Guaranteed Mortgage Certificate (GMC)
What Is a Guaranteed Mortgage Certificate (GMC)?
A guaranteed mortgage certificate, otherwise called a guaranteed mortgage pass-through certificate, is a bond backed by a pool of mortgages.
Guaranteed Mortgage Certificates are issued by either the Federal Home Loan Mortgage Corporation, prevalently known as Freddie Mac, the Federal National Mortgage Association, prominently known as Fannie Mae, or the Government National Mortgage Association, famously known as Ginnie Mae.
Understanding Guaranteed Mortgage Certificates (GMCs)
Following the 2008 financial crisis and the federal government's takeover of Fannie Mae and Freddie Mac, each of the three of these housing finance companies are completely owned by the U.S. government. As a result of this backing, guaranteed mortgage certificates are viewed as exceptionally safe investments.
Guaranteed mortgage certificates are a type of mortgage-backed security, a financial instrument made in 1968 so a more extensive population of investors could earn money in the residential real estate finance market. Mortgages that adjust to the standards of Fannie Mae, Freddie Mac, or Ginnie Mae are called conforming mortgages, and ones that are not are called non-conforming mortgages.
Guaranteed mortgage certificates are backed simply by conforming mortgages. To make a guaranteed mortgage pass-through certificate, one of these mortgage finance companies will buy several dozen individual mortgages and utilize the interest rate proceeds from those mortgages to pay interest on the guaranteed mortgage pass-through certificate.
The federal government has supported this course of mortgage securitization through Fannie Mae, Freddie Mac, and Ginnie Mae under the theory that government support of the mortgage finance market assists make with selling finance more accessible to prospective homebuyers.
Upsides and downsides of Guaranteed Mortgage Certificates
Guaranteed mortgage certificates are interesting to investors since they frequently pay a higher rate than government and corporate debt, yet remain moderately safe investments. In any case, investors should know about the risks of investing in guaranteed mortgage certificates, similar to inflation risk, by which the value of these bonds might dissolve in the event that inflation rises.
To make a guaranteed mortgage pass-through certificate, Fannie Mae, Freddie Mac, or Ginnie Mae buy several dozen individual mortgages and utilize the interest rate proceeds from those mortgages to pay interest on the guaranteed mortgage pass-through certificate.
There is additionally the risk that you may not recuperate your whole principal investment assuming enough of the underlying mortgages fail. These certificates likewise risk falling in value if too a large number of the mortgage borrowers prepay their loans, which might reduce the value of the certificate in an environment of falling interest rates.
Besides, investors can't expect that the federal government's support of Fannie Mae and Freddie Mac will go on endlessly, and assuming the companies are privatized, buyers of securities they issue ought to beware of the risk of failure for these firms. On the off chance that the firm you purchase a guaranteed mortgage certificate from fails, you may not receive every one of the payments you are owed.
Features
- Guaranteed mortgage certificates are interesting to investors since they frequently pay a higher rate than government and corporate debt, however remain somewhat safe investments.
- Following the 2008 financial crisis and the federal government's takeover of Fannie Mae and Freddie Mac, guaranteed mortgage certificates are viewed as exceptionally safe investments.
- A guaranteed mortgage certificate, otherwise called a guaranteed mortgage pass-through certificate, is a bond backed by a pool of mortgages.
- Guaranteed Mortgage Certificates are issued by either Fannie Mae, Freddie Mac, or Ginnie Mae.
