Government National Mortgage Association's Secondary Mortgage Market Activities

Published by the Government Accountability Office on 1977-03-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME

00552 - [A0891628]

Government National ortgage Association's Secondary Mortgage
Market Activities. CED-77-28. March d, 19'7. 56 pF.
Staff study by Henry Eschwege, Director, Community and Economic
Development Div.
Issue Area: Domestic Housing and Community Development: Federal
    credit Incentives to Stimulate Housing (2104).
Contact: Community and Economic Development Div.
3udget Function: Commerce and Transportation: Mortgage Credit
    and Thrift Insurance (401).
Organization Concerned: Department of Housing and Urban
    Development; Government National Mortgage Association.
Congressional Relevance: House Committee on Banking, Currency
    and Housing; Senate Committee on Banking, Housing and Urbai
Authority: Housing and Urban Development Act of 1968 (12 U.S.C.
    1717). Bmerg'.ncy one Finance Act of 1970, title III (12
    U.S.C. 1452 P' seq.). Housing Act of 1954 (12 U.S.C. 1716 et
    seq.). Emergency Home Purchase Assistance Act of 197el.
    Emergency Housing Act of 1975.
         The Government National Mortgage Association
participates in the buying and selling of mortgages in the
secondary mortgage market.  Findings/Conclusions: The
Association attempts to accomplish its legislatively assigned
missions primarily by: issuing to mortgage originators
commitments to purchase mortgages with primarily below-market
iDterest rates; purchasing and selling such mortgages; and
guaranteeing securities, backed by pools of mortgages, that are
issued by approved mortgage originators. Review of the
Assoriation's sales activity identified a number of alternatives
that rrrant study by the Association because they have
potential to increase revenues or otherwise imprcve operations.
The sale of Association mortgages directly tc the Federal
financing Bank woild allow the Association to adhere to the
Office of Management and Budget's imposed outlay ceiling, while
it would eliminate the need to sell the mortgage in the private
market under unfavorable conditions. Recommendations: The
Association might be able to receive a better return on the sale
of securities if it sold the securities directly to investors
rather than by blocks to syndicates which resell them at a
profit. The Associaticns should also consider reducing the
amount required for a security issue to an amount less than the
present $1 million. (SC)

     i-   .     STUDY BY THE STAFF OF THE
                UNITED STA TES

               Government National
               Mortgage Association's
               Secondary Mortga.ge
               Market Activities
               This study develops information on the Gov-
              ernment National Mortgage Aociation's
              buying and selliig of mortgages in the second-
              ary mortgage market. It also discusses GAO's
              report of November 29, 1976, which recom-
              mended that the Secretary of Housing and
              Urban Development consider tie desirat ity
              of alternatives to tt,e present mortgage
              practices hich night increase revenuessales or
              otherwise improve operations.

              CED-77- 28                                 MAhi 1   3, 1 9 7 7

     This study was prepared by GAO's
                                      Community and Economic
Development Division for the Subcommittee
                                           on Housing'and
Urban Affairs, Senate Committee on
                                   Banking, Housing and Urban
Affairs.  The Subcommittee requested that we
                                              develop informa-
tion on the Government National Mortgage
                                          Association's buying
and selling of mortgages in the secondary
                                           mortgage market.
     After testimony was provided to the
                                         Committee in September
1976, we made arrangements to issue
                                    (1) a report to the Secre-
tary ct Housing and Urban Development
                                      outlining the areas that
need improvement in the Association's
                                      secondary mortgage market
activities (CED-77-6, Nov. 29, 1976),
                                       and  2) a staff study
describing the Association's role
                                  in the secondary mortgage

     The staff study presents the most
                                       current data available
at the time of our review but has
                                  not been updated to reflect
changes that may have taken place
                                  since our testimony in
September 1976.

                             Henry Eschwege
                             Director, Community and
                             Economic Development Division
                                         Department of Housing and
                                           Urban Development


      The Housing and Urban Develcoment Act directs the
      Government National Mortgage Acsociation to parti-
      cipate in the secondary mortgage market for the
      purpose of:

              -- Making mortgage financing available for
                 those Americans unable to obtain adequate
                 housing under established financial

              -- Retarding or stopping declines in
                 homebuilding and mortgage lending.

              -- Encouraging mortgage originators to epand
                  their allocation of funds for mortgage

              -- Attracting nontraditional sources of
                 long-term investment capital to the mort-
                 gage market.

