U.S. Government Agency Securities

Agency securities are issued by government-related entities that support the housing and lending markets. The critical exam distinction is the level of government backing each agency receives.

Ginnie Mae (GNMA) - Government National Mortgage Association

• Status: Government agency; wholly owned corporation within the U.S. Department of Housing and Urban Development (HUD)
• Government backing: Backed by the full faith and credit of the U.S. government
• Underlying loans: Pools of government-insured mortgages: Federal Housing Administration (FHA), Veterans Affairs (VA), and USDA (Rural Housing Service)
• Product type: Pass-through mortgage-backed securities (MBS)
• Interest payments: Monthly (principal and interest passed through to investors)

Key facts about Ginnie Mae:

• The only mortgage-related agency whose securities carry the explicit full faith and credit guarantee
• Ginnie Mae does not originate or purchase mortgages; it guarantees the timely payment of principal and interest on MBS issued by approved private lending institutions
• GNMA pass-throughs are considered the safest mortgage-backed securities

Exam Tip: Gotchas

• Ginnie Mae guarantees the MBS but does NOT originate or purchase mortgages. It only guarantees timely payment on securities issued by approved private lenders.

Fannie Mae (FNMA) - Federal National Mortgage Association

• Status: Government-Sponsored Enterprise (GSE); publicly traded, privately owned; under federal conservatorship since 2008
• Government backing: No explicit full faith and credit guarantee; carries an implied (moral) government backing
• Underlying loans: Conventional conforming mortgages (not government-insured)
• Products: Pass-through MBS and agency debt securities
• Interest payments: Monthly pass-through of principal and interest

Additional details:

• Fannie Mae purchases conventional mortgages from lenders and packages them into MBS for sale to investors
• Also issues its own agency debt (unsecured bonds and notes) to fund operations
• Because Fannie Mae is a GSE, its securities are not backed by the full faith and credit of the U.S. government

Exam Tip: Gotchas

• Fannie Mae and Freddie Mac have been in conservatorship since 2008 but are still classified as GSEs, not government agencies. Their securities still carry only implied backing.

Freddie Mac (FHLMC) - Federal Home Loan Mortgage Corporation

• Status: Government-Sponsored Enterprise (GSE); publicly traded, privately owned; under federal conservatorship since 2008
• Government backing: No explicit full faith and credit guarantee; carries an implied (moral) government backing
• Underlying loans: Conventional conforming mortgages
• Products: Participation certificates (PCs), which is Freddie Mac's name for its pass-through MBS
• Interest payments: Monthly pass-through of principal and interest

Additional details:

• Freddie Mac performs essentially the same function as Fannie Mae: purchases conventional mortgages, pools them, and sells MBS
• Freddie Mac's pass-through securities are called participation certificates (PCs) rather than MBS

Sallie Mae (SLM Corporation)

• Original status: Created by Congress in 1972 as a GSE to facilitate a secondary market in federally guaranteed student loans
• Current status: Fully privatized (completed 2004). No longer a GSE or government agency
• Government backing: None. Securities are not backed, guaranteed, or insured by any government entity
• Products: Private education loans; issues asset-backed securities (ABS) backed by private student loan pools

Additional details:

• Despite its historical association with the government, Sallie Mae is now a fully private corporation
• Its securities carry no government guarantee of any kind

Agency Comparison Summary

Exam Tip: Gotchas

• Ginnie Mae = full faith and credit; Fannie Mae/Freddie Mac = implied guarantee only; Sallie Mae = no government backing at all. A question asking "Which agency security is backed by the full faith and credit of the U.S. government?" has only one answer: Ginnie Mae.

Agency Security Characteristics

• Tax note: Unlike direct Treasury obligations, agency securities (GNMA, FNMA, FHLMC) are generally subject to both federal AND state/local income tax
• Types: Pass-through certificates, participation certificates, agency debt (debentures, discount notes)
• Denominations: Minimum $25,000 for most GNMA pass-throughs; lower minimums for some agency debt
• Primary dealers: Same dealers designated for Treasury securities often make markets in agency securities
• Issue form: Book-entry
• Quotations: Agency debt quoted as percentage of par; MBS quoted in 32nds (like Treasuries)
• Yield spread: Agency securities trade at a yield spread over comparable-maturity Treasuries, reflecting credit risk (for GSEs), prepayment risk, and liquidity differences
• Payment frequency: Monthly (unlike Treasuries which pay semiannually). Both interest and principal are returned monthly as borrowers make mortgage payments

Think of it this way: Agency securities sit between Treasuries and corporate bonds on the risk spectrum. Ginnie Mae is closest to Treasuries (full government backing), Fannie Mae and Freddie Mac are in the middle (implied backing), and Sallie Mae is essentially a private corporation with no government backing at all.

Exam Tip: Gotchas

• Agency securities are NOT exempt from state/local taxes. Only direct Treasury obligations get that exemption. Agency MBS and debt are taxed at federal, state, and local levels.