Sunday, September 21, 2014
The Good Sister
While Fannie Mae and Freddie Mac were out trying to wreck the liquidity of the world’s money markets with their bad behavior during the subprime loan scandal, their good sister Ginnie Mae quietly went about her job guaranteeing Mortgage Backed Securities (MBS) backed by residential loans insured by Government agencies. “The Government National Mortgage Association (GNMA), or Ginnie Mae, was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae’s mission is to expand affordable housing in the United States by channeling global capital into the nation’s housing finance markets.” (Wikipedia) MBS bonds backed by Ginnie Mae are considered “full faith and credit” securities. That is the timely payment of principal and interest is guaranteed by the United States Government. Period. During the crisis of 2008, the Government came to the rescue of Fannie Mae and Freddie Mac in spite of their bad behavior and the lack of the “full faith and credit” guarantee. Fannie Mae and Freddie Mac were corporations that had been sponsored by the Federal Government, but they were owned by individual shareholders not by the Government. In September 2008, facing bankruptcy, Fannie Mae and Freddie Mac were put under Government receivership, effectively wiping out their shareholders. Bond funds that buy and sell MBS backed by GNMA are of interest to the conservative investor looking for a bit more yield than offered by U.S. Treasuries, but something that is guaranteed by the full faith and credit of the United States. An example of these products, Vanguard GNMA Fund Investor Shares (VFIIX), currently pays about 2.5%. Nothing to brag about, but better than 0.75% for a five year certificate of deposit backed by the Federal Deposit Insurance Corporation (FDIC). As is always the case with Vanguard funds this product only carries a miniscule 0.21% expense ratio. The industry average for similar products is 0.98%. There is some risk associated with these products. When a lot of people are paying off their loans at a rapid rate or refinancing at a lower rate, the value of your shares will decline. While the principal and interest of individual securities is ultimately guaranteed, the instantaneous value of the bonds represented by your shares rises when interest rates drop and drops when interest rates rise. Vanguard also allows the VFIIX investor the ability to write checks off their holding, effectively offering a checking account with a 2.5% interest rate. Something to think about, but as always: Let’s be careful out there!