Ginnie Mae operates as a unit of HUD and its administrative, staffing, and budgetary decisions are coordinated with HUD. Ginnie Mae is organized into five offices and relies on contractors for many aspects of its work. Contracted functions include certifying new MBS, administering payments to investors, data collection from issuers and risk analysis, Ginnie Mae servicing of defaulted loans, internal control reviews, issuer compliance reviews, and information systems management. Ginnie Mae staff responsibilities include policy and management functions and oversight of contractors. We discuss Ginnie Mae’s organization, staffing, and budget in greater detail later in this report. Ginnie Mae guarantees the performance of MBS, which are obligations of the issuers that are backed by mortgages insured or guaranteed by federal agencies, such as FHA, PIH, VA, or RHS. Ginnie Mae provides an explicit federal guarantee (full faith and credit of the United States) on these MBS, but it does not issue the MBS or originate the underlying mortgages. Rather, it relies on approved financial institutions (issuers) to pool or securitize the eligible mortgages and issue Ginnie Mae- guaranteed MBS. The issuers can service the MBS themselves or hire a third party to transmit the monthly principal and interest payments to investors. Ginnie Mae’s explicit guarantee can lower the cost of borrowing for issuers, which allows them to offer lower interest rates to mortgage borrowers. Issuers can obtain these mortgages by originating the loans or purchasing the loans from another institution. See figure 1 for an overview of Ginnie Mae securitization. Ginnie Mae’s guarantee is limited to the risk that issuers cannot make the required monthly principal and interest payments to investors. While other federal agencies already insure or guarantee the mortgages that back Ginnie Mae-guaranteed MBS, the private-sector issuers of these MBS are responsible for ensuring that investors that purchase these MBS receive monthly payments on time and in full, even if the borrower makes a late payment or defaults. Ginnie Mae issuers are responsible for making these advance payments to investors using their own funds and for recovering any losses from the federal agencies that insured or guaranteed the mortgages. If an issuer cannot ensure the timely payment of principal and interest to investors, Ginnie Mae defaults the issuer, acquires the servicing of the loans, and uses its own funds to manage the portfolio and make any necessary advances to investors. Ginnie Mae charges issuers a monthly guarantee fee, which varies depending on the product, for guaranteeing timely payment. Issuers also pay a commitment fee to Ginnie Mae each time they request authority (commitment authority) to pool mortgages into Ginnie Mae-guaranteed MBS. Investors in Ginnie Mae-guaranteed MBS face the risk that a mortgage will be removed from the MBS pool prematurely—either due to borrower default or prepayment of a loan—which reduces the amount of interest earned on the security. However, investors do not face credit risk—the possibility of loss from unpaid mortgages—because Ginnie Mae guarantees timely payment of principal and interest. Ginnie Mae has several different products. Its original MBS program, Ginnie Mae I, requires that all pools contain similar types of mortgages (such as single-family or multifamily) with similar maturities and the same interest rates. The Ginnie Mae II MBS program, which was introduced in 1983, permits pools to contain loans with differing characteristics. For example, the underlying mortgages can have varying interest rates and a pool can be created using adjustable-rate mortgages. Ginnie Mae’s Multiclass Securities Program, introduced in 1994, offers different types of structured products, including Real Estate Mortgage Investment Conduits (REMIC) and Ginnie Mae Platinum Securities. REMICs tailor the prepayment and interest rate risks associated with MBS to investors with varying investment goals. These products direct principal and interest payments from underlying MBS to classes, or tranches, with different principal balances, terms of maturity, interest rates, and other characteristics. Platinum Securities allow investors to aggregate MBS with relatively small remaining principal balances and similar characteristics into new, more liquid securities. The MBS aggregated into these structured products retain Ginnie Mae’s full faith and credit guarantee. In addition, Ginnie Mae guarantees the timely payment of principal and interest on the structured products and charges an additional fee to the financial institutions that create them. Ginnie Mae also requires that these institutions contractually agree to reimburse any costs Ginnie Mae may incur to guarantee these products. Ginnie Mae defines its mission as expanding affordable housing by linking capital markets to the nation’s housing markets. Ginnie Mae does this by serving as the dominant