Ginnie Mae's recent proposal to build a $60 billion portfolio of its own mortgage-backed securities met some disapproval last week at the Mortgage Bankers Association's annual convention, where representatives from both Fannie Mae and Freddie Mac criticized the proposal on the grounds that Ginnie Mae does not have the capability to manage the risks of a MBS portfolio.

However, Ginnie Mae officials defended the plan, saying that the GSE needs its own investment portfolio in order to support its MBS.

"This proposal is wrapped in a lot of bigger issues, but the process is under way," said Theodore Foster, a Ginnie Mae spokesman at the convention. "It is one of those deals where larger budget issues with HUD are integrally linked to the passing of this proposal. We had originally proposed it for 2001 and it got moved up. Somebody saw the numbers on the net income side and said, Lets make a grab for it.'"

David Glenn, Freddie Mac's president and chief operating officer, described the plan as a "risky, time-consuming venture" for Ginnie Mae.

"I would be very careful about that," Glenn said.

Fannie Mae chairman and chief executive officer Franklin Raines warned that Ginnie Mae might put pressures on the Treasury Department with the MBS purchase cost.

"It is an outlay in the budget, not a saving," Raines said.

However, George Anderson, Ginnie Mae's executive vice president, maintained that the GSE's bonds have trailed those of Fannie and Freddie only because they are less actively traded.

"Our analysis to account for the difference rests on the fact that Ginnie Mae does not have the tools to supports its MBS," Anderson said. "It is the sole reason for their lack of liquidity."

According to Ginnie Mae's Foster, both the cash-flow and net-income sides of the proposal are being actively debated, and the GSE intends to ramp up its outstanding MBS next year.

"We are at $600 million now without added capacity," said Foster. "But there are still so many issues to figure out before we can go forward with this. For instance, what is the commitment authority for the budget going to be?"

Additionally, Foster mentioned that the GSE would be focusing more heavily on finding a remedy for a problem that both investors and issuers have been complaining about recently - the fact that Ginnie Mae II prices are not where they should be.

"We get complaints from both sides, because relative to Ginnie Mae I's, Ginnie II's are cheap," Foster added. "Buyers would like to improve value, while issuers want to bring an off-coupon loan to Ginnie Mae, but have to put it into Ginnie II's. So we want to figure out a way to either meld the two, or somehow improve their pricing."

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