      The Association attempts to accomplish these missions
      primarily by

              -- issuing to mortgage originators commitments
                 to purchase mortgages with primarily
                 belo%-market interest rates;

              -- purchasing and selling such moLtgages; and

              -- guaranteeing securities, backed by pools of
                 mortgages, that are issued by approved
                 mortgage originators.   (See p. 8.)

      A commitment is an agreement by the Government
      National Mortgage Association to purchase a specific
      type of mortgage bearing a specified interest rate
      at a specified price from a mortgage originator.
      The interest rate specified in the commitment is
      usually lower than the market interest rate.

   iear She . Upon removal, the report
  cover date should be noted hereon.     i                  CED-77-28
Commitments are intended to
                             encourage mortgage
originators to make loan commitments
which are intended to make             to homebuilders
                            it easier for builders to
obtain construction financing.
                                  The commitment also
insures builders that homebuyers
                                   can obtain a mort-
gage and enables the  uilders to advertise the
availability of below-market
                              interest rates.
Legislation authorizing the
                             Government National
Mortgage Association to make
                              commitmenrts and purchase
mortgages places a ceiling
                            on the combined amount
of commitments and purchases
                              that the Association may
have outstanding at any time,
                               which was $20.5 billion
as of March 31, 1976.  (See p. 10.)
The Office of Management and
                              Budget must approve the
Association's use of the legislative
                                       authority.  The
Office of Management and Budget
                                 determines timing and
amount of authority to be released
based on requests made              to the Association
                       by the Secretary of Housing
and Urban Development and the
                               President.   The types
of mortgages to be purchased
                              are mutually agreed on
by the Office of Management
                             and Budget and the
Secretary of Housing and Urban
                                Development with recom-
mendations from the Government
                                National Mortgage

The methods the Association
                            used to satisfy commitments
and the amount of commitments
                              each method satisfied
during the period JuLy 1, 1972,
                                through March  1,
1976, were:

    -- The holder of the commitment
                                     took action to
       cancel the commitment or allowed
                                         it to expire
       by not delivering mortgages
                                    for purchase by
       the Association within the
                                   specified time
       period--$.4 billion.

    -- The obligation under a commitment
       by the commitment holder or        was assumed
                                    a third party with
       the Association paying the
                                   difference between
       the commitment price and current
                                         market price
       at the time of assumption--$6.2
    --The Government National Mortgage
      purchased the mortgages when     Association
      $12.1 billion.  (See p. 23.)

The Association finances its purchases of mortgages
and related operations through borrowings from the
Treasury and revenues it receives primarily from
proceeds from the sale of mortgages and mortgage-backed
securities. During fiscal years 1973-75, the Asso-
ciation had revenues of $5.8 billion, of which 75.1
percent ($4.4 billion) came from mortgage and security
sales. Through these sales, the Association minimizes
its borrowings from the Treasury by substituting
private for Federal funding. (See p. 28.)
Because the Government National Mortgage Association,
as intended by its authorizing legislation, generally
purchases mortgages with below-market interest
rates at a higher price than private investors are
willing to pay, it usually suffers a loss when it
sells these mortgages on the private market. Con-
sequently, the Association can minimize those losses
best by timing its sales to take advantage of the
most favorable market conditions.  (See p. 29.)
The amount and timing of its sales are heavily
influenced by the Office of Management and Budget's
ceiling on the Association's net outlays (difference
between expenditures and revenues), which affect
its Treasury borrowings. This net outlay ceiling
can place the Association in the position of having
to sell mortgages to stay within the outlay ceiling
even though losses could possibly be minimized by
delaying sales until market conditions improved.
In fiscal year 1975, the Office of Management and
Budget allowed the Government National Mortgage
Association to exceed the ceiling by $1.9 billion
in order to avoid excessive losses.  (See p. 33.)
Between July , 1972, and March 31, 1976, the
Association has used a variety of sales methods
to dispose of $9.1 billion worth of single-family
mortgages. Two of the sales methods--security
auctions and whole loan auctions--were used to
sell most of the single-family mortgages--about
$7 billion.  (See p. 34.)
The Association has had difficulties selling its
multifamily mortgages and has tried four different
sales methods between July 1, 1972, and March 31,
1976, under which it sold $1.1 billion of such
mortgages. Most mortgages--$676 million--were
sold by the whole loan method.  (See p. 38.)

