Which government-owned entity guarantees principal and interest payments to mortgage-backed securities investors?

The Government National Mortgage Association, commonly known as Ginnie Mae, is the entity that guarantees principal and interest payments to investors in mortgage-backed securities. Ginnie Mae plays a critical role in the U.S. housing finance system by ensuring that these securities are backed by the full faith and credit of the federal government, which helps to attract investors by reducing their risk.

This guarantee enhances the liquidity of mortgage-backed securities, making them more appealing to investors. When borrowers make their mortgage payments, Ginnie Mae ensures that the investors receive their expected returns, which maintains a stable market for these securities. This support is particularly important for loans issued through government programs, such as those insured by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).

In contrast, other entities mentioned in the question serve different roles within the housing finance system. The Federal National Mortgage Association, often referred to as Fannie Mae, does assist in providing liquidity in the mortgage market but does not offer the same type of government-backed guarantee as Ginnie Mae does. The Federal Housing Administration primarily provides insurance for loans to help borrowers obtain mortgages, while the Federal Home Loan Banks focus on providing liquidity to their member banks and savings associations.