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-- Posted: Dec. 15, 1999

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Ginnie Mae -- a simple name for a complex investment

Dear Dollar Diva,
What is a Ginnie Mae?

Ginnie Mae, or the Government National Mortgage Association, is a pool of home mortgages offered to investors as a conservative, U.S. Government-backed security.

What's good about a Ginnie Mae?

It is the highest yielding security backed by the federal government with estimated yields about 1 percent higher than Treasury notes or bonds.

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You receive a check every month rather than twice a year, as you would if you invested in a bond.

Although they are offered in denominations of $25,000, which is pricey for the average investor, you can buy pre-owned Ginnie Maes for much less. The price will depend upon how much principal remains to be paid on the loans -- the less outstanding principal, the lower the cost. But you need to trust your broker when buying the pre-owned variety -- it's too hard to estimate the actual yield on these, and brokers have been known to twist the truth when selling them.

There are also Ginnie Mae mutual funds that make this investment more accessible, but returns can plunge when interest rates rise.

What's bad about GNMA?

Your monthly checks are made up of interest and principal. If you spend the whole check, you eat into your principal, which is usually not what investors like to do. Also, the amount of the check is different each month. If a homeowner makes an additional principal payment on his mortgage, your check will be higher in the month he does it. It will be lower in the following month because you have less principal in the pool.

It's too complicated an investment for the average investor. The government guarantees the loans against default, but it does not guarantee the return on your investment. Yields can only be estimated based on the interest rate and years remaining on the loans in the pool. If the higher interest loans in the pool are paid off early, the yield will be reduced.

Mortgage refinancing is generally a function of interest rates (when they go down, more people refinance), demographics (retirees are more likely to pay off their mortgages than generation Xer's ) and other economic events (changes in tax laws, the health of the economy). No one knows how many homeowners will pay off their mortgages early, and it's not something the investor has any control over

Ginnie Maes behave like bonds: When interest rates go up, the value of the security goes down. Ginnie Maes generally rise very little in an up market and crash in a down market. So if you have to sell your Ginnie Mae before its maturity, you will probably lose a lot of money.

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