What Are These Bonds And Why Should Home Buyers Care?
When you borrow from a bank or finance company to buy your home, the loan itself becomes a valuable asset for the holder. The value comes from your promise to pay the amount due each month, on time, every month. Given the time and effort that it took to approve you and the solid reputations of the institutions involved, it is very likely that your promise to repay your conforming loan will be a sound investment for the holders of such bonds.
Consumers want to purchase homes, but they seldom have the cash to do so without some assistance. Real estate ownership requires capital, which has to come from somewhere. It is also difficult to buy and sell homes, compared to other investments like stocks and bonds. These agency bonds make buying your home affordable by providing the liquidity that allows investors to inject capital into the market.
Liquidity For Mortgage Lending
If there were nothing like the real estate bond market investors would be in short supply, and lenders would charge much higher interest rates. Since it is the equity in the land and buildings that secure the lending, it is a relatively safe investment, and that was the attraction to pool loans together and sells them as agency bonds.
Bonds are high-value loans in which brokers sell shares. In return for holding a bond, you get a coupon, which is a periodic payment, usually semi-annually, and the repayment of the face value of the loan when it matures. However, no law says that this is the only structure; it is a matter of the market makers finding the bond structures that are most popular with investors and exploiting them for profit.
Agency Bonds From Fannie Mae Freddie Mac And Ginnie Mae
Entities such as FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae), are not part of the government, but they do receive sponsorship for the agency bonds they create. These instruments pool together home loans and sell the bonds to investors. These organizations were set up to purchase home loans and bundle them as investments, to sell to institutional investors such as investment banks, pension funds, insurance companies, sovereign wealth funds, and wealthy private investors.
Agency bonds generate the capital that funds your home loan. It is this form of institutional investing that enables you as a homeowner to purchase a home with financing at a low rate of interest and a low down payment. Ginnie only invests in loans that are backed by government guarantees. Fannie Mae and Freddie Mac will buy notes that conform to their standards but which do not have the same government backing. The government backing makes the Ginnie Mae bonds even safer investments than the others.