Ginnie Maes

MEET My friend Ginnie Mae. She's quite attractive, not a racy type at all, but safe and most rewarding for those who know and love her.

Ginnie Mae is really a security, issued by the Government National Mortgage Association and backed by the mortgages that the quasifederal organization holds. When you invest in one, you are buying a share in a pool of fixed rate home mortgages insured by the Federal Housing Administration or the Department of Veterans Affairs. You also get your principal returned in monthly installments because homeowners pay off their mortgages monthly. You probably want to reinvest that principal right away, so you do not deplete your capital. Since you get both interest and principal paid in installments, you collect higher regular payments from a Ginnie Mae than from a bond or a certificate of deposit or some other interest bearing security.

One problem with Ginnie Maes is that you can never be certain how much money you will receive each month and how long these installments will last. That's because homeowners often pay off their mortgages ahead of schedule. Prepayments are so common that Ginnie Maes backed by 30 year mortgages actually have an average life of only 10 to 12 years. To compensate investors for the uncertainty, Ginnie Maes offer a higher interest rate than Treasury issues of comparable maturities. For example, the "bond equivalent yield" on Ginnie Maes backed by 10.5% 30 year mortgages in mid 1989 was 10.16%, versus 8.7% on the 10 year Treasury bonds with which they are most often equated. The bond equivalent tells you how much you would have to get from other bonds that pay interest only twice a year to equal the yield of a Ginnie.

Ginnie Maes are as safe as U.S. Treasury securities because the government protects you against late payments and foreclosures; so they are particularly attractive for conservative investors. But, as mentioned, Ginnie Maes will give you about a point or two more yield than comparable Treasuries will.

Trouble is, Ginnie Maes cost a bundle $25,000 each. But for $1,000, and in some cases as little as $100, you can go to a mutual fund dealer or a stockbroker and buy Ginnie Maes in the form of bond mutual funds or unit trusts. In mid 1989, the mutual funds were yielding an average annual interest of about 9. 1 %. But beware: If homeowners prepay their mortgages, the yield and share price of a Ginnie Mae fund will likely fall.

Some unit trusts even let you write an unlimited amount of checks against your money; the minimum check is usually $500. You also can reinvest your monthly payments of interest and principal. That allows your money to compound and keep continually working for you. And you can cash in your units at any time, without fees or penalties.