FAQ FRIDAY - October 24, 2008

Q. What is the difference between GNMA and FNMA?

A. GNMA is a corporation under the U.S. Department of Housing and Urban development. FNMA is an agency that became independent and now trades on the New York Stock exchange. Both agencies were created to encourage lending. By taking on the loans the banks have made, they free up the banks to make more loans. Because GNMA and FNMA can borrow at lower rates, these mortgages are then pooled and sold in smaller pieces to investors who expect to make better returns.

GNMAs are made up of mortgages that are FHA insured or VA guaranteed, backed by the full faith and credit of the U.S. government. The government guarantees payment of principal and interest. FNMAs are pools of conventional mortgages that they have purchased and guaranteed to form mortgaged backed securities (MBS). FNMA guarantees the payment of principal and interest. These pools are not backed by the U.S. government but the guarantee is implied which is what we recently experienced. Typically, interest rates on GNMAs are higher than treasuries and interest on FNMAs are higher than GNMAs because of the increased risk.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of 1. avoiding penalties under the Internal Revenue Code or 2. promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Securities offered through Valley National Investments, Inc. - an independent broker/dealer and member FINRA and SIPC.