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Removal of Regulation Specifying Minimum Face Value of Ginnie Mae Securities
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[Federal Register: June 8, 2005 (Volume 70, Number 109)]
[Rules and Regulations]
[Page 33649-33652]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn05-27]
[[Page 33650]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 320
[Docket No. FR-4856-F-02]
RIN 2503-AA17
Removal of Regulation Specifying Minimum Face Value of Ginnie Mae
Securities
AGENCY: The Government National Mortgage Association (Ginnie Mae), HUD.
ACTION: Final rule.
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SUMMARY: This final rule removes the regulation that specifies the
current minimum face amount of any security issued by the Government
National Mortgage Association (Ginnie Mae). The removal of the
regulation allows Ginnie Mae to change the current minimum amount of
$25,000. This final rule follows publication of a proposed rule on
April 13, 2004. The Department gave careful consideration to the public
comments and decided to adopt the proposed rule as final without change.
DATES: Effective Date: July 8, 2005.
FOR FURTHER INFORMATION CONTACT: Thomas R. Weakland, Senior Vice
President, Office of Program Operations, or Stephen L. Ledbetter,
Director, Securities Policy and Research, Government National Mortgage
Association, Room 6216, Department of Housing and Urban Development,
451 Seventh Street, SW., Washington, DC 20410; telephone 202-708-2884
(this is not a toll-free number). Speech-or hearing-impaired
individuals may access this number through TTY by calling the toll-free
Federal Information Relay Service at 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. The April 13, 2004 Proposed Rule
HUD published a proposed rule on April 13, 2004 (69 FR 19746) that
invited public comment on the Department's proposal to remove the
regulatory provision at 24 CFR 320.5(c). That regulation provided that
``The face amount of any security cannot be less than $25,000.'' The
proposed rule stated that after this final rule becomes effective, the
minimum face amount for Ginnie Mae securities would be published in
Ginnie Mae's Mortgage-Backed Securities Guide. The proposed rule also
indicated, among other things, that Ginnie Mae would like to offer
investors different denominations of Ginnie Mae guaranteed securities
in order to ensure that Ginnie Mae securities remain attractive to
investors.
Five public comments were received in response to the proposed
rule. The Department carefully considered the issues raised in the
comments, and has decided to adopt the proposed rule as final without
change. For the convenience of the reader, the comments are summarized
below with HUD's response immediately following the comment.
II. Discussion of Public Comments Received on the Proposed Rule
One commenter expressed its support for the proposed rule. The
commenter stated that empowering Ginnie Mae to set its minimum
denominations on a flexible basis will help the marketability of Ginnie
Mae mortgage-backed securities (MBS) to the benefit of FHA and VA
borrowers. Other commenters raised questions or comments about the
proposed rule as follows:
Comment: Removing the $25,000 minimum denomination limit will drain
insured deposits out of depository institutions; this could harm the
liquidity of community banks, and thus weaken their ability to respond
to the credit needs of their communities.
HUD Response: Ginnie Mae MBS are not generally considered
substitutes for insured deposits. Unlike insured deposits, the cash
flow of an MBS depends on the cash flow of an underlying pool of
mortgages. For example, while a certificate of deposit and an MBS may
have identical stated maturities, their effective durations will likely
be substantially different. In addition, the duration of the MBS is
generally more sensitive to changes in interest rates. Due to these
fundamentally different cash flow characteristics, the Ginnie Mae MBS
investor base is quite different from a community bank's depositor
customer base. Removing the $25,000 minimum denomination limit on
Ginnie Mae MBS should thus have little impact on the ability of
community banks to raise funds through the use of insured deposits.
It is also important to note that the fundamental premise of the
Ginnie Mae business model is to help community banks and other
participating institutions respond to the credit needs of their
communities. The Ginnie Mae guarantee allows community banks to raise
funds more easily and cheaply by creating more liquid Ginnie Mae
securities. Because banks know they can pool their loans as Ginnie Mae
MBS and sell them for a good price, they can use these proceeds to make
additional loans in their communities. Any change in the minimum
denomination that benefited investors by enhancing the liquidity of
Ginnie Mae securities would benefit community banks as well, allowing
them to respond more effectively to the credit needs of their
communities by offering lower rates to the low- and moderate-income
borrowers that are at the core of Ginnie Mae's mission.
