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From: stern@tilt.FUN
Newsgroups: net.invest
Subject: Re: Info on \"Ginny Maes\"
Message-ID: <13000005@tilt.FUN>
Date: Mon, 21-Oct-85 09:56:00 EDT
Article-I.D.: tilt.13000005
Posted: Mon Oct 21 09:56:00 1985
Date-Received: Tue, 22-Oct-85 05:48:03 EDT
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Nf-From: tilt!stern    Oct 21 09:56:00 1985

[]

Getting your money back in "small globs" is not exactly "the problem" with
Ginny Maes.  A bit of background:

GNMA certificates are pass-through mortgages.  This means that the government
assumes (and therefore guarantees) the mortgage, and then essentially sells it
to you.  You get the monthly payments, and then get the principal back when
it matures.  The certificates are available at different rates (corresponding
to mortgages issued at different rates) and are priced so that the yield to
maturity is between 10.46% and 13.59% If you look in the Octoboer 21 'Barrons' 
on page 127, you can see what various GNMA certificates are yielding to maturity.

The problems referred to are two-fold:

(a) GNMAs are sold for $25,000, with $5,000 increments above that.  When you
get $3,234 in payments, where do you put the money?  This is the small globs
of money problem -- in order to see the 11% or so compounded, you have to 
reinvest that money at 11% or better.  Mutual funds here seem to be a win, because
any distributions just buy more shares, no minimum required.  (also, you don't
need great wads of cash to open an account with a mutual fund, whereas you need
the cash to buy GNMAs on the market).  The yield on mutual fund accounts, though
will be slightly less than GNMA yields because of their management fees and any
sales charges imposed

(b) If interest rates suddenly drop, there is a chance the mortgage you bought
will be paid off early (the person accepting the loan borrows more money at 
the lower rate, and pays off the expensive loan).  If this happens, your nice
fat return goes away and you have to shop for something comparable.  

--Hal Stern
  Princeton University
  {ihnp4, allegra, seismo}!princeton!flakey!stern