Ginnie gains on Fannie, Freddie as credit woe deepens

NEW YORK (Reuters) - Mortgage bonds backed by the government have jumped relative to Fannie Mae and Freddie Mac securities in recent weeks as signs of a deepening credit crisis burnish the appeal of that bedrock guarantee.

Investors have preferred the bonds of Ginnie Mae, whose securities are backed by the Federal Housing Administration, over the corporate-guaranteed debt of the private companies since mid-October, and the trend appears set to persist.

"Ginnie Mae should trade better because of the full faith and credit guarantee" in a volatile environment, Michael Cheah, a former manager for the Monetary Authority of Singapore who invests $2 billion for AIG SunAmerica Asset Management in Jersey City, New Jersey, said in a recent interview.

In pricing, Ginnie Mae MBS paying 5.5 percent interest have gained 1-17/32 since October 15, 7/32 point more than the increase seen for Fannie Mae MBS, according to Reuters data.

The higher premium on Ginnie Mae bonds comes amid increased demand from investors in Asia as steeper-than-expected losses at U.S. and European investment banks are coming to light, bond traders said. Closer to home, Nomura Holdings Inc (8604.T), which a year ago stopped trading low-margin guaranteed MBS to focus on some of the riskiest subprime debt, last week posted its first quarterly loss in four-and-a-half years.

GINNIE TURNS BACK THE TIDE

Ginnie Mae's fortunes began to turn as investors, seeing renewed erosion in credit markets, bought the bonds along with Treasuries for their perceived quality. Ginnie Mae prices had already been improving since it decided last month to separate loans created under the new FHA Secure program from existing bond programs, eliminating some risks for investors.

Ginnie Mae securities had been drubbed in September on concerns the FHA plan to reduce foreclosures by refinancing defaulted borrowers would hinder trading. By mixing loans more likely to default with other FHA mortgages, Ginnie Mae would have clouded the prepayment outlook that helps determine the bonds' values, investors feared.

The premium on Ginnie Mae debt over Fannie Mae MBS had declined to 22/32 in mid-September from 30/32 a month earlier. The gap was 31/32 on Friday, widening by 2/32 to 3/32 in a "flight-to-quality," one trader said in an e-mail.

Ginnie Mae, created by the government in 1968, helped develop the markets for mortgage securities with Fannie Mae and Freddie Mac. Their market share of $7.2 trillion mortgage bond market was slashed during the recent housing boom as lenders were able to sell loans with easier credit terms through the more lucrative Wall Street programs now at the heart of a global credit crisis.

Ginnie Mae bond volume is now on the upswing, and their relative price gains in the face of rising issuance may suggest investor demand is also growing, said Stephen Ledbetter, a senior adviser at Ginnie Mae in Washington.

"It wouldn't surprise me if part of the story is that we are seeing some confidence in the full faith and credit guarantee of the Ginnie Mae security," he said.

Shares of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) slumped on Friday after the regulator of the two government-sponsored enterprises said the companies had "growing exposures to credit risk" and should not be allowed to expand mortgage investments as lobbied for by the chief executives and some lawmakers. The guarantee on the $3.5 billion in outstanding Fannie Mae and Freddie Mac MBS is based on company credit, not the government.

Freddie Mac in August said expenses related to failed loans and reserves for expected losses more than quadrupled in the second quarter. Since then, credit markets have seized further, and prices on Freddie Mac, Fannie Mae and Ginnie Mae mortgage securities have lagged gains in U.S. Treasury debt.

At the close of trade on Friday, Freddie Mac shares were down 2.2 percent. Earlier in the session they hit a four-and-a-half year low at $46.87. Fannie Mae slid 3.5 percent after having earlier touched a 14-month low of $51.63.

Foreign central banks, some of the biggest buyers of the "agency" corporate debt and MBS of the three issuers, in the last week of October dumped $4.4 billion of the securities, from record holdings in the prior period, the Federal Reserve said on Thursday.

"A lot of investors are either on sidelines or retrenched, and not a buyer of any mortgage-related assets," one mortgage capital markets executive said earlier this week. "Others are being very selective."