FHA Reform Could Lift GNMA Supply

4 August 2006
All Associated Press News

NEW YORK (AP) -- There may be a fringe benefit from moves in Congress to modernize the Federal Housing Administration's mortgage insurance program -- the number of Ginnie Mae securities available to investors.

That's because the bulk of the outstanding $412.3 billion in Ginnie Maes -- mortgage-backed securities guaranteed by the Government National Mortgage Association -- cover FHA-insured mortgages. Ginnie Mae also guarantees bundled mortgages backed by the Department of Veterans Affairs or issued through the Agriculture Department's rural housing programs or the Department of Housing and Urban Development's Office of Public and Indian Housing.

Ginnie Mae doesn't buy or sell loans or issue mortgage-backed securities. Rather, it guarantees for investors the payment of all principal and interest on securities issued by mortgage bankers and other lenders and backed by federally insured or guaranteed loans. This allows lenders to sell their loans at a good price and "recycle" the dollars back into writing more mortgages.

Fannie Mae and Freddie Mac, which are publicly traded companies, perform similar functions for conventional mortgages but do not have "the full faith and credit" of the government behind their guarantees the way Ginnie Mae does. That's what makes the Ginnie Mae products more attractive to conservative investors, including foreign governments.

Michael Decker, senior vice president and head of policy and research for the Bond Market Association, a trade group based in New York, said investors have "a double level of protection" when they invest in Ginnie Mae securities -- the Ginnie Mae guarantee on top of the FHA insurance or VA guarantee.

While most attractive to institutional investors such as pension funds and insurance companies, Ginnie Mae securities also appeal to "a significant minority of individuals in the market" who buy mortgage-backed securities to diversify their bond holdings, he said.

About the only risk they face is that home buyers have the option of prepaying their mortgages; when this happens, the investor gets principal payments early but foregoes the future interest payments that would have been made on that principal, he said.

Decker said the availability of Ginnie Maes could get a boost if the Senate follows the House in approving FHA reforms to increase loan limits, reduce down payment requirements and institute a risk-based insurance premium structure.

The $412.3 billion in outstanding Ginnie Mae mortgage-backed securities is down from a peak of $604 billion in 2001, said Stephen L. Ledbetter, director of securities policy and research at Ginnie Mae. The drop reflects, in part, business that the FHA lost to conventional mortgage lenders who have been providing larger loans on better terms than the FHA has to low- and moderate-income buyers.

"The expectation is that FHA production would be substantially increased" if Congress enacts the reforms, Ledbetter said. He pointed out that 90 percent of FHA loans go into Ginnie Mae-guaranteed securities.

For small savers, one of the best way to invest in Ginnie Mae securities is through mutual funds that specialize in them, such as the Schwab Ginnie Mae Fund available through Charles Schwab Corp., based in San Francisco.

Matt Hastings, manager of the $37 million fund, said that Ginnie Maes are fully government guaranteed like Treasury securities but yield a little more because the underlying mortgages typically carry higher rates than Treasuries.

Along with the mortgage-backed securities issued by Fannie Mae and Freddie Mac, Ginnie Mae securities "have been attractive to foreigners for quite some time," Hastings said.

Individuals seek them out for "good yields as well as relative security," he added.