Why are Ginnie Mae rates on MBS lower than rates on underlying mortgages?


The reason Ginnie Mae rates on securities are lower than the interest rates on the loans used as collateral for the MBS because of existing mortgage loans guaranty and servicing fees.

Mortgage-Backed Securities (MBS) are pools of mortgages used as collateral for the issuance of bonds. Ginnie Mae and other MBS are commonly referred to as pass-through certificates, because the underlying principal and interest payment passes through (is paid) directly to investors.

Therefore, the Ginnie Mae interest rates on MBS would be lower than the rate of existing loan rates, as to allow for servicing and pay for the government guaranty.

For example, if some Ginnie Mae MBS carry a rate of 6%, the underlying home loans may very well have a rate of 6.5%.

Ginnie Mae issues MBS on mostly loans insured by the Federal Housing Administration (FHA), or by the Department of Veteran Affairs (VA). Ginnie Mae MBS are the only MBS with investment risk of zero, as investors are guaranteed to be repaid by the US government even when the underlying mortgage loans are at default.

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