One of the Government National Mortgage Association's
missions is to attract new investors into the mort-
gage market, thereby increasing the amount of invest-
ment capital available for mortgage origination.
This is accomplished primarily through the sale of
securities backed by Association-held mortgages and
by guaranteeing securities--backed by pools of
mortgages--issued by mortgage ortginators. As of
March 31, 1976, outstanding mortgage-backed securi-
ties guaranteed by the Association had a value of
$23.3 billion; 35 percent of these securities had
been iLurchased by the category of investors that
normally did not invest capital in the mortgage
Mortgages sold individually are purchased almost
exclusively by traditional investors in the mortgage
market, such as mortgage bankers and savings and
loan institutions.  (See p. 45.)
GAO's review of the Association's sales activity
identified a number of alternatives that it believes
warrant study by the Association because they have
potential to increase revenues or otherwise improve
operations. In a report to the Secretary of Housing
and Urban Development (CED-77-16, November 29, 1976),
GAO recommended that the desirability of implementing
these alternatives be determined.
The Government National Mortgage Association's
ability to hold mortgages during periods when
 interest rates are relatively high is restricted
by the Office of Management and Budget's required
end of the fiscal year outlay ceiling. The sale
of Association mortgages directly to the Federal
Financing Bank would allow the Association to adhere
to the Office of Management and Budget's imposed
outlay ceiling, while it would eliminate the need
to sell the mortgage in the private market under
unfavorable conditions, thereby providing a potential
opportunity to minimize losses. Negative features
of such sales, such as worsening market conditions,
must also be considered.   (See p. 50.)
When the Association holds a security auction, it
offers a block of securities for sale requiring
that the potential investor submit a bid for the

entire block. As of March 31, 1976, only two large
syndicates have submitted bids and purchased
securities. The syndicates then resell the securi-
ties at a profit. The Association might be able
to receive a better return on the sale of securities
if it sold the securities directly to investors.
(See p. 54.)
The Association requires that a security issue have
a minimum value of $1 million. Its officials indi-
cated they could have sold as securities some of the
$501.3 million worth of mortgages the Association
sold through whole loan auctions since January 1975
if the minimum had been $100,000. The Government
National Mortgage Association should consider reducing
the amount required for a ecurity issue to an amount
less than $1 million because (1) its securities have
been sold for a better price than the individual
mortgages, and (2) securities' sales have attracted
more nontraditional investors than have mortgage
sales. (See p. 53.)

                          C o   n   t e n t s



               Secondary mortgage market                        1
               Government participation                         1
               Scope of review                                  3
                                        OF THE
             ASSOCIATION                                        8
               Mortgage commitments and
                                          urchases              8
               Disposition of commitments
                 other than purchase       via methods
               Guarantees o: mortgage-backed                17
                                              securities    21
               Comparison of commitments
                                          to housing
                 starts and interest rates
               Factors influencing the
                                       sale of mortgages
                 and securities
              Disposition of mortgages                     29
              Determination of sales                       34
                                      price                41
              Yields on GNMA's and other
              Attraction of nontraditionalinstruments      42
                                            investors      45
              Management and liquidation
                                          of acquired
              Trustee operations                           48
             An alternative to private
                                        market sales       50
             Opportunity to obtain more
               in sales activities       competition
             Potential savings through
               of securities to private the direct sale
                                         investors         54
FHA     Federal Housing Administration
FHLMC   Federal Home Loan Mortgage Corporation
FNMA    Federal National Mortgage Association
GAO     General Accounting Office
GNMA    Government National Mortgage Association
HUD     Department of Housing and Urban Development
OMB     Office of Management and Budget
VA      Veterans Administration
RFC     Reconstruction Finance Corporation
                             CHAPTER 1

     The Housing and Urban Affairs Subcommittee, Senate
Committee on Banking, Housing and Urban Affairs, requested
on October 22, 1975, that we review the Government National
Mortgage Association's (GNMA's) operations in the secondary
mortgage market. This review was to provide the Subcommittee
information on the following matters during the period July 1,
1972, through March 31, 1976:

     -- The role played by GNMA in th\, secondary mortgage
     -- The nature and level of GNMA activities during the
        specified period.

     --The manner in which GNMA activities are conducted.

     -- The criteria used by GNMA in its decisions to sell
        mortgages and in determining sales price.

     On September 20, 1976, we presented testimony on GNMA's
secondary mortgage market activities before the Senate Com-
mittee on Banking, Housing and Urban Affairs.

