Ginnie Mae is considering changes to its Ginnie Mae II government loan securitization program, according to sources in Washington and on Wall Street.

According to some market players, these changes are driven by the increasingly popular programs to securitize government loans from Fannie Mae and, to a much lesser degree, from Freddie Mac.

"Conversations with officials at Ginnie Mae lead us to believe that the agency wants to add flexibility," said Steve Banerjee, a mortgage analyst at Prudential Securities Inc.

To become more competitive, sources speculated that the Ginnie Mae II program could lower the servicing fee or build other flexibilities into the Ginnie Mae II program. But while those familiar with the situation confirmed that the changes are being made in order to make Ginnie Mae more competitive in the marketplace, they would not specify what directions are being considered, adding that any changes would occur in the distant future.

Clearly, the Ginnie Mae II program has grown rapidly in popularity in the past year. But more recently, the Fannie Mae GL (government loan) program has also become more widespread as well. Securities in this program carry the prefix GL, but are often known on Wall Street as "Fannie Ones," which is the GL subset for current production.

The competitive dynamic between the Fannie Mae GL program and Ginnie Mae II program is complex. One fundamental difference is that Ginnie Mae mortgage-backed securities carry a 44-basis-point servicing fee, whereas Fannie Mae GL MBS entail a lower servicing fee of 25 basis points.

At Fannie Mae, Andrew Bon Salle, director of the trading desk, outlined another advantage offered by the Fannie Mae GL program: A mortgage with a note rate of 7.875%, for example, would have to go into a Ginnie Mae II pool carrying a coupon rate of 7.0%. Once the Ginnie Mae guarantee fee of six basis points is subtracted out, the originator is left with 81 basis points of servicing, a large amount. This large amount of servicing can subject the servicer-lender to the risk of impairment under accounting procedures.

Conversely, in the Fannie Mae GL program, with its 25-basis-point servicing fee, the lender could put the loan in a 7.5% coupon pool and not incur the large servicing charge and impairment risk, Bon Salle said, noting the lender would have to "buy down" the Fannie Mae guarantee fee. He said this has "capitalized the servicing fee into the MBS."

Fannie Mae began the program after being asked to develop it by one or two lenders, but the program has grown to eight to 10 lenders and a monthly volume of $400 million to $500 million, he added.

One Wall Streeter said that any changes in the Ginnie Mae II program that improve the bid on the Street could eventually result in the Ginnie Mae II program eclipsing the flagship Ginnie Mae I program. The Ginnie Mae II program, while not as flexible as the Fannie Mae GL program, offers more flexibility than the Ginnie Mae I program.

For example, unlike the Ginnie Mae I, the Ginnie Mae II program allows "odd lots." This means the program allows loans with notes that increase in increments of one-fourth or one-eighth, whereas Ginnie Mae I only allows increases of one-half. That may help to explain why Ginnie Mae IIs have recently been added to the Salomon Smith Barney Bond Index.

The Mortgage Bankers Association would like to see the flexibilities of the Ginnie Mae II program incorporated into the Ginnie Mae I program, and in the past has apparently opposed enhancing the Ginnie Mae II program. The Bond Market Association has opposed changing the Ginnie Mae I program.

Some traders on Wall Street said the Ginnie Mae II program easily dominates Fannie Ones, and no changes are needed. One said that Fannie Ones did well during the refinancing wave, but now volume has slacked off.

- ES

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.