Freddie Mae and Fannie Mac are shifting their investment instrument strategies in anticipation of losing market share due to Ginnie Mae's impending foray into the Real Estate Mortgage Investment Conduit market. Other secondary mortgage market players may want to change their plans as well.
Freddie Mac said that the emergence of the much-awaited Ginnie Mae Remic in early 1994 will crowd the agencies out of the more than $25 billion Ginnie Mae-backed Remic market. Moreover, the Remic will force the secondary market superpower Freddie to concentrate entirely on the conventional Remic market with its fellow government-sponsored enterprise giant, Fannie Mae.
"What you're going to see is that there is no incentive for Fannie and Freddie to issue Ginnie-backed Remics." said Barnard Buscemi, Freddie Mac vice president of securities marketing, during a mortgage-backed securities conference at the Public Securities Association in New York Oct. 5.
"When Ginnie comes out with its own collateralized program, we expect to see a reduction in demand for securities we issue backed by their collateral. If Ginnie can put their stamp on a Remic with Ginnie Mae collateral, then why would we?"
Buscemi said the Ginnie Remic would be an obstacle for Freddie Mac because investors will be more attracted to the explicit full faith and credit of the government guaranty that goes with it. A HUD spokesman said that Ginnie's Remic program was on track and that financial advisers were being hired but said pricing and collateralization strategies were still in the planning stages.
Freddie Mac and Fannie Mae both stand to lose some market share at first - and perhaps much more later - because their government guaranties are only implied. A Fannie Mae spokesman said it looks at the new Remic as a positive move for mortgage-backed investments and that there was plenty of room for competition. He wouldn't comment. however, on how Fannie might change its strategies.
Overall, the percentage of Ginnie-backed Remic products isn't near the magnitude of the conventional Remic market - nearly $775 billion in oustanding volume so far this year. But it has been a reliable niche for the GSEs. which may lose most, or all, the relatively untapped. but potentially enormous, Ginnie-backed Remic market that already exists.
Both GSEs, however, are waiting to see what types of restrictions Ginnie will place on itself before deciding on strategies with regard to its investment products. If Ginnie decides to deal only with principal-or interest-only products, it would foster a different response from Freddie than it would if it dealt in international products only, Buscemi said.
"The ARM product is minor," Buscemi said, referring to Ginnie-backed adjustable-rate mortgage Remics that both Fannie and Freddie dabble in. "But the biggest force here will be the Ginnie Mae fixed-rate instrument; clearly that [market] will be affected."
The Clinton budget calls for Ginnie Mae to issue $50 billion worth of Remics in fiscal 1994, earning $146 million for the agency the first year and $730 million over five fiscal years. Some secondary market analysts, however, doubt Ginnie Mae could generate that kind of volume, given its limited staff. The agency only issued $49.1 billion in plain vanilla mortgage-backeds in the first half of the year - but officials at Ginnie Mae believe the figure is attainable.
Investors believe the new Remic will be a stable, profitable instrument, and its success will create more demand for the Remic market, said Gary Gordon, a secondary mortgage market analyst with Paine Webber Inc.
That means a better price for mortgage-backed securities and, most likely, more efficiency, he said.