     On October 5, 1976, arrangements were made with the
Subcommittee to finalize the request by issuing (1) a report
to the Secretary pointing out the need for certain improve-
ments in GNMA's mortgage activities and (2) a staff study
presenting additional information on GNMA's mortgage-buying
and -selling activities.  (See p. 50.)
     GNMA was created by the Housing and Urban Development
Act of 1968 (12 U.S.C. 1717) as a Government-owned corporation
within the Department of Housing and Urban Development (HUD).
All GNMA's powers and duties are vested in the Secretary of
HUD. The Secretary directs the administration of GNMA and,
within limitations of the law, determines the general policies
which govern GNMA's operations.


     The majority of home mortgages are made by deposit
institutions, such as savings and loan associations, mutual
savings banks, and commercial banks, which obtain funds from
depositors and invest these funds in mortgages as an earning
asset. These institutions operate in the primary market where

   investors normally allot
                            a portion of their available
   anticipated funds for                                 or
   mortgages.            permanent investment in residential

          These primary lenders
   an independent group of         and investors are supplemented
                              mortgage     lenders who originate mort-  by
   gages primarily for sale
   of lenders, known as mortgageto others. This independent
   because of the following            bankers, came into being group
         -- There are significant
                                     differences in the supply
            mortgage money relative                                 of
                                        to demand in various parts
            of the country and there
            a State or major metropolitan are also differences within
        -- It is not always economical
                                              for primary investors
           have their offices where                                   to
                                         there is mortgage demand.
        The mortgage banker brings
  investor together by originating       the borrower and primary
  in anticipation of finding              mortgages for his own account
  Because mortgage bankers       a   ready   market for such loans.
  usually do not have enough  do   not   accept   deposits of
  ments and, therefore,          capital to make permanentfunds, they
                           seek to sell the mortgages            invest-
  originated. Some primary                                  they have
 because they are located lenders are also sellers of mortgages
 generate enough savings in mortgage markets which do not
                             to satisfy local mortgage
       The secondary mortgage
 sale and purchase transactions   market, therefore, consists
 originate mrtgages for               between organizations thatof
 all or some of the mortgages own account but expect to sell
 tutions (i.e., thrift              they originate,
                          institutions, insurance and other insti-
 State pension funds) interested                        companies,
 investments.                           in purchasing mortgages and
      Although the secondary
 highly organized with         mortgage market
                        a centralized trading had    not been
 two significant developments                   facility, recently
 operations. The first          were implemented to improve
 gage Market Information was  the creation of the Automated its
                          Network, Inc., in June                Mort-
 mortgage trade associations                       1974 by five
Corporation (PHLMC) (see       and the Federal Home
                           page 5 for a discussion Loan Mortgage
The Network is a computerized                         of FHLMC).
                                 data bank which allows
subscribers--240 as of                                    its
                        October 1976--to list instantly,
computer terminals, mortgage
                                information,                  via
buy and sell, delivery
                        times, loan-to-valuesuch   as offers to
                                               ratios, prices
on short-term money
bonds, international market  instruments, selected
                      money rates, and the daily notes and
trdding summary. The Network's                      securities
                                   objective is to increase

 the liquidity of mortgage investments
 buy and sell them. Actual transactionsby making it easier to
                                         are not handled
 through the system but are handled privately
 person-to-eerson contact.                    by telephone or

      The second development was establishment
                                                 of an interest
 rate futures trading market in GNMA mortgage-backed
 cates )y the Chicago Board of Trade in                 certifi-
 development of this market stems from   October  1975.   The
 interest rates which recently have beenthe volatility in the
                                          creating new risks
 and expenses for the morteage originator
                                           and investor. Thus,
 the purpose of this market, like commodity
 allow the risk to be shifted from mortgage exchanges, is to
 to speculators. The originator/investor      originator/investor
 insulate his profit margin against loss   is  then able to
 speculator with the possibility of a     while  providing the
      Trading units, called contracts,
 certificates with a principal balance are GNMA mortgage-backed
                                        of $100,000 and a stated
 interest rate of 8 percent. Around 114,000
 tracts were traded during the first year      GNMA futures con-
                                           of operation. Activ-
 ity in the futures trading market for
                                       GNMA futures contracts
 is regulated by the Commodity Futures
                                       Trading Commission.
      A bas.c dilemma of the mortgace market
fact that as interest rates rise, deposits     stems from the
tutions decline and funds available for      with  thrift insti-
                                          mortgagse lending also
decline. Consequently, mortgage
who rely on the secondary market barkers   and other originators
                                  for the permanent placement
of their mortgage loans find their traditional
unavailable. Under these circumstances,           sources
                                           the mortgage bankers
have used their available capital to
they are unable to sell and thus they originate mortgages which
originating new mortgages.             lack the capital for