While a lower minimum denomination is not likely to substantially
increase the investor base of Ginnie Mae MBS, it will result in
increased flexibility for current Ginnie Mae investors. For example, a
lower minimum would make it easier for existing investors to reinvest
principal and interest payments on their Ginnie Mae MBS into more
Ginnie Mae MBS. This would have the effect of increasing the demand for
Ginnie Mae securities, which ultimately results in lower rates for low-
and moderate-income borrowers.
Comment: The investors attracted to smaller denominations of Ginnie
Maes are likely to be individuals who may be less sophisticated than
current investors and less able to anticipate the multiple risks to
which all mortgage-backed security investors are exposed. The proposed
change could expose a class of individuals to risks that they are not
equipped to manage. Moreover, some investors might mistakenly believe
that securities issued in small denominations have the same risk
characteristics as instruments covered by deposit insurance.
HUD Response: The current $25,000 minimum denomination does not
prevent small investors from buying Ginnie Mae securities. Small
investors can already invest in Ginnie Mae securities in amounts
substantially less than $25,000; indeed, investors can invest $1,000 or
less in mutual funds that hold all Ginnie Mae MBS. Through mutual funds
and other similar vehicles, those same investors can invest in
corporate bonds, stocks and other securities that are much more risky
than Ginnie Mae MBS.
The purpose of the $25,000 minimum denomination requirement was not
to protect less sophisticated investors; it was implemented primarily
to limit the operational complexities and expenses associated with the
market as it existed in 1970, when all Ginnie Mae MBS were issued as
physical securities. This was not just the case for Ginnie Mae
securities. For example, the U.S. Department of the Treasury and the
Federal Reserve converted Treasury securities to a book-entry system
over a 20-year period, starting in 1966, in order to lower the
substantial costs associated with safekeeping and transferring
[[Page 33651]]
physical securities.\1\ These costs were partly responsible for
Treasury increasing the minimum denomination for Treasury bills from
$1,000 to $10,000 in 1970.\2\ The move to a book-entry system made it
easier for Treasury to resume allowing Treasury securities to be
offered to investors in smaller denominations; in 1998, Treasury
lowered the amounts for Treasury bills and notes from $10,000 and
$5,000, respectively, to $1,000.
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\1\ In an article published in the December 2004 volume (Vol.
10, No. 3) of FRBNY Economic Policy Review, Kenneth D. Garbade of
the Federal Reserve Bank of New York points out that ``the cost of
safekeeping a bearer municipal bond in the mid-1980s was about $6
per year, and [the] safekeeping costs for bearer Treasury bonds in
the mid-1960s were comparable.'' Obviously, this fee would be
prohibitively expensive on a low minimum denomination security.
\2\ See Chapter 7 of Instruments of the Money Market, edited by
Timothy Q. Cook and Robert K. Laroche, Federal Reserve Bank of Richmond.
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Similarly, Fannie Mae maintained a $25,000 minimum denomination for
its MBS until it moved from physical to book-entry certification.
During the period when Fannie Mae allowed both, it had two different
minimum denominations: $25,000 for a ``Certificate in definitive form''
\3\ and $1,000 for a ``Certificate in book-entry form.'' Today, both
Fannie Mae and Freddie Mac MBS are book-entry securities, and,
consistent with market norms, have $1,000 minimum denominations. It
should be noted that Ginnie Mae eliminated the option for Ginnie Mae
MBS to be issued as physical securities as part of its conversion of
the settlement of all Ginnie Mae securities from the Depository Trust &
Clearing Corporation to the Federal Reserve's book-entry system in
2002.\4\
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\3\ See, for example, the prospectus dated November 12, 1987,
for Fannie Mae Guaranteed Mortgage Pass-Through Certificates.
\4\ Although all Ginnie Mae securities are issued in book-entry
form, investors still have the option, after initial issuance, to
convert their securities to physical form.
