Sunday, September 6, 2009

GNMA Mortgage pass-Through or Mortgage-backed securities

During the 1970s the federal government increasingly active in the secondary market for mortgages in order to expand the volume of funds available to the housing market. One of the most successful federal government programs in this area is carried out by the government national mortgage association (GNMA or, more commonly, "Ginnie Mae"). Ginnie Mae purchases residential mortgages in the secondary market and adds them to an investment pool. All mortgages in the pool bear the same interest rate, carry similar maturities, and represent loans against similar types of residences. Then , Ginnie Mae issues its own securities (which it guarantees) as claims against the principal and interest earned by the mortgage pool. These Ginnie Mae IOUs-usually called passthroughs or mortgage-backed securities- are standardized, readily marketable instruments with interest rates generally higher than on U.S. Treasury securities.
In October 1975 the Chicago board of trade opened trading activity in futures contracts for GNMA pass-through certificates. The basic trading unit was set at $1000,000 for certificates with a stated interest rate of 8 percent ("Ginnie Mae 8‘s"). if the rate of interest on a Ginnie Mae issue is lower than 8 percent, then the basic trading unit will be greater than $100,000. On the other hand, if the interest rate is above 8 percent, the basic trading unit is scaled down below$100,000. for example, $107,816.70 is the basic trading unit for an interest rate of 9 percent. Prices on Ginnie Mae issues are qouted as a percent of par with minimum quotes in 32nds of a point. Delivery months on GNMA futures contracts are February,March,June,August,September,November,and December.
Two types of GNMA futures are traded today: (1) GNMA CDR (collateralized depository receipt), and (2)GNMA CD (Certificate delivery). The difference between these two contracts hinges on current market interest rates. As we noted above, GNMA certificates with 8 percent coupon rate were chosen as the basis for GNMA futures contracts traded at the Chicago Board of Trade. the 8 percent figure was chosen because it was a common interest rate attached to GNMA certificates when trading first began. When interest rates rise above or fall below 8 percent, one of two types of adjustments are made in GNMA futures contracts. the dollar amount on the contract invoices can be adjust with the principal balance unchanged-a GNMA CD. Alternatively,the amount of GNMA certificates actually delivered (known as the principal balance) can be altered to capture interest-rate changes with the dollar amount of the contract invoice remaining unchanged. this is known as a GNMA CDR contract. Also, a GNMA CD Contract calls for delivery of the actual GNMA certificates, while a CDR contract requires the delivery of a receipt which evidences GNMA Certificates held in safekeeping by an authorized depository.

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