Question:

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

Answer:

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.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 2.9/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: