Although Ginnie Mae is in the process of rethinking the changes that it proposed to its Program I due to a unanimous negative reaction from the dealer community, plans to change the program are certainly not dead.

"I would say it is on hold for now, but it is not dead," asserted George Anderson, executive vice president of Ginnie Mae. "[Dealers] were pretty strong on their opposition to changes in the Ginnie I program, but we left it that we will revisit the issue jointly to see if we could find some workable solutions."

Last week, a conference call held by the Bond Market Association revealed that dealers and investors were dead set against the proposal to broaden the loans eligible for Ginnie Mae I pools. The proposal included adding odd coupons to Ginnie I's (having weighted average coupons up to 75 basis points, from the current 50 basis point limit).

"Although it was a consistent negative reaction, nothing has really been taken off the table," Anderson said. "I do think they had legitimate concerns, however. They underscored the fact that we have a significant outstanding amount of Ginnie Mae I securities, and if we make changes - even if it is on a prospective basis - it will have an impact on the outstanding.

"However, they gave us the impression that they understood the concerns we had regarding our position in the market."

Ginnie Mae has recently been placed in an uncomfortable position due to the fact that its market is being somewhat eroded by the Federal Home Loan Banks' Mortgage Partnership Finance program. Moreover, Fannie Mae and Freddie Mac are also eating away at Ginnie's market share, leaving the GSE in a difficult position.

"Ginnie Mae needs to make a change and bring their program into the twenty-first century," said Michael Hoeh, head MBS portfolio manager at Dreyfus Corp. "They need to think it out a bit more so that their changes are not disruptive to the marketplace. Maybe they can implement these changes at the turn of the year so that it creates another vintage. Hopefully they'll make it clean and make the change exactly at year-end, and do it in a more orderly fashion."

According to David Montano, director of MBS research at Credit Suisse First Boston, if the changes to the Ginnie Mae I program were implemented, GNMA I durations would be lower, making them more comparable to conventionals. Additionally, it may help the market ease the "technical" situation partly caused by the drop in production in Ginnie Mae Is."

"It's been argued that this may worsen liquidity or disrupt the market," Montano said. "Changes are usually looked upon with suspicion by market participants. On the other hand, liquidity generally declines with lack of float or interest in the security. Since many market participants are already vested to maintain liquidity, and the float should be increasing, not decreasing, it appears to us that liquidity should improve long-term."

In the meantime, the immediate prospects for Ginnie Mae involve looking at the Ginnie Mae II program. The proposal included as a possibility the restriction of the coupon dispersion in Ginnie II mortgage pools.

"The reaction we heard underscored the magnitude of this decision," Ginnie Mae's Anderson added. "But from what we heard from the community, it implies they're committed to working with us in a short time frame on something that is a better alternative. So we will work alongside originators and investors to come up with something that works for everybody."

Although Anderson did not expect to have any major announcements concerning Ginnie Mae I pools at the upcoming Mortgage Bankers Association meeting in San Diego, some market observers said that they wouldn't be surprised if the GSE is still cooking up some significant changes that would be announced at the meeting.

A Good Buying Opportunity?

In the meantime, some money managers are seeing this tumultuous period as an excellent relative-value opportunity from an overall fixed-income standpoint.

"There are interesting opportunities out there in terms of Ginnie-Fannie swaps to be done," said an investor. "Additionally, there will be more uncertainty coming up with regard to the Fannie/Freddie benchmark.

"Net, the residential securities are absolutely money-good. They're not in danger, so any opportunity to buy them on the cheap is something that investors should jump at, from an asset allocation standpoint."

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