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Ginnie Mae investors are protected from unknowingly taking risks by
a statutory and regulatory framework that includes requirements that
broker-dealers be registered with the Securities and Exchange
Commission (SEC). In addition, most broker-dealers are required to join
a self-regulatory organization (SRO). A primary mission of both the SEC
and the SROs is to create and enforce rules for broker-dealers designed
to protect investors. The SEC's principal method for protecting
investors is to ensure that they are provided with timely,
comprehensive and accurate information with respect to prospective
investments. SROs put additional requirements on their members. For
example, broker-dealers are required to have reasonable grounds for
believing that investments are suitable for customers, and they have a
fundamental responsibility for dealing fairly with their customers.
These investor protections will continue to apply for broker-dealers
selling Ginnie Mae MBS regardless of what the minimum denomination
requirement is.
Comment: Just because HUD allowed Fannie Mae and Freddie Mac (the
GSEs) to offer small denomination securities, that is no justification
for allowing Ginnie Mae to do the same.
HUD Response: This comment appears to be alluding to questions that
have recently been raised with respect to certain products offered by
the GSEs that are specifically targeted at retail investors. However,
these products--Investment Notes for Fannie Mae and FreddieNotes[reg]
for Freddie Mac--are senior debt products that are part of their term
note funding programs; they do not represent interests in or receive
payments from mortgages. Thus, unlike Ginnie Mae MBS, these products
have cash flows that are similar to certain types of deposit products,
and may appeal to retail investors as higher-yielding substitutes for
federally-insured deposits. In contrast, as discussed above, Ginnie Mae
MBS are not generally considered substitutes for insured deposits.
Findings and Certifications
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action'' as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the office of the Regulations
Division, Office of General Counsel, Room 10276, 451 Seventh Street,
SW., Washington, DC 20410-5000.
Environmental Impact
This rule removes an existing regulation. The rule does not direct,
provide for assistance or loan and mortgage insurance for, or otherwise
govern or regulate, real property acquisition, disposition, leasing,
rehabilitation, alteration, demolition, or new construction, or
establish, revise, or provide for standards for construction or
construction materials, manufactured housing, or occupancy. Therefore,
in accordance with 24 CFR 50.19(c)(1), this rule is categorically
excluded from the requirements of the National Environmental Policy Act
(42 U.S.C. 4321 et seq.).
Unfunded Mandates Reform Act
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538)
establishes requirements for federal agencies to assess the effects of
their regulatory actions on state, local, and tribal governments and on
the private sector. This rule does not impose a federal mandate on any
state, local, or tribal government, or on the private sector, within
the meaning of the Unfunded Mandates Reform Act of 1995.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally
requires an agency to conduct a regulatory flexibility analysis of any
rule subject to notice and comment rulemaking requirements unless the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities. There are no anti-
competitive discriminatory aspects of the rule with regard to small
entities, and there are no unusual procedures that will have to be
complied with by small entities. The rule removes an existing
regulation. Accordingly, the undersigned certifies that this rule will
not have a significant economic impact on a substantial number of small
entities.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on state and local
governments and is not required by statute, or the rule preempts state
law, unless the agency meets the consultation and funding requirements
of section 6 of the executive order. This rule does not have federalism
implications and does not impose substantial direct compliance costs on
state and local governments and does not preempt state law within the
meaning of the executive order.
List of Subjects in 24 CFR Part 320
Mortgages, Securities.
Accordingly, for the reasons described in the preamble, HUD amends
24 CFR part 320 as follows:
[[Page 33652]]
PART 320--GUARANTY OF MORTGAGE-BACKED SECURITIES
? 1. The authority citation for part 320 continues to read as follows:
Authority: 12 U.S.C. 1721(g), 1723a(a), and 42 U.S.C. 3535(d).
Sec. 320.5 [Amended]
? 2. Amend Sec. 320.5 by removing and reserving paragraph (c).
Dated: May 23, 2005.
Michael J. Frenz,
Executive Vice President, Government National Mortgage Association.
[FR Doc. 05-11312 Filed 6-7-05; 8:45 am]
BILLING CODE 4210-66-P