GNMA GUARANTEE PASS THROUGH CERTIFICATE< what is it?

Question

GNMA GUARANTEE PASS THROUGH CERTIFICATE< what is it?

Answer 1

It is a bond backed by mortgages guaranteed by the US government.  Pass thru means that you don&#039;t know what you will receive each month.  If somebody makes a mortgage payment on the underlying mortgage, it gets passed thru to you.  Part of it is earned interest and part of it is return of principal.  If they pay off, you get your principal returned, and no more interest on that mortgage because they&#039;re no longer making payments.

If interest rates go down, the mortgage holders refinance and you get your principal returned and lose the interest you were counting on.  In other words, you&#039;re screwed.

If interest rates go up, the mortgage holders can&#039;t afford to buy an new home and don&#039;t want to refinance, so you get very little return of principal and are stuck with receiving the interest, which is now below market.   In other words, you&#039;re screwed.

Can you tell that I think they are the dumbest investment ever invented and I wouldn&#039;t buy one ever?

Answer 2

It is a mortgage bond.  Supposedly guaranteed by the U S government.  ha ha  Beyond that it becomes so complicated it is almost unexplainable. They are best avoided because of their complexitiies.  The quoted interest rate is actually almost never the actual interest rate.

Answer 3

Just to make it simple (and not to dumb it down)

Mortgages held by banks, mortgage companies and other lenders,  bundle their mortgages by interest rates, they go to the Government National Mortgage Association (GNMA) and say let&#039;s issue a security and it will cover all these mortgages.

GNMA takes the mortgages, issues a security (certificate) and gives it a number (pool number). and it will have interest, the same as the mortgage rate.

Each month the mortgage holders pays their mortgage, the GNMA holder gets some interest AND a piece of the mortgage payment, which is a return of their invested principal /

So each month the certificate will have less value, since some of the principal has been paid back.  Eventually when the mortgage holders pay down their mortgages (either pay them down or refinance) the certificate holders will get their money back plus interest.