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Ginnie Mae Funds for Your Retirement
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41-18 CRESCENT ST
LONG ISLAND CITY, NY 11101
47-46 VERNON BLVD
LONG ISLAND CITY, NY 11101
Hernan Barona, E.A
BY JOHN SAVIGNANO, CPA
Many people prefer to have some conservative
holdings in their IRAs and
other retirement accounts. This century
has already produced two nasty bear
markets (in 2000 – 2002 and 2007 –
2009). If a third downturn occurs, investors
will be glad they held some defensive
positions, which might minimize losses
and possibly offer gains.
When it comes to playing defense,
Ginnie Maes may merit consideration.
The nickname comes from the formal
name, Government National Mortgage
Association, or GNMA. This agency
promises investors the payment of
principal and interest from residential
mortgage loans insured or guaranteed
by federal entities, such as the Federal
Housing Authority and the Department
of Veterans Affairs. Ginnie Mae mortgage
bonds are the only mortgage securities
with full federal backing.
Ginnie Mae securities might be considered
the “safe option” for retirement
investing. Yields are not enormous in
today’s environment, but they may be relatively
attractive. Typically, Ginnie Maes
pay one to two percentage points of yield
more than Treasuries. Why should supposedly
safe Ginnie Maes pay more?
One answer rests with mortgage
backed securities. Most bonds lose
value when interest rates rise but gain
value when rates fall because their fixed
yields become more attractive.
Mortgage-backed securities, including
Ginnie Maes, also suffer loses when
rates rise. However, rising rates can cause
a slowdown in mortgage pre-payments
because borrowers are less likely to refinance
their loans. This slowdown means
that Ginnie Mae investors have less
money to reinvest at higher yields.
The opposite phenomenon effects
mortgage securities when rates fall. More
refinancing occurs as homeowners seek
the lower loan rates. That means more
cash flow to investors holding mortgage
bonds and more money to reinvest at
lower rates. Thus, mortgage-backed securities
may lose more than conventional
bonds when rates when rates rise and
gain less when rates fall.
Treasury securities and funds holding
them pay interest that’s taxable at the federal
level, but is generally exempt from
state and local income taxes. Therefore,
these holdings can be especially attractive
to investors in high-tax areas.
Mortgage-backed securities, even federally
backed Ginnie Maes, do not enjoy
state or local tax exemption; they’re
fully taxable at all levels of government.
This relative disadvantage, along with
the complexity and interest rate threats,
may explain the higher yields (verses
Treasuries) that Ginnie Mae offers to
investors. Their tax treatment also might
cause Ginnie Maes to be appealing holding
in retirement accounts where all
the income taxes can be deferred until
money is withdrawn.
Investors can often purchase individual
Ginnie Mae bonds for around $25,000.
Some retirees are pleased with these
“pass-through” securities because they
deliver monthly cash flow, reflecting the
regular payments made on the underlying
mortgages by homeowners. If you
work with a savvy financial adviser or if
you are willing to research Ginnie Maes
on your own, this can be an astute choice.
That said, the Ginnie Mae market is
complex, likely to lead to missteps by novice
investors. Many people prefer owning
shares of a fund and relying on the expertise
of professionals to choose suitable
Ginnie Maes. Diversification and a lengthy
time frame might overcome interest rate
concerns and deliver the benefits of relatively
high yields. Many leading fund families,
including Vanguard, Fidelity and T.
Rowe Price, have established Ginnie Mae
mutual funds with performance records
for investors to evaluate.
In terms of performance, Ginnie Mae
funds generally had positive returns in
2008 when the stock market nosedived.
The past is no guarantee of future results,
but an encouraging track record might
indicate that Ginnie Mae may be worth a
place in a retirement portfolio.
John Savignano is a partner with
Savignano Accountants & Advisors located
at 47-46 Vernon Blvd., Second Floor, in
Long Island City. If you have any questions
or require additional information, please call
John at 718-707-0955.