Hopeful home buyers, take heart. Investors in stocks and bonds, take note. Ginnie Mae has launched Social Bonds.
Ginnie Mae has published new information for investors pointing to the “significant social impact” of its bonds, as they back mortgage funding for home buyers in historically underserved communities. Its new updates should attract attention, and further boost first-time homebuyers’ access to funding.
OK, but wait… Who is Ginnie Mae? And what’s its connection to home mortgage affordability? Let’s break this down.
It’s All About Mortgage-Backed Securities.
Our home loans typically become parts of mortgage-backed securities (MBS). In fact, two-thirds of total home mortgage debt today is bundled into these securities. Investors can purchase MBS products from Ginnie Mae and other financial institutions.
Most homeowners don’t think about the activity of their loans in these funds. But investors do.
Investing in an MBS looks much like investing in a bond fund. Individual loans get bundled into funds, and investors buy them for their portfolios.
And much like regular bond investors, MBS investors tap into cash flows generated by the underlying debt. MBS investments run the length of the mortgages. Many have 30-year terms; some run 10 or 15.
How, mainly, do mortgage-backed securities differ from regular bonds? Standard (corporate or government) bonds generate income for investors by deploying investors’ pooled money. But investors in a mortgage-backed security receive earnings from the bundled loans. While bonds pay out at maturity, mortgage-backed securities offer regular pay-outs, from the monthly interest and principal that homeowners pay regularly.
A Win for Banks, Investors, and Homeowners? That’s the Idea.
As most new homeowners soon learn, banks that issue mortgages resell them. That is, they send homeowners’ loans into the secondary mortgage market, where they’re bundled as securities and resold to investors.
So, who benefits?
Lenders make money through this system. They can resell their mortgages, let someone else manage them, and pull in money that they can use to make still more loans. This way, their money works for them through multiple channels.
Mortgage-backed securities from Ginnie Mae are considered safe assets. Low-risk financing in very much demand by the whole mortgage market. Plus, government backing is a risk buffer that helps keep rates down, so more borrowers can be served.
Because the secondary market creates more loans, it helps keep mortgage rates from rising too sharply. This, in turn, helps home buyers.
Because of this market dynamic, buyers have wider opportunities to get financing at mortgage rates they can handle.
Big banks don’t just lend out money. They also invest in mortgage-backed securities. MBS funds can give banks and institutional investors exposure to particular risk-reward opportunities they want in their portfolios.
Big banks say they support the housing market through this system. Keeping the market active makes for a robust economy, they point out. Plus, it creates job opportunities.
And this is why our mortgages are much more than agreements between ourselves and specific mortgage lenders. Though we submit our payments to a particular servicer, so much more is going on with the money we transfer. The investors who hold mortgage-backed securities collectively hold our loans. And they have a vested interest in our ability to successfully repay these loans. Whenever the borrowers aren’t paying, investors lose.
Ginnie Mae Plays a Leading Role in the MBS Model.
Ginnie Mae is the Government National Mortgage Association. It’s a housing finance corporation. It’s also a part of, and fully owned by, the U.S. government. Created in 1968, Ginnie Mae is a section of the Department of Housing and Urban Development (HUD).
Ginnie Mae is the leader of the mortgage-backed security system, ever since the first MBS came out in 1970. Investors were drawn to the MBS model. It offered a stable cash flow. It had the full backing of the U.S. government. Ginnie Mae could raise funds to buy more mortgage loans. It worked, and by the late 1970s, Fannie Mae and Freddie Mac were creating mortgage-backed securities, too.
Ginnie Mae also buys and sells these bundles of mortgages called MBS. This keeps liquidity (basically, cash) in the market. Ginnie Mae accepts funding from U.S. and international investors. By standing behind its mortgage-backed securities, Ginnie Mae creates a strong asset. MBS returns are usually higher than U.S. Treasury Bond yields. Not surprisingly, the mortgage-backed securities model appeals to a broad range of investors.
Ginnie Mae is, not surprisingly, a major supporter of the federal housing agencies. These include the Federal Housing Administration (FHA), the Department of Agriculture (USDA), the Veterans Administration (VA), and more. The links between Ginnie Mae and these agencies make financing available to more borrowers than the market would otherwise serve.
Now, What Will Ginnie Mae’s Update Actually Do?
With its new Social Bond label, Ginnie Mae will offer investors in mortgage-backed securities expanded access to its data. Investors will now be able to check for themselves that Ginnie Mae’s Social Bonds bring value to society, particularly by expanding access to home loans.
And Ginnie Mae does have the receipts to prove the bonds’ social benefit. Over the course of this year, Ginnie Mae has enabled securitization for well over half a million first-time homebuyer loans.
So, the update matters. It will promote buying. It will encourage transfers of deeds.
And the need has never been more pressing. In October 2023, Redfin announced that a typical buyer pays the mortgage company a record-setting $2,866. Redfin adds that an applicant has to earn $115K to buy the typical home now. That’s significantly more than most households bring in.
Ginnie Mae’s on a mission to bring mortgage financing to those who want it and need it. This means first-time buyers, applicants with modest incomes, tribal and rural home borrowers, historically marginalized communities, veterans, and seniors. Adding a “Social Bonds” label to MBS products can flag the importance of this societal value. As Ginnie Mae’s president Alanna McCargo stated in a release, the term “Social Bonds” represents “an important step forward for our securitization program and a powerful tool for investors who want to put capital to work that impacts America’s communities and households.”
Now we know.
Ginnie Mae press release via GinnieMae.gov: Ginnie Mae Mortgage-Backed Securities Portfolio Reaches $2.492 Trillion in October (Nov. 7, 2023).
Ginnie Mae press release via GinnieMae.gov: Ginnie Mae Announces First-Ever Social Bond Enhancements to Define its Significant Impact in Promoting Broader Access to Mortgage Financing (Sep. 14, 2023).
Ginnie Mae All Participant Memorandum (APM) 23-10 via GinnieMae.gov: Addition of Social Bond Content to Single Family Prospectuses (Sep. 14, 2023).
Dana Anderson for Redfin.com: Homebuyers Must Earn $115,000 to Afford the Typical U.S. Home. That’s About $40,000 More Than the Typical American Household Earns (published Oct. 17 and updated Oct. 18, 2023).
Kyle G. Horst for DSNews.com: Ginnie Mae Announces Social Bonds to Promote Broader Access (Sep. 15, 2023).
James Royal for Bankrate, LLC (part of Red Ventures) via Bankrate.com: What Are Mortgage-Backed Securities? (Jun. 6, 2023).
And as linked.