by mortgages in the pool to investors.

Ginnie Mae insures the bond, for a fee. But it doesn’t own any bonds itself.

As time goes on, “the bank collects mortgage payments from borrowers and passes payments to Ginnie Mae, which passes them through to investors,” says Ginnie Mae spokeswoman Terry Carr.

If a borrower defaults, the bank can foreclose and collect from FHA or VA. But the bank is responsible for making the pass-through payments whether or not the borrower pays.

“If the bank can’t make all or part of the pass-through payment, Ginnie Mae makes sure that bondholders continue to get their promised payments,” Carr continues.

If loans default and FHA or VA insurance doesn’t cover the full amount, Ginnie Mae makes up the difference.

These bonds are sold mainly to institutions including mutual funds. Funds that have Ginnie Mae in their names must invest at least 80 percent of their assets in Ginnie Mae-backed securities.

Ginnie Maes account for about 10 percent of the mortgage-backed securities market, says Dan Newhall, a principal with Vanguard Group.

Fannie and Freddie are much bigger and more diversified.

They buy mortgages from lenders that are not government insured but meet certain standards. Fannie and Freddie package loans into mortgage-backed bonds and sell them to investors. Fannie and Freddie also guarantee bonds that are packaged and sold by others, as long as the mortgages meet their standards.

Unlike Ginnie, Fannie and Freddie keep some bonds on their own books. They also buy and hold some mortgage securities packaged by others.

Fannie and Freddie securities are found in a wide variety of bond funds including government-income funds, which are allowed to buy them even though they had no explicit government backing, at least until some possible bailout procedures for Fannie and Freddie. And this is while the more secure Ginnie Mae is making a profit.

Its bonds are safer

Historically, Ginnie Mae bonds have been considered safer than Fannie and Freddie securities.

“You don’t have to worry about credit risk with Ginnie Maes,” says Morningstar analyst Paul Herbert. “They are backed by the full faith and credit of the U.S. government, just like a Treasury bond. That’s not the case with Fannie and Freddie, although recent steps suggest that if they don’t have the full faith and credit, they’re pretty close.”