Goldman Sachs says the emergence of the Federal Home Loan banks' Mortgage Partnership Finance program as an alternative to Ginnie Mae has contributed to the recent volatility of Ginnie's mortgage-backed securities.

Goldman cited the direct competition from the banks, the resulting scarcity of Ginnie securities, and uncertainty about how Ginnie will handle the competitive threat. Profit-taking by some traders late last week also whipsawed Ginnie prices, Goldman said in a research report issued Friday.

The spread between Ginnie's 7.5%-coupon bonds and comparable Fannie Mae issues narrowed last week from a 1.0625 premium for the Ginnies on Wednesday to 0.71875 at Friday's close. The spread has rebounded this week, though, to 0.78125 by about midday Tuesday.

Ginnie Mae was put to the test this year for the first time in its 32-year existence when the Mortgage Partnership Finance program, run by the Chicago Home Loan Bank, emerged as a major competitor for FHA loans.

In the past Ginnie had little competition in the secondary market for FHA loans. Ginnie "wraps" or guarantees the credit on pools of FHA loans, which are sold as bonds. Ginnie is backed by the full faith and credit of the U.S. Treasury, so its securities are considered a relatively safe investment.

Figures on the volume of loans Ginnie has lost because of its new competition are not available, but if Ginnie's bond issuance is any indication, the company's business has fallen steadily since Mortgage Partnership Finance started buying FHA loans this year.

Goldman's report said that "more evidence may be seen in the months ahead" that Ginnie is losing loans to the Chicago-based program. Less issuance bodes well for Ginnie securities, because it makes the bonds a scarcer commodity, analysts said.

However, uncertainty around how Ginnie will address the competition has made some investors wary of the bonds.

Ginnie got help from the Federal Housing Finance Board, the regulator of the Home Loan banks, which proposed to install a cap on the percentage of assets FHA loans could take up on the Home Loan banks' balance sheets.

But Wall Street investors shot down Ginnie's proposals to revamp its securities program in May, and according to May press reports the Treasury and the Office of Management and Budget turned up their noses at a Ginnie proposal that it hold its own mortgage-backed securities.

Goldman said in its report last week that traders who held Ginnie Maes on a short-term basis were unloading them steeply.

An analyst from another Wall Street firm said that more than $5 billion of Ginnie Maes was sold on Friday by short-term traders, who took huge profits after the release of economic data that morning boosted bond prices.

Another Wall Street analyst said that the profit-taking was the result of Ginnie Mae's becoming overvalued against Fannies because of concerns over the future of the government-sponsored enterprises.

On Monday, Ginnie Mae announced that it will use Fed Wire, the clearing system run by the Federal Reserve, for clearance, settlement, and payment processing of its securities.

Ginnie currently uses the Depository Trust Co. The planned change is designed to increase the attractiveness and liquidity of Ginnie Mae securities, particularly for foreign investors.

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