Ginnie Mae Pool No. 1: A Revolution Is Paid Off

30 YEARS LATER, pioneer homeowners write the final check on mortgages that changed Wall Street and Main Street forever.

NEW YORK - One of Wall Street's old friends is about to retire.

It's Ginnie Mae Pool No. 1, the first Government National Mortgage Association mortgage-backed security that passed homeowners' monthly loan payments on to investors. A remaining handful of borrowers soon will make final payments on mortgages taken out in 1970 that back up the pool.

Pool 1's retirement should be cause for celebration.

Mortgage securities pioneered by Ginnie Mae brought benefits all around. Bankers could sell their loans to bond investors, instead of taking the risk they would lose value, and then use the sale proceeds to make new home loans.

That increased lenders' profits and led them to cut the mortgage rates they offered consumers. Investors won, too, because they could make more off mortgage securities than on other fixed-income investments.

Ginnie Mae invented mortgaged-backed securities to attract more money to U.S. housing, and the government agency more than accomplished its goal. Now 66 percent of Americans own their own houses.

"Money from the Ginza in Tokyo and the Bahnhofstrasse in Zurich has been taken to Elm Street to make housing more affordable for the American consumer," said Lawrence Small, president of Fannie Mae, the largest buyer of U.S. home mortgages.

What's more, Ginnie Mae's groundbreaking idea has spread. Wall Street firms now create securities that pass on payments from car loans, credit cards and commercial real-estate mortgages to investors worldwide. This $3.4 trillion behemoth of asset-backed securities - including $2.4 trillion of mortgage securities - even tops the Treasury securities market in value.

"I realized there was a brave new world out there, but really, I'm dead serious, I never had so much as a clue" it would grow so large, said Robert Dall, a former Salomon Brothers partner who started the firm's mortgage business in 1977, when Ginnie Maes were still an oddity.

Ginnie Mae has been so successful it has reduced its own role in the mortgage business. The agency was created to serve lower-income borrowers using Federal Housing Administration and Veterans Administration programs. Later entrants Fannie Mae and Freddie Mac (government-sponsored corporations originally called Federal National Mortgage Association and Federal Home Loan Mortgage Corp.) expanded the benefits to the majority of borrowers when they sold packages of conventional mortgages. Those companies now are the third- and tenth-largest U.S. financial concerns and dwarf Ginnie Mae, which has its stamp on just a quarter of outstanding U.S. home-mortgage securities.

"We took on the early risks and were the first to standardize the marketplace, but others refined and improved upon that and made it better," said George Anderson, Ginnie Mae's acting head.

For all their success, mortgage securities remain somewhat mysterious. Most loans in the packages are for 30 years. But nobody can predict when the mortgage-backed security will mature because most homeowners pay off their mortgages early.

While the first Ginnie Mae mortgage security has had a full life, 72,660 securities sold after it have expired early because underlying mortgages were paid off. (All told, Ginnie Mae has sold 380,977 mortgage-backed securities.) Research teams armed with multimillion dollar computer models today still fail at predicting when mortgage securities will retire.

Subsequently, Wall Street devised ways of repackaging mortgage securities and separating the interest and principal payments from the underlying loans, reducing the prepayment risk in some securities and increasing it on others, with yields in proportion.

Congress created Ginnie Mae in 1968. Pool No. 1 was marketed in February 1970, backed by $7.5 million of loans originated by Tower Mortgage.

Initially, there was stiff opposition to Ginnie Mae securities. Supporters had to assure the U.S. Treasury the new bonds wouldn't cut into sales of government debt. Proponents also had to show that Ginnie Maes wouldn't ruin savings and loans, as the thrifts and their homebuilder allies suggested.

"The alliance of the savings and loan associations with the National Association of Home Builders was trying to run me out of town," recalled John Heimann, 70, at the time an adviser to the Department of Housing and Urban Development on mortgage finance. A former U.S. Comptroller of the Currency, he retired last year as Merrill Lynch & Co.'s head of global financial institutions.

Investors resisted too, even though all the underlying loans were guaranteed by the government. "Insurers wanted certainty at that time, and mortgages were very uncertain," said Michael Henderson, who defied his peers and bought some of the first Ginnie Mae bonds when he was chief investment officer of Western National Life Insurance.

By 1978, however, Ginnie Maes were a $54 billion market. Mortgage securities became still more credible when Freddie Mac and then Fannie Mae began selling securities backed by conventional mortgages. In 1981, there were $19.9 billion of Freddie Mac issues outstanding in addition to Fannie Mae's $717 million.

"It's what really started to add liquidity to the market," said Jayne Shontell, who heads investor relations at Fannie Mae.

Today, only 25 percent of mortgage securities are Ginnie Maes, compared with 42 percent for Fannie Mae and 33 percent for Freddie Mac.

While Ginnie Mae's role in the mortgage market may be shrinking, it serves the borrowers who need it most - those who don't qualify for conventional mortgages. "There are still some markets that clearly can be better served by government," said Ginnie Mae's Anderson.

Most of the mortgages packaged into Ginnie Mae Pool 1 were on homes that cost less than $25,000 in 1970, said Walter Klein, chief executive of Frederick, Md.-based First Nationwide Mortgage, which collects monthly payments on the loans.

By contrast, Ginnie Mae today buys FHA mortgages up to $208,800, and Fannie Mae and Freddie Mac buy conventional loans up to $240,000.

The homebuyers in Pool 1, primarily from Minnesota, paid interest rates of about 7.5 percent, close to current levels for both FHA and conventional loans, Klein said. Over the loans' lives, however, 30-year mortgage rates rose as high as 18.6 percent and fell as low as 6.5 percent, according to Freddie Mac.

Over the years, all but 10 of the homeowners in Ginnie Mae's inaugural mortgage bond either paid off or refinanced their loans. All declined to talk with a reporter. "The borrowers were more interested in paying off their loans," Klein said.

Of those 10 mortgages, only three remain backing up the security. (First Nationwide last month bought the other seven from the pool; the rest are in the hands of the company that brought mortgage securities into the mainstream, Salomon Smith Barney.) The combined balance due on the 10 mortgages is $2,309.39.

Soon Pool 1 will vanish. Three cheers for the pioneer.