U.S. HUD's Ginnie Mae plans two new bond programs
By Aleksandrs Rozens
NEW YORK (Reuters) - An agency within the U.S. Department of Housing and Urban Development (HUD) plans to introduce two new types of bonds it expects to sell next year that may cut borrowing costs for home buyers.
One of the bonds planned by the U.S. Government National Mortgage Association (Ginnie Mae), the HUD agency, has a complex structure created from other securities that pool home loans, while the other bond will bundle income from the servicing of home loans.
The plans, unveiled at a celebration of Ginnie Mae's 35th anniversary in Washington D.C. Tuesday, were outlined by a Ginnie Mae official to Reuters Wednesday.
Here's how the new bond programs work.
Many mortgage banks resell their home loans on Wall Street as bonds. The simplest of these securities are known as pass-throughs and they are repackaged into complex transactions known as collateralized mortgage obligations (CMOs).
From these CMOs, Interest-Only securities (IOs) are created by stripping out interest payments made monthly by borrowers. Principal only securities (POs) are backed solely by principal payments. These slices of principal and interest payments are one of the new bond programs planned by Ginnie Mae.
"If somebody does a large IO PO deal, that takes bonds out of the market. All else being equal, that will make the securities appreciate slightly and that would modestly lower borrowing costs to consumers," said Art Frank, head of mortgage research at Nomura Securities International Inc.
Investors such as hedge funds or mortgage banks like to buy IOs and POs to hedge, or protect, themselves against changes in interest rates.
The two top sources of housing finance in the United States, Fannie Mae and Freddie Mac , have had such IO PO programs in place since the 1980s.
Like Freddie Mac and Fannie Mae, Ginnie Mae sells guarantees of timely payment of principal and interest for loans to lenders. Lenders are then able to more readily resell the loans as bonds with a Ginnie Mae guarantee, attracting investors like banks, money managers, and central banks.
"We looked at this concept for many years," said Ted Foster, Vice President, Office of Mortgage-Backed Securities at Ginnie Mae.
"What I imagine is we would create more investor interest. It would make it a more robust investor base for GNMAs. We want to make these securities more appealing and this will drive down borrower costs."
The IO and PO deals are expected to be structured in July 2004 and the other transaction, the sale of excess income from the servicing of home loans, will be sold in September 2004.
Servicing involves the collection of principal and interest payments each month by companies which, often, are an arm of a lending company. Sometimes this collection generates excess income, and it is this expected extra income that Ginnie Mae plans to sell as a bond.
By selling this excess income in a security, Foster said, "it will make more capital available for lending ... You hope that as there is more capital available there would be improvement in rates for borrowers."
Copyright 2003, Reuters News Service