Ginnie Mae Mulls Consequences Tied to Having Two Types of Bonds

Ginnie Mae, the U.S.-owned corporation that guarantees almost $1.4 trillion of mortgage bonds, is seeking input on the potential issues created by it backing two main types of single-family securities, according to John Getchis, its head of capital markets.

Ginnie Mae sent questionnaires to Wall Street dealers this week as it considers steps to address any damage to the liquidity of its bonds that might stem from having both the Ginnie Mae I and II securities, Getchis said in a telephone interview. It also plans to hold discussions with issuers and investors in coming weeks, he said.

The agency wants to “ascertain the merits of the various options and also to see what might be the unintended consequences,” Getchis said. Types of moves it may consider include consolidating its products or seeking changes to rules set by the Securities Industry and Financial Markets Association that govern which debt can be used to satisfy forward contracts in the so-called To-Be-Announced market, he said.

The existence of two types of Ginnie Mae securities splits trading activity in a mortgage-bond market also broken up into notes carrying a series of different coupons. The Federal Reserve, as part of its $85 billion of monthly bond buying meant to stimulate the economy, has been acquiring many of those with the lowest coupons, which will stop being made when rates rise.

Trading Volume

Less trading volume in specific debt often reduces its value by hampering liquidity, or how easily investors can buy or sell at quoted prices. Traders and investors may also seek to exploit low volumes by entering contracts to receive bonds while acquiring much of the supply.

Ginnie Mae, formally named the Government National Mortgage Association, guarantees bonds mainly filled with home loans insured by the Federal Housing Administration or Department of Veterans Affairs. It backed the first bonds in the modern mortgage securities market in 1970.

Lenders’ creation of Ginnie II securities, which were introduced in 1983, have dwarfed their use of Ginnie Is in recent years. Ginnie II single-family issuance totaled $31.8 billion in February, compared with $6.9 billion for Ginnie I pools, according to a March 18 agency statement.

Ginnie IIs differ from Ginnie Is in a number of ways, including the admissibility of mortgages from multiple lenders. Ginnie IIs also have a smaller minimum servicing fee, giving issuers more flexibility over which coupon bonds they choose for their loans. Additionally, Ginnie IIs package as little as $250,000 of single-family debt, compared with $1 million for Ginnie Is.

Ginnie IIs represented 63 percent of the agency’s $1.38 trillion of outstanding bonds in February, compared with 47 percent of its $1.12 trillion in securities two years earlier, according to data on its website.

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