Though some positive feedback has greeted the new legislative proposal allowing Ginnie Mae to insure private mortgages, experts say that the agency would have a lot of learning to do in terms of dealing with private mortgage insurance companies.

The bill, which is being sponsored by Senator Wayne Allard (R., Colo.), will authorize Ginnie to guarantee conventional MBS with private mortgage insurance.

According to the senator's aide, the bill would create a public-private partnership between Ginnie and private mortgage insurance companies. Under the proposal, the private insurers would cover for the first 45% loss on a Ginnie Mae securitized loan. The range of coverage, however, will depend on the borrower's loan-to-value ratio.

"Only after you go below 45%, which would be catastrophic, would the government guarantee kick in," said the aide.

The proposed legislation is aimed at mortgages with loan-to-value ratios of 80% to 97% and puts a $275 million cap on the loans under the program, the same limit that rivals Freddie Mac and Fannie Mae currently have. This cap would be raised, as the conforming loan limits for the GSEs' are increased.

Though many believe this is a welcome development, analysts say that it would be a difficult process for Ginnie because, unlike Freddie and Fannie, the smaller agency has had no experience with and has no existing institutional apparatus for dealing with uninsured mortgage loans or mortgage loans partially insured by private mortgage insurance.

Ginnie, thus far, for about 31 years, has only guaranteed loans backed by other government programs such as the Federal Housing Administration and Department of Veterans Affairs.

Unique features of private MI and Ginnie's learning curve

The fact that Ginnie Mae has had no prior experience in administering private MI is seen as a drawback because this would require getting over a steep learning curve.

According to Michael Youngblood, head of real estate research at Banc of America Securities, private mortgage insurance, for instance, has certain exclusion characteristics that have to be taken into account.

The various factors that need to be considered, though generally known to the industry and familiar to rivals Freddie and Fannie, would all be brand new to Ginnie.

An example of an exclusion provision would be private insurance companies not routinely paying for losses on property attributed to casualty and condemnation. The property would have to be repaired first before a mortgage insurer would make the claim eligible.

There are also some basic questions that need to be answered before Ginnie could proceed with this endeavor successfully. Will the 45% coverage by private insurers be adequate to protect Ginnie Mae against considerable losses? What premium would Ginnie need to charge issuers for covering potential losses that exceed 45%? Under the law, Ginnie is required to charge fees that are adequate to pay for its operational expenses.

"Though Ginnie Mae has very strong management, it is fair to say that its management team has been small in size and has not had prior experience in this kind of undertaking," said Youngblood. "I believe that Ginnie could come up the learning curve and manage the program successfully if the legislation is passed. It is a steep curve though."

Objective of the bill

The bill is aimed at expanding opportunities for home ownership by increasing competition in the secondary mortgage market, which is now dominated by Freddie and Fannie.

"It would basically just put another player out in the secondary market for mortgages," said the Allard staffer. "You are not talking about jumbo mortgages here, but about middle-income and first-time borrowers."

Art Frank, head of MBS research at Nomura Securities, said that the proposed bill, as it is currently written, is well beyond the initial Ginnie Mae Choice' proposal that Ginnie has been talking about for more than a year now. The earlier version of the proposal only allowed Ginnie to insure certain non-conforming, conventional mortgages.

"This seems to be a bill that would have Ginnie directly compete with Fannie and Freddie in the high-LTV market and use private mortgage insurance to reduce the risk to the government," said Frank. "I think it is going to be a very controversial proposal."

However, this would not be the first proposal to foster competition against the GSEs'. The Federal Home Loan Banks (FHLB) launched their MPF program to compete with Fannie and Freddie among thrift institutions. Sources said there is also ongoing discussion on legislation that would strengthen the role of the FHLB.

$50 billion authorization

Some observers say that since the dollar amount of mortgages that Ginnie could securitize under the proposed bill is initially limited to only $50 billion, it is obviously not meant to foster competition between Ginnie and industry heavyweights Freddie and Fannie.

"If you look at the dollar amount of mortgages that could be done under the proposed legislation, it is quite small compared to the volume that Freddie and Fannie do every year," said a representative from a private MI company.

Ginnie reportedly guaranteed $105.5 billion of MBS in 2000 while Fannie and Freddie last year issued $211.6 billion and $166.9 billion, respectively.

Also, at this time, with low rates and the onslaught of another refinancing wave, $50 billion would not really cut into the two GSEs' market share.

The Allard staffer said, however, that the $50 billion authorization is only the initial pilot program level, and the amount may be increased in the future.

A big plus for MI companies

According to the private MI representative, the proposed bill would be a definite plus for mortgage insurers because it might allow them to insure mortgages that were previously done by the FHA.

He added that the proposed law would also be beneficial to borrowers because it would allow two efficient entities to work together to expand the housing market.

"Ginnie Mae is one of the more efficient government agencies though it has a very small staff," said the representative. "The mortgage insurance industry is also a highly efficient way of expanding home ownership opportunities. Joining the two together is a benefit to the borrowers."

Analysts say they are not anticipating the bill to be passed in the near term with Congress planning to adjourn in October and with about 13 appropriation bills still pending. Aside from the fact that Congress still has other issues to contend with including the country's declining surplus, the Ginnie Mae proposal is deemed too controversial to get through in the next two months.

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