secondary market vehicle for government-insured or -guaranteed mortgage loan programs. Ginnie Mae’s guarantee benefits lenders, borrowers, and investors in a number of ways. First, the guarantee benefits lenders by increasing the liquidity of mortgage loans, which may lower the cost of raising funds and allow lenders to transfer the interest-rate risk of a mortgage to investors. Second, the guarantee benefits borrowers by lowering the cost of raising funds for lenders, which helps lower interest rates on mortgage loans. Finally, Ginnie Mae’s guarantee provides investors with a fixed-income security that has the same credit quality as a U.S. Treasury bond. Ginnie Mae relies on its fee revenues rather than appropriations from the general fund to pay for its operations and cover costs related to issuer defaults. However, the amount of MBS Ginnie Mae can guarantee each year is capped by its commitment authority level in HUD’s appropriation. For 2010 and 2011, Ginnie Mae was authorized each year to guarantee up to $500 billion in MBS. Ginnie Mae guarantees the timely payment of principal and interest on MBS. For budgetary purposes, Ginnie Mae and other federal agencies estimate the net lifetime costs (credit subsidy costs) of their guarantee program and include the costs to the federal government in their annual budgets. For Ginnie Mae, credit subsidy costs represent the net present value of expected cash flows over the life of the securities it guarantees, excluding administrative costs. Cash inflows consist primarily of guarantee fees charged to MBS issuers and cash outflows includes advance payments of principal and interest on delinquent mortgages underlying MBS from defaulted issuers. When estimated cash inflows exceed expected cash outflows, a program is said to have a negative credit subsidy rate. When the opposite happens, a program is said to have a positive credit subsidy rate, and therefore require appropriations to cover the estimated subsidy cost of new business. Historically, Ginnie Mae has estimated that its guarantee program would have a negative credit subsidy rate and, as a result, generate budgetary receipts for the federal government. These receipts have resulted in substantial balances in a reserve account, which is used to help cover unanticipated increases in those costs—for example, increases due to higher-than-expected issuer defaults or fraud. According to Inside Mortgage Finance data, from calendar year 2007 to 2010 Ginnie Mae’s share of the MBS market increased from nearly 5 percent to 25 percent as the total size of the secondary mortgage market declined and the role of private-label MBS issuers declined substantially. The size of the MBS market decreased from $2.16 trillion in new MBS in calendar year 2005 to $1.57 trillion in calendar year 2010, a decline of nearly one-third (see fig. 2). The overall market decline was driven by the housing downturn and increased defaults and foreclosures. This led to mortgage lenders tightening their underwriting standards and making fewer loans. Also, private-label MBS issuers faced a sharp decline in eligible loans and investor demand. As the demand for FHA and other federally insured or guaranteed mortgages grew during this time, financial institutions increased their issuance of Ginnie Mae-guaranteed MBS to finance these federally insured or guaranteed loans. As Ginnie Mae’s market share increased, the number of Ginnie Mae issuers generally stayed the same although their numbers declined from 2007 to 2008 and increased in 2009 and 2010 (see fig. 3). Moreover, for the three quarters of 2011, 371 financial institutions participated in the Ginnie Mae-guaranteed MBS program. While most were mortgage banks, the issuers with the largest Ginnie Mae-guaranteed MBS portfolios were commercial banks. As of June 30, 2011, three commercial banks accounted for nearly two-thirds of the dollar amount of outstanding Ginnie Mae-guaranteed MBS. According to Ginnie Mae data, concentration among issuers generally has remained the same. More specifically, in 2005, 20 issuers accounted for 92 percent of Ginnie Mae single-family MBS issuance; in 2010, 26 issuers accounted for 94 percent of single- family MBS. According to Ginnie Mae data, as Ginnie Mae’s share of the secondary mortgage market increased, the volume of Ginnie Mae-guaranteed MBS outstanding increased from $412 billion in 2005 to more than $1 trillion in 2010 (see fig. 4). Concurrently, new guarantees of Ginnie Mae- guaranteed MBS increased from about $89.3 billion to nearly $413 billion. To accommodate the securitization of an increasing volume of federally insured and guaranteed mortgages, Congress increased the statutory cap on Ginnie Mae’s commitment authority from $200 billion to $500 billion over the same period. The increases in annual volume were due to increases in the volume of mortgages insured by FHA or guaranteed by VA, PIH, or RHS that were pooled into Ginnie Mae-guaranteed MBS (see fig. 5).