The federal government yesterday proposed creating a new board to regulate speculative trading in Ginnie Mae mortgage commitments that has resulted in millions of dollars in losses for institutional investors.
The organization, named the Federal Mortgage-Backed Securities Rulemaking Board, would be self-regulating and would consist of representatives of bank and nonbank securities dealers and public representatives. The board in turn would be subject to the oversight of the Treasury, the Federal Reserve, and the Securities and Exchange Commission, the three agencies that proposed it. The board would have the authority to set margin requirements for forward transactions, which currently have none.
Ginnie Mae is the nickname given to mortgage-backed securities issued by the Government National Mortgage Association. The securities are based on pools of mortgages insured by the Federal Housing Administration and the Veterans Administration that mortgage bankers and other real estate lenders sell to investors.
Ginnie Mae securities are considered very safe investments, but the futures and forwards markets based upon them have been risky.
However, continually rising interest rates have often spelled disaster for speculators who were betting on rate decreases that did not materialize. Because there was no down payment or margin on borrowed money required, almost anyone could speculate in Ginnie Maes.
Forward contracts or commitments were sold by dealers over the counter on a negotiable basis with no quoted prices. They also offered many complex variations on the basic contracts.
Moreover, investigators for the federal agencies found many examples of high-pressure sales tactics and even outright fraud on the part of forwards dealers. Institutional investors such as pension funds and credit unions often were urged to buy Ginnie Mae forwards in large amounts then they could logically afford.
Legislation creating the board was introduced by Sen. Harrison A. Williams (D-N.J.). Williams' office declared yesterday, "At a time when mortgage credit is so badly needed from all sources, we must not allow this program to be undermined."