Ginnie Mae doing well due to U.S. guarantees

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The Government National Mortgage Association, or Ginnie Mae, is reporting a record level of bond activity through August, filling the void left by other mortgage-backed security agencies hurt by the subprime mortgage crisis.

Agency-guaranteed issues soared to a record $29 billion in August, the highest rate of issuance in Ginnie Mae's history. For the first eight months of this year, total mortgage-backed securitization stood at $162 billion, compared with $58 billion for the corresponding period in 2007.

For mutual fund investors, Ginnie Mae-driven funds were poised to easily outperform broader-based mortgage funds, which include bonds tied not only to Ginnie Mae but also to the Federal National Mortgage Association, or Fannie Mae, and Federal Home Loan Mortgage Corporation, or Freddie Mac.

Be it at Fidelity Investments, Pimco, Federated Investors or any other investment firm, a fund that bears the Ginnie Mae name is required to hold no less than 80 percent GNMA-guaranteed issues.

The pattern suggests Main Street has been able to discern the difference, said a University of Pittsburgh finance professor, between what two sound-alike tags actually mean: government-guaranteed mortgage backed securities, as in Ginnie Mae issues, and government-supported ones, as in Fannie and Freddie.

"The reason why Ginnie Mae has done well is that it was created specifically with explicit government guarantees," said Jay Sukits, who spent 20 some years handling mortgage securities on Wall Street before coming to Pitt's Katz Graduate School of Business.

"If you look into this debacle, Fannie and Freddie kind of threw their credit standards out the window," he added.

One of Fidelity's best performers has been its GNMA fund, which posted a year-to-date gain of 3.05 percent through August, in contrast to losses posted by all but one of the family's 50-plus domestic equity funds. Its mortgage fund gained just .03 percent.

At investment management firm Pimco, a comparable offering also has posted a 3 percent-plus return through August, nearly 15 times the gain posted by Pimco's broader-based mortgage-backed securities "A" fund.

At Federated Investors, the story is similar for institutional clients. Its multiagency mortgage fund loaded with Fannie and Freddie issues was dwarfed in performance by its GNMA fund by more than 2.5 to 1.

While Ginnie Mae officials aren't gloating, the results announced Monday tended to reinforce what has been happening with mutual funds.

"Thirty billion dollars in thirty days clearly shows investors are confident in Ginnie Mae mortgage-backed securities," said Joseph Murin, agency president and former Pittsburgh National Bank loan officer, in a news release.

"This surge clearly shows that we are providing the support the secondary market needs as the mortgage finance industry continues to work its way through the housing downturn and credit crisis," he added.

"These securities are the only mortgage-backed securities to carry the explicit full faith and credit guarantee of the United States Government."

The Ginnie Mae spurt comes with the anticipated falloff in subprime-fueled Fannie and Freddie activity, according to eMBS, a Tampa, Fla.-based mortgage bond data provider.

Its records, which are less current than GNMA's, show Ginnie Mae's fixed-rate issuance stood at $27.5 billion in August, compared with Fannie's $28.5 billion and Freddie's $18.7 billion. GNMA hasn't ended the year with more activity than its sisters in some 15 years.

Aside from the nature of the government relationship, other things set the agency apart from Fannie and Freddie. Ginnie Mae guarantees and bundles pools of mortgage securities but doesn't buy or sell them. Instead, it backs loans made primarily by the Federal Housing Administration and the Veterans Affairs department.

FHA loans typically go to first-time home buyers and those with low to moderate incomes, but that ceiling may rise now that the mortgage cap has been increased to more than $600,000 in high-priced areas.

Ronald Reardon, co-head of mortgage investments for Valley Forge-based Vanguard, is not surprised its GNMA fund rose 2.49 percent through August and headed above 3 percent into mid-September. Vanguard doesn't have a mortgage securities fund.

To Mr. Reardon, the mutual fund trend stems from more subprime-candidate borrowers turning to FHA loans, despite the legendary, onerous paperwork. "A lot of the people who would've gone through and gotten an FHA loan found it easier to go the subprime route. Now, they're going back to the Ginnie Mae program."

With subprimes unavailable, he said, Ginnie Mae is "the only game in town."

"If you're looking to borrow 80 or 90 percent of a property's value or your credit score is below 740," he explained, "pretty much all you can do is go through the GNMA program."

As for mutual fund performance, Mr. Savits put it this way: "If you are in a fund that calls itself a Ginnie, then you can probably feel pretty good. I wouldn't call it completely safe, but I don't think you're going to see a debacle of defaults like with Fannie Mae. I don't think it will ever happen to Ginnie."


David Guo can be reached at dguo@post-gazette.com or 412-263-1413.


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