Ginnie Mae No Longer Weighing Bond Shakeup, President Tozer Says

Ginnie Mae, the U.S. government-owned corporation that guarantees almost $1.5 trillion of mortgage bonds, is no longer actively considering merging its two types of securities, President Ted Tozer said.

Moves by Wall Street dealers and data providers encouraged by the agency have helped boost the attractiveness to investors of its Ginnie Mae II securities relative to Ginnie Mae I bonds, Tozer said in a telephone interview. That’s allowed the share of issuance by lenders in the Ginnie IIs to grow even larger in recent months, helping to address his concern that lower volumes may make trading more difficult, Tozer said.

“We thought at this point we might need to be more assertive with what we do, but the market is proving its resiliency and ability to move effectively without us needing to move overtly,” he said. “The market is telling us it’s working fine as is, but we’ll continue to keep our ears to the ground.”

The existence of two types of Ginnie Mae securities splits up trading activity. Ginnie Mae studied whether to seek or make more dramatic changes with trading projected to fall as rising interest rates curb homeowner refinancing and the Federal Reserve’s bond purchases reduce available supply, Tozer said last week.

Liquidity Risks

The Mortgage Bankers Association and Wells Fargo & Co., the largest U.S. home lender, are among those also citing liquidity risks in calling for a merger of bonds guaranteed by government-backed Fannie Mae and Freddie Mac. After reaching $2 trillion last year, originations will fall to $1.7 trillion this year and $1.2 trillion in 2014, the association forecasts. The Fed now owns $1.4 trillion of the $5.4 trillion of agency mortgage debt, and is purchasing $40 billion a month to bolster the economy.

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 securities in the modern mortgage-bond market in 1970.

Ginnie II bonds differ from Ginnie Is in several ways, including the admissibility of mortgages from multiple lenders. Ginnie IIs also have a smaller minimum servicing fee, giving issuers more flexibility about which coupon bonds they choose for their loans and how much cash flow they retain as servicers.

Lenders’ creation of Ginnie II securities, which were introduced in 1983, is dwarfing their use of Ginnie Is. Ginnie II single-family issuance totaled $27.5 billion in September, compared with $3.7 billion for Ginnie I pools, according to an Oct. 22 statement.

Steadily Decreasing

Creation of Ginnie Is probably fell to less than $1 billion last month, a share of the market that has been “steadily” decreasing this year to average about 13 percent, Nomura Securities International analysts led by Ohmsatya Ravi wrote in a Nov. 18 report. There would be “many implementation challenges” in combining the programs, they said.

Ginnie Mae stepped up its consideration of moves such as ending the Ginnie I program or seeking changes to trading rules in April, when it sent questionnaires to dealers.

Since then, more dealers have offered paired trades of Fannie Mae securities and Ginnie IIs, rather than requiring lenders and investors to first swap from Fannie Mae notes to Ginnie Is and adding to their transaction costs, Tozer said. Ginnie II prices are also easier to find on trading terminals than in the past, and new disclosures allow investors to better identify once-delinquent loans, he said.

The agency may seek 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, such as those regarding allowed loan maturities and “specified” pools, Tozer said.

Ginnie IIs represented 66 percent of the agency’s $1.46 trillion of outstanding bonds in September, compared with 51 percent of its $1.22 trillion in securities two years earlier, according to data on its website.

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