      The Government's initial participation
mortgage market was in 1935, when             in the secondary
                                   the Reconstruction Finance
Corporation (RFC) was authorized to purchase
Housing Administration (FHA)-insured           certain Federal
                                      mortgages covering
residential housing. These purchases
                                       were authorized to
supplement the inadequate level of mortgage
                                              funding available
in the secondary market. In 1938, in
                                       part  because RFC pur-
chases were insufficient to meet demands
industry, the Federal National Mortgage   of  the housing
                                         Association (FNMA)
was created to purchase FHA-insured
FNMA's authority was expanded to allow            In 1948
                                        it also to purchase
Veterans Administration (VA)-quaranteed
                                         mortgages. The
following section discusses the Government's

in th secondary market relating to the
GoveLnment National Mortgage Association creation of the
Government participation prior
to creation of GNMA

     The Housing Act of 1954 (12 U.S.C. 1716,
                                              et seq.),
entitled "Federal National Mortgage Association
amended Title III of the National Housing       Charter Act,"
Federal Government's participation in     Act and recast the
                                      the secondary market.
This was occasioned by the following:

    -- New types of Government-backed mortgages,
       renewal, low-cost and cooperative housing, such as urban
       assistance to encourage loan origination. required

    --A danger existed that market forces
                                           would result in
       increased offerings to FNMA of overpriced,
                                                  less saleable
      residential and specific purpose mortgages
      where FNMA's original secondary mortgage    to a point
      be adversely affected.                    function woul.

     -- Several organizations concerned with
                                             homebuilding and
        mortgage lending, such as the National
                                               Association of
        Home Bui ders and the United States Savings
        League, had advocated the formation of      and Loan
                                               a secondary
        market facility which would ultimately
                                               become privately
        financed and operated.
     In recognition of the above, the FNMA Charter
FNMA to establish separate accountability          Act required
                                          for the following
three functions:

    --The original support program for FHA-insured
      VA-guaranteed mortgage financing, including and
      housing loans insured by the Farmers Home     some rural
      tior, and FHA-insured home improvement     Administra-
                                              loans. Under
      this function FNMA was authorized to provide
      mentary assistance to the secondary market     supple-
                                                   for home
      mortgages by providing a degree of liquidity
      mortgage investments. By purchasing mortgages  for
      originators, such as mortgage bankers,           from
      provide, as needed, a market where the  FNMA  would
      could sell their mortgages and obtain originators
                                             funds with
      which to originate new mortgages.
    -- Special assistance was to be provided
                                             through FNMA's
       purchase of urban renewal, low-cost and
       housing and other new types of Governmentcooperative
       instruments that were not attractive to    financing

       investors because of their below-market interest rates.
       Such assistance was to be provided when either the
       President of the United States should deem it in the
       public interest or the Congress should specifically
       designate special programs. Eligible mortgagee had to
       meet, in general, the purchase standards of private
       mortgage investors, but specifically were not required
       to be readily acceptable to private investors.
     -- The management and liquidation of federally owned
        mortgages in the existing portfolio. FNMA's responsi-
        bilities consisted of managing and liquidating these
        mortgages with a minimum adverse effect on the home
        mortgage market and a minimum loss to the Government.
Government participation after
the creation of GNMA

     The Housing and Urban Development Act of 19Fq (12 U.S.C.
1717) was occasioned by the reformation of the Fr'eral budget
to a unified basis. Under the unified budget concept, FNMA's
expenditures would have been carried as budget outlays even
though the purchasing funds were obtained principally through
borrowings from the public.  It was feared that representation
of FNMA's expenditures as budget outlays would have an adverse
effect on FNMA's response to home financing demands, so the
Congress enacted legislation to partition FNMA into two con-
tinuing entities. One entity, the new FNMA, was created to
carry out secondary market operations financed entirely by
private sources. The other entity, GNMA, war established
within the Department of Housing and Urban Development to
carry out, as needed, certain of the activities carried out
by the old FNMA.

