Ginnie Mae Seeks To Raise Profile In Giant Mtge Sec Mkt

28 March 2003
Dow Jones Capital Markets Report
By Christine Richard

NEW YORK -(Dow Jones)- Ginnie Mae pioneered the mortgage securities market in 1970, but in recent years it's been far from a market innovator.

Other players, including Fannie Mae (FNM), Freddie Mac (FRE) and numerous banks and financial institutions, have grabbed an increasing part of the world's largest bond market, causing Ginnie Mae's share to decline to 12% this year from around 60% in 1990.

But a number of changes are in the works at Ginnie Mae to make its securities more attractive to mortgage lenders, mortgage-backed securities originators and investors.

"Ginnie Mae has been the old dependable product for a long period of time," said Theodore Foster, vice president of mortgage-backed securities at Ginnie Mae, which is a government corporation within the Department of Housing and Urban Development. "At this point, we want to be more aggressive, more competitive, because we believe it will make our product more appealing to investors."

More demand for Ginnie Mae securities will decrease yields on those securities and lower the cost of homeownership for borrowers, Foster added. "Ultimately, we will put more borrowers into homes."

Ginnie Mae's mission, which dates back to the Great Depression, is to guarantee timely interest and principal payments on securities made up of loans insured by government agencies such as the Federal Housing Administration (FHA) and the Veterans Administration (VA).

Ginnie Mae bonds are the only mortgage-backed securities - in the more than $6 trillion dollar mortgage market - to carry the full faith and credit guarantee of the U.S. government. But, the implied federal government guarantee on Fannie Mae and Freddie Mac debt has established their securities as triple-A-rated, while Wall Street uses a variety of structuring techniques to turn noninsured pools of loans into triple-A rated securities.

Moving With The Times

That's why raising its profile among investors in an increasingly crowded mortgage-backed securities market has become a priority for Ginnie Mae, which despite its declining share of the mortgage-backed securities market issued $125 billion in such securities in 2002.

At an investment forum at the New York Stock Exchange earlier this week, Ginnie Mae announced plans to securitize pools of hybrid adjustable rate mortgages insured by the FHA and the VA.

In the past, borrowers eligible for VA or FHA loan guarantees were limited to traditional fixed-rate 30-year and 15-year mortgages.

But legislative changes now allow FHA to insure mortgages that offer fixed periods of interest followed by a capped, adjustable rate. The VA will insure such mortgages starting in October. It's a riskier product, but one that Ginnie Mae believes it should be supporting.

"It makes things riskier when you're adjusting someone's mortgage," said Foster. Yet, "it's a better match for some consumers," and extends the range of government lending, Foster added.

For Ginnie Mae securities holders, the risk an individual won't be able to shoulder a higher mortgage payment translates into prepayment rather than default risk. That's because under the FHA and VA insurance programs, those agencies pay off loans that go into default.

More Servicing Flexibility

Another upcoming change at Ginnie Mae is a reduction in the minimum number of basis points issuers of federally-guaranteed mortgage securities must set aside for servicing. In the past, Ginnie Mae has required a minimum of 44 basis points on loans going into portfolios it guarantees under its GNMA II program, but effective July 1 it will reduce that requirement to 19 basis points.

That's important because it will allow banks offering FHA and VA mortgages to compete more on the interest rates they offer borrowers, Foster said. While it's riskier to allow reduced servicing fees, or fees lenders receive to process payments and work with borrowers when they fall behind on payments, it's become possible in part because of rising home prices, said Foster.

In the last three years, mortgages in Ginnie Mae securities have increased to an average of $100,000 from $80,000 just three years ago.

With the cost of servicing essentially a fixed cost, that's led to an increase in the money to support servicing, Foster said.

The reduced servicing requirements also will allow for more flexibility in how mortgages are assembled into securities, according to Foster.