The encyclopedia · Finance & Accounting · Financial decision · 1968–1971
Ginnie Mae guaranteed the first mortgage-backed security, and mortgages became bonds
Ginnie Mae guaranteed the first mortgage-backed securities in 1970, turning 30-year loans into bonds.
Ginnie Mae (GNMA) · US Department of Housing and Urban Development
The solution
In the late 1960s, housing demand surged with the baby-boom generation while inflation and deposit outflows were squeezing the thrifts that funded mortgages. To broaden the capital base for housing, the Housing and Urban Development Act of 1968 created Ginnie Mae as the successor to the Fannie Mae of that era.
Ginnie Mae's innovation was the mortgage pass-through: it pools home loans — initially the government-insured FHA and VA mortgages — and guarantees the securities issued against the pool, promising investors timely payment of principal and interest with the full faith and credit of the federal government behind it. In 1970, Ginnie Mae became the first organization to create and guarantee mortgage-backed securities.
That single guarantee did two jobs: it standardized the mortgage-payment risk for investors, and it let originators sell loans and relend. Freddy Mac issued its first pass-through in 1971 and Fannie Mae in 1981, and the mortgage-backed security grew from a novelty into the largest bond market in the world.
Why it worked
- A government guarantee on the security, not the loan, made an illiquid 30-year asset a liquid, priceable bond.
- Pooling diversified away single-borrower default risk before the guarantee even applied.
- Selling loans recycled capital to originators, multiplying the lending power of the original deposits.
- Because the product was standard, a market could form around it — investors learned one product, not thousands of loans.
What can be applied
When a balance sheet (the bank) cannot absorb a needed asset class, repackage the asset as a guaranteed security so the capital market, not the balance sheet, funds it.
Aftermath
The pass-through created the US mortgage-backed securities market, now among the world's largest debt markets, and was copied internationally. Ginnie Mae itself stayed narrow — it guarantees only government-insured pools — while the private-label market it enabled grew far larger and, in 2008, catastrophically mispriced risk, triggering the global financial crisis that led to the federal rescue of Fannie Mae and Freddie Mac. The mechanism worked; the discipline around it did not.
Sources
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