     In July 1970, to strengthen and further develop the
secondary mortgage market, primarily in conventional mortgages,
the Federal Home Loan Mortgage Corporation was created under
Title III of the Emergency Home Finance Act of 1970 (12 U.S.C.
1452 et seq.). FHLMC, which is wholly owned by the Federal
Home Loan Bank System, was created to buy and sell conven-
 ional, FHA-insured and VA-guaranteed mortgages. The same
act also amended the Housing and Urban Development Act of 1968
to authorize FNMA to purchase and sell conventional mortgages.
Before 1970 there was no secondary market facility for
conventional residential mortgages.

     FNMA and FHLMC perform similar functions. The primary
differences between FNMA and FHLMC are as follows:

    -- FHLMC was created primarily to purchase conventional
       mortgages for which there was no secondary market

      facility. FNMA, on the other hand, was established to
      purchase FHA-insured and VA-guaranteed mortgages and
      until July 24, 1970, was not authorized to purchase
      conventional mortgages.

    -- FHLMC purchases mortgages primarily from savings and
       loan organizations, whereas FNMA purchases mortgages
       primarily from mortgage banker organizations.
     Under the 1968 act, GNMA was directed to carry out the
following activities that were previously carried out by the
old FNMA:

    -- Perform secondary mortgage market activities funded
       through Government borrowings.

    -- Purchase home mortgages as directed by either the
       President or the Congress.

     -- Manage and liquidate a portfolio of mortgages formerly
        held by FNMA.
    -- Act as trustee for a number of trusts for which FNMA
       had been the trustee.

     The act also authorized GNMA to guarantee securities,
backed by pools of mortgages, issued by either the new FNMA
or by other GNMA-approved mortgage originators.

     GNMA's authority to sell mortgages was changed
significantly in 1969, when it was authorized to sell mortgages
at a discount (less than the unpaid principal balance).
     Before 1974 GNMA as authorized to purchase and sell
mortgages that were Government insured or guaranteed. GNMA's
authority was broadened by the Emergency Home Purchase Assist-
ance Act of 1974, which authorized GNMA to participate in the
single family conventional mortgage market. Subsequently,
GNMA was authorized by the Emergency Housing Act of 1975 to
purchase and sell conventional multifamily mortgages.
Servicing agreements

     GNMA fulfills its legal responsibility by making the
major decisions on policy matters, such as the timing, amount,
and methods of mortgage purchase and sales. However, the
day-to-day operations of GNMA's programs are carried out by
FNMA and a portion of one program is carried out by FHLMC.

     GNMA is bound to the new FNMA and FHLMC by servicing
agreements which provide that these organizations perform
certain services to administer and operate GNMA's programs.

     The combined services agreement between FNMA and  NMA
provides that FNMA administer and operate all GNMA Special
Assistance Programs, the GNMA/FNMA Conventional Home Mort-
gage Program, and perform certain services in connection with
the GNMA mortgage-backed security program, as such programs
exist and are operated as of June 1, 1975.  The mortgage
purchase and servicing agreement between FHLMC and  NMA pro-
vides that FHLMC perform certain services to administer the
GNMA/FHLMC conventional home mortgage program.  The agreements
among GNMA and FNMA and FHL'C stipulate that FNMA and FHLMC
shall provide the necessary personnel, equipment, and facili-
ties to perform their respective services.

      Services to be performed under both agreements include
approval of sellers, administration o   commitments, loan
review, purchasing mortgages, supervision of servicing,
recordkeeping, mortgage liquidation, and   roperty disposi-
tion.   Additional services provided under the FNMA/GNMA
agreement include servicing FHA project mortgages in GNMA's
portfolio, spot checking purchased conventional home mort-
gages, selling mortgages, and reviewing mortgage-backed

     GNMA incurred servicing expenses of $22.5 million--
$21.1 million to FNMA and $1.4 million to FHLMC--under both
agreements during the 3-1/2 year period from July 1, 1972,
to December 31, 1975.


     We conducted our review at GNMA headquarters in
Washington, D.C.; interviewed GNMA officials; obtained de-
scriptions of GNMA's activities; identified prices paid and
received for mortgages in GNMA's purchasing and selling opera-
tions; and evaluated GNMA's criteria regarding the purchase
and sale of mortgages.  We examined pertinent legislation,
administrative regulations, and records of operation.

