Ginnie Chief Seeks to Boost Lackluster Securities

George S. Anderson is on a mission to reinvent Ginnie Mae, the 31-year-old arm of the Department of Housing and Urban Development that fosters securitization of home loans to low- and moderate-income borrowers.

The 55-year-old economist and Ginnie Mae executive vice president, who has run the organization since the politically-appointed chairman, Kevin Chavers, left in 1998 for a private-sector job, says Ginnie must reposition itself to compete in an increasingly crowded market.

Ginnie has issued more than $121 billion of securities this year, bringing the total outstanding in the market to $569 billion. But Mr. Anderson argues it needs to start investing in its own securities if it is to fulfill its mission, and he has proposed letting the government agency amass a $60 billion portfolio.

"Ginnie Mae mortgage-backed securities are not trading where we believe they should be," said Mr. Anderson, who monitors the pricing of securities on Wall Street via a computer terminal on his desk. He said letting Ginnie invest in its own securities would produce better liquidity and ultimately lower costs for homebuyers.

The proposal comes amid rising competition in the secondary market for the loans to low- and moderate-income borrowers that are Ginnie's bread and butter.

With a full-time staff of only 58, Ginnie Mae -- which guarantees HUD, Veterans Administration, and Rural Housing Service loans -- competes with Fannie Mae and Freddie Mac, two huge government-chartered loan buyers. And this year the two have been targeting Ginnie's traditional borrower base as a way to build their own business.

Indeed, Fannie Mae estimates it has bought $17.4 billion of loans made under HUD's FHA program and the VA program so far this year, up from $6 billion last year.

This total includes both individual loans it sells to other investors and securities it holds in a $504 billion portfolio. And Mr. Anderson contends the GSEs' ability to invest in mortgage-backed securities has given them an unfair pricing disparity.

Fannie Mae securities have only an implied guarantee from the government, he said, but Ginnie Mae's are backed by the full faith and credit of the government. Yet Fannie's securities trade at a lower yield than Ginnie's, he noted.

"Fannie Mae and Freddie Mac, through their portfolio activity, have overcome and surpassed the lack of full faith and credit," Mr. Anderson said.

The investment-portfolio proposal, included in Ginnie Mae's budget for 2001, is subject to approval by the Office of Management and Budget, Congress, and the Treasury Department.

It could well win support from many lenders who see Fannie and Freddie as a duopoly. Phyllis Slesinger, a staff vice president of the Mortgage Bankers Association, said the trade group likes the idea, provided it is structured to "minimize risk to Ginnie Mae and the Treasury." Another major investor could bring "a pricing benefit" in the secondary market that "would translate to lower rates for the consumer," she said.

But the proposal may face opposition from Fannie and Freddie, which are known for their lobbying clout.

By buying more Ginnie Mae securities, the GSEs are expanding their role and may be making a "semi-political" statement that there is no need to expand Ginnie Mae, said Gary Gordon, an analyst at PaineWebber Inc. A Ginnie Mae diversification into portfolio investment could "hurt Fannie and Freddie" because it would mean greater competition.

Indeed, Tom Lawler, senior vice president of portfolio management at Fannie Mae, argued that there is little need for Ginnie to come into the market as an investor. It is a "misconception," he said, that the pricing differential between Ginnie Mae and Fannie Mae securities is due to Fannie's investment alone. Ginnie Mae securities perform differently because the loans differ from other mortgages. For one thing they are "fully assumable," he said. That is, homebuyers who qualify for FHA or VA financing can assume the seller's mortgage rate.

Mr. Lawler attributed this year's pricing differential to interest rates. "It is unclear that their price performance reflects anything but the fact that with interest rates up people are concerned that prepayment speeds will be slower than that of comparable Fannie Mae or Freddie Mac securities," he said. Government loans tend to prepay more slowly because the borrowers are less likely to be qualified to refinance.

Mr. Lawler said Fannie's purchase activity should help Ginnie securities. "If Ginnie Mae securities fall in price to an unfair level relative to other securities, then the fact that investors, including ourselves, go in and buy those securities should cause any material fundamental undervaluation not to last very long."

Fixed-income investors nevertheless confirmed that the pricing disparity exists and argued that an additional investor would add to liquidity in the marketplace.

"It is chronic that Ginnie Mae securities are underpriced relative to conventionals," said Michael J. Pecoraro, a portfolio manager at J.P. Morgan & Co.'s investment management subsidiary.

The disparity becomes especially clear during waves of refinancing, such as occurred last year, when the lower prepayment rates on government loans should have made Ginnie Maes more attractive but did not. "People should really be bidding up these Ginnie Mae securities relative to conventionals,'' he said. "But they're not, in a large way."

In 1999 "supply was well ahead of demand," as Ginnie Mae stepped up issuance of securities backed by adjustable-rate loans that gained in popularity with consumers as rates rose, said Tony Coffey, a portfolio manager for the Franklin Templeton Group in San Mateo, Calif. "It has taken some time for the market to absorb that increase in supply," but the spreads have recently started to tighten, he said.

Having Ginnie as an investor would create "an additional source of demand in the market that should provide liquidity to the market as a whole and likely result in somewhat tighter spreads," Mr. Coffey said. "We've already seen with Fannie and Freddie that they are a major source of demand for their own securities because they do have major investment portfolios."

Meanwhile, as Ginnie Mae's proposal for a portfolio moves through Washington, Mr. Anderson said, the agency will continue to serve "the hard-to-reach markets" in central cities and rural areas where the returns on investment are not acceptable for private-sector companies that must answer to shareholders.

"We're cutting our revenues up to half for lenders to go do business," he said. "We're not concerned about the prospect of taking in less money to get more housing done in these areas."

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