Ginnie Mae certificates available for more-modest investors, too

Funds invested in securities of the Government National Mortage Association (GNMA, or "Ginnie Mae") total about $80 billion. Original-issue GNMA certificates are sold to investors in $25,000 minimum increments. Two attractive options are available, however, for investing as little as $3,000 in GNMA certificates, and yields are in the neighborhood of 11 percent.

GNMA certificates represent mortgages bought from lending institutions and pooled. GNMA is one of several secondary markets for mortgages, and investors are guaranteed liquidity and no losses from default. Generally, GNMA certificates yield about 1/2 percent more than other US government bonds with similar maturities and may equal the yield from high-grade corporate bonds. Interest from GNMA certificates is taxable at all levels.

Income from GNMA certificates is paid monthly and includes a return of capital as the principal of the mortgages is paid down along with interest. Thus, for anyone in retirement practicing the planned consumption of capital, all of the payments, return of capital plus interest, could be considered income. Or the principal may be reinvested and only the income spent.

Previous "Moneywise" articles have noted the $25,000 minimum investment requirements. Although not specifically stated, the $25,000 limit applies only to original issues. One alert reader noted correctly that older, partly paid-down certificates are sometimes available on the secondary market at less than $25,000. In times of high long-term interest rates, previously issued certificates may be available at substantial discounts. Partly paid-down certificates may be bought or sold through stockbrokers.

Mortgages included in GNMA pools are required to be insured by FHA or Farmers Home Administration or guaranteed by the Veterans Administration. Once a pool is approved by the GNMA, securities are backed by the full faith and credit of the US. Holders of certificates are assured of payment even though an individual homeowner may default on his mortgage loan. Typically, a pool of mortgages will include loans up to 30 years, but early resales, defaults, or both, on average paying off the pool in 12 years.

Individuals may also participate in GNMA certificates through special-purpose mutual funds. Vanguard, for example, offers shares in GNMA portfolios in a no-load mutual fund. An original investment must be at least $3,000, but subsequent additions may be as little as $50. As a no-load fund there is no cost for investment or redemption.

Attractive options for repayment are available. You could take only the income portion of declared dividends and invest the principal amounts in more shares of the fund. Or you could take the full monthly dividend that includes interest and a portion of the capital invested. Shares in the fund are redeemable at any time at the net asset value. Full information is available in a prospectus from Vanguard (Drummer's Lane, Valley Forge, Pa. 19482).

Prices of certificates directly or shares of a GNMA mutual fund will vary according to long-term interest rates. US Treasury, corporate, and municipal bonds also march to the same long-term interest-rate beat -- prices down when interest-rate are high and the inverse -- prices higher when interest rates are down. Thus, timing your purchase and sale can affect overall yields as much as quoted rates at a certain time. Substantial investment benefits are available to the canny investor who foresees changes in interest rates. But investing in GNMA certificates directly or through a mutual fund removes one element of risk because of the US government guarantee.

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