Ginnie Faces Historical Time, But an Unclear Future
September 13, 1999
On the historical occasion of last week's 30th anniversary of the Ginnie Mae Pool No. 1, the first Government National Mortgage Association mortgage-backed security that passed home payments on to investors, the government-sponsored enterprise is coincidentally in a transitional, critical period that has the MBS market abuzz with speculation.
A proposal issued last month by U.S. Department of Housing and Urban Development Secretary Andrew Cuomo, which would allow Ginnie Mae to build a $60 billion investment portfolio - representing nearly 10 % of Ginnie Maes outstanding - and purchase its own MBS, seems to be going ahead at full speed, according to market sources.
The idea would rely on money allocated from the Treasury Department, and would support the Ginnie Mae market by making the sector more similar to Fannie Mae and Freddie Mac, which have always bought their own securities in an aggressive manner.
"The idea has been put forth and now we are putting some meat on the bones," said Ginnie Mae spokesman John Jackson. "There are many people working on the proposal, including myself."
Though not confirmed by Ginnie Mae, word on Wall Street is that the GSE is in the process of convening a user group sometime this month to discuss how HUD should proceed in terms of hiring an adviser and managing the portfolio. There is also a rumor circulating that Ginnie Mae is looking to hire independent money managers to manage on the GSE's behalf.
However, according to Rob Fry, the head of public affairs at Ginnie Mae, the agency, a division of HUD, cannot go ahead with the proposal without congressional approval.
Therefore, the time frame for Cuomo's plan is still undetermined, pending discussion - and this topic is fraught with elements that make it controversial, or even downright contentious.
"Clearly, this is a matter of policy as well as one of practice," said Michael Youngblood, managing director of real estate at Banc of America Securities. "It raises the broader issue, that if Ginnie can do this, why can't the Small Business Administration, or the Farm Credit Administration, for instance - or any other part of the government? If Ginnie Mae can pop out $60 billion from the Treasury and go arbit it in the capital markets, why can't other GSEs do it?"
"I think it is sort of a mixed blessing," added Lisa Brown Premo, head portfolio manager at First Union. "I don't necessarily think it's bad, but on the other hand, you don't want every agency doing this. The agencies have kind of cornered their sectors, in a way, and Ginnie Mae has a long way to go."
Still, other market players believe that HUD is making this proposal in order to forestall any discussion that may resurface regarding the possible privatization of Ginnie Mae.
Though the idea of privatization was actively discussed during last year's budget process, Cuomo has recently stated that the GSE may ultimately be privatized unless the industry supports the current purchase plan. The Mortgage Bankers Association is fully endorsing Cuomo's proposal for the same reason.
"In my view, the Office of Management and Budget is desperate for money and the privatization issue might reemerge," said Laurie Goodman, head of mortgage research at PaineWebber. "Having another proposal on the table basically eliminates any discussions of privatization, because this is far more lucrative. I think the chances of this proposal passing for the year 2000 is between 5% and 10% at best. It is much more likely for 2001."
A Fallen Star?
Though Ginnie Mae bonds initially traded better on the news of the proposal, the product's recent outperformance of Fannie Mae and Freddie Mac securities might be due to other factors, such as international buyers jumping in and snapping up the currently-cheap paper.
Overall, market sources agree that Ginnie Mae, like HUD, has clearly been in retreat over the last decade, never recapturing its past glory.
"They were never able to create a successful REMIC program, which put their program at a disadvantage to the other agencies," Youngblood said. "And they never phased out the Ginnie I program in favor of Ginnie II, so the two markets effectively cannibalized each other."
"Ginnie Maes are assumable, so there is a lot more extension on the Ginnie side," explained Dale Westhoff, a director at Bear, Stearns & Co. "Fannie and Freddie aggressively pursued the CMO market, and since they are for-profit, they try to maximize value to their shareholders."
Indeed, it would seem that Ginnie Mae's fortunes have ebbed during the last decade, while Fannie Mae's and Freddie Mac's have risen.
"The high watermark for Ginnie was the 1986 to 1987 mortgage boom when Ginnie Mae pass-throughs were the preferred instrument, the most liquid obligation and the dominant holding of banks and credit unions who participated in mortgages," added Youngblood.
Sources note that this is unfortunate, because despite the huge boom in new and existing family housing, the country still has a chronic shortage of low- and moderate-income housing for both families and the elderly.
Interestingly, Ginnie Maes have been in the premium sector recently and have been exhibiting better convexity this past year, doing better than conventionals in a down market.
"It is premature for investors to start scurrying around and chipmunking Ginnie Maes into private treasure troves, in any pre-season attempt to capitalize on the proposed portfolio," advised PaineWebber's Goodman.
"Swap markets seem to be driving our market more than ever before, and Treasurys have become scarcer," Premo explained. "So as swap spreads widen, agencies widen and mortgages widen, and Ginnie Maes outperform conventionals, which you wouldn't expect."
For the second quarter 1999, Ginnie Maes returned 1.08%, whereas conventionals returned only 0.98%.