The Government National Mortgage Association is preparing an updated version of its mortgage-backed securities program that will feature electronic fund transfer, computerized record-keeping and vastly larger mortgage "pools."
The program, known as Ginnie Mae II, is designed to make the association's securities more attractive to investors by simplifying their bookkeeping, speeding up the flow of funds, and, through the so-called jumbo pools, reducing sharp swings in the securities' value.
The new arrangement "improves the security itself and also makes it easier for investors to deal with the securities," said Ginnie Mae President Robert W. Karpe. " . . . If it makes it a more desireable thing to buy, more people will buy it, more pension funds will go into it, which haven't because of the complexity so far. And if more people buy it, that means more funds available for low- and moderate- priced homes, and that's why we're here."
Glen Corson, of the Mortgage Bankers Association of America, termed the new system, "a very good thing," adding, "We're very enthusiastic about it."
Karpe and other Ginnie Mae officials emphasized that the changes they are contemplating are basically mechanical ones and that in broad outline the new program will operate much the same way as the current one. They noted that the current program, Ginnie Mae I, will continue in existence as long as there is demand for it.
The change comes at a time when fluctuating interest rates and changes in the banking industry have sent experts throughout the real estate financing industry back to their drawing boards in search of new and better ways to raise money for mortgage loans. The focus of much of their attention is the secondary mortgage market, in which mortgages can be sold to investors to provide lenders with cash to make new loans.
Ginnie Mae, through its mortgage-backed securities and other programs is a major factor in the secondary market.
In general terms, both Ginnie Mae I and Ginnie Mae II operate this way:
A mortgage lender, having first obtained Ginnie Mae's approval to participate in the program, makes a loan. Then he pools it together with other loans he has made or expects to make, and issues a security. He then sells the security, generally through a capital markets brokerage.
The reason for this arrangement is that the market for entire loans is relatively limited, but more investors are willing to buy asecurity that in effect entitles them to a share of the income from a batch of loans.
The original lender collects borrowers' payments and passes them along to the security buyers.
Ginnie Mae, which is a government corporation and deals in this program exclusively with FHA and VA loans, guarantees that the lender will make prompt payment to the security holders. If he fails to do so, the association steps in, takes over the loans and makes the payments.
Since the loans themselves are guaranteed by either FHA or VA, and since the lender's performance is guaranteed by Ginnie Mae, the securities are safe and widely traded.
Ginnie May II would streamline the transfer of funds. Currently, if a lender has issued a thousand securities, as he might with a large pool, he might have to send out a thousand checks each month, "and that," noted Karpe, "is a lot of work."
Likewise, a major pension fund might have purchased a thousand securities, and thus it would receive, perhaps from several issuers, a thousand checks.
In Ginnie Mae II there will be a central paying agent--Chemical Bank of New York, which beat out a number of competitors for the contract. Issuers will need to send only a single check to the central paying agent, and the agent will in turn send a single check to each security holder, "whether he owns one security or 2,000 securities," Karpe said.
In addition, these transactions can be carried out by wire transfer. Karpe said he expects some to be done that way from the beginning and as the program continues most of them will probably be.
Under the current arrangement, the lender must send his check to be received by the security holder by the 15th of each month. If the borrower is late, the lender must send the check anyway, collecting from the borrower later.
Under the new system, said Karpe, the lender must have his money to the cnetral paying agent by the 22nd of the money, for transmittal to the security holders by the 25th. "One advantage to the issuers is that they have a little more lag for each homeowner to make his payment before they have to come up with the check or the wire transfer to the central paying agent."
Another advantage, he said, is that the new system, through its use of computers, will be able to keep up with who owns which security, even though the securities are traded every day. Now, if a security is sold shortly before the payment date, the check is likely to go to the previous holder, who will then have to forward it to the new owner. Under Ginnie Mae II, transfers instantaously goes into the computer and the check is issued to the proper recipient.
"Another aspect [of Ginnie Mae II] is that we take many, many small pools and put them into one big monthly jumbo pool," Karpe said. " . . . The security holder then gets a mix" that tends to stabilize the securities.
Corso of the Mortgage Bankers agreed. He noted that while Ginnie Mae issues are back by a uniform product--FHA and VA loans--but pools may still have somewhat different characteristics. Loans from some geographic areas, California is one example, pay off faster than others becasue people are more likely to sell their houses and move. Loans with high interest rate tend to be more likely to be paid off early.
Jumbo pools, because they will contain so many loans, will tends to cushion these changes.
The new program also allows mixing of interest rates in these jumbo pools, another feature that will increase homogeneity and make it easier for lenders to create pools when rates are changing rapidly.
Karpe also noted that the computerization will give the agency a greater capacity to monitor performance of issuers. Currently, Ginnie Mae relies on spot checks, which Karpe said have worked fairly well, but in the new system computers will be able to flag any failure to make a payment on time.
He said that overall the new system is expected to bring more buyers into the market for the securities, and that greater investor interest and greater ease of handling may even lead to some reduction in the interest rates they carry. He said he is aware of large institutions who like Ginnie Mae securities and hold substantial amounts of them but find them inconvenient to trade.
Karpe credited Ginnie Mae Executive Vice President Warren Lasko with the design work that led to the new program. Lasko said the target date for implementation of Ginnie Mae II is July 1. "We're on track. We have a plan and we're on schedule," he said.