     We also interviewed officials of FNMA and FHLMC
concerning their selling practices, officials of organizations
that participate in the secondary market for mortgages, and
knowledgeable individuals in the field of housing finance.
In addition, we obtained statistical data on economic factors,
such as housing starts and mortgage interest rates, which
affect GNMA's operations.

                          CHAPTER 2

     The Housing and Urban Development Act of 1968 (Act)
directs GNMA to participate in the secondary mortgage market
     -- Make mortgage financing available for segments of the
        population which are unable to obtain adequate housing
        under established financial programs.

     -- Retard or stop declines in homebuilding and mortgage
     -- Encourage originators to expand their allocations for
        mortgage investments.
     -- Attract nontraditional sources of long-term investment
        capital to the mortgage market.
     GNMA attempts to accomplish these missions primarily by:
     -- Issuing to mortgage originators commitments to purchase
        mortgages with primarily below-market interest rates.
     -- Purchasing and selling such mortgages.

     -- Guaranteeing securities, backed by pools of
        mortgages, that are issued by approved mortgage
     In addition the Act directs GNMA to manage and liquidate
federally owned mortgages, acquired from FNMA and other Govern-
ment agencies, with minimal adverse effect on the home mortgage


     A commitment contract is an agreement by GNMA to purchase,
at a pre-established price, mortgages that are made by a mort-
gage orginator. The commitment stipulates the type of mortgage,
dollar amount, mortgage interest rate (generally below-market
interest rate), and date by which the commitment must be
exercised.  For instance, GNMA might make a commitment with a
mortgage originator to purchase $5 millioni worth of conven-
tional mortgages with interest rates of 8 percent within 1
year from the commitment date.

      Commitments are directed at stimulating homebuying
 home construction by assuring originators that the       and
 they originate may be sold to GNMA if the- do not
 hold them. This assurance is intended to (1)       want to
 originators to make commitments to builders and to
                                                     make it
 easier for the builder to obtain construction financing
 and (2) sell homes because it assures the builder
                                                    that poten-
 tial homebuyers will be able to obtain mortgage financing.

     Commitments are also intended to make homebuyers'
mortgage payments lower than they would be otherwise
the commitments stipulate the interest rate that the since
must bear, which is generally below-market interest mortgages
     Although the availability of below-market interest
through GNMA's various programs are intended to stimulaterates
homebuying and home construction, studies performed
and an economist on the President's Council of Economic HUD
Advisors to ascertain if the programs are meeting their
tives have resulted in different conclusions. Our        objec-
these studies and discussion with financial experts review  of
GNMA's programs disclosed the following reasons for
difficulty in measuring the impact of GNMA's program:the

     -- The program is relatively new, particulary the
        portion authorized in 1974 and 1975 under emergency
     --Econometric models, which financial experts use as
       primary method to measure programs of this type, area
       not sufficiently developed to measure GNMA's program.
     Presently GNMA is authorized to make commitments for
FHA, VA, and conventional single and multifamily mortgages.
Before September 1974, however, most commitments
                                                 were for
FHA-insured and VA-guaranteed mortgages on single family
multifamily dwellings. On October 18, 1974, GNMA was      and
authority to make commitments for conventional single given
mortgages and on July 2, 1975, for conventional multifamily

     Commitments to purchase single family mortgages provide
a 1-year period during which the mortgages must be
                                                   made and
delivered to GNMA for purchase. A single exention of
can be granted. Multifamily commitments provide periods months
2 years for delivery with the possibility of more than    of
extension of 30 days each.
     If and when an originator delivers mortgages for
to GNMA against an outstanding commitment, GNMA pays

originator the price agreed to in the commitment contract
and becomes the holder of the mortgages. By selling the
mortgages to GNMA, the originator obtains capital which may
enable him to make additional mortgages while at the same
time continue to service the mortgage for a fee equal to
three-eighths of one percent a year of the unpaid principal.

     In addition to purchasing mortgages against commitments,
GNMA, before fiscal year 1975, purchased mortgages directly
from originators through immediate purchase contracts. How-
ever, since then GNMA's mortgage purchases have been limited
to purchases against outstanding commitments. In a few
cases FNMA has been permitted to purchase mortgages against
GNMA commitments.

Authority for GNMA commitments
and purchases

     GNMA's mortgage commitment and purchase activities,
referred to as its special assistance functions, are carried
out under two separate authorities--traditional special
assistance and emergency special assistance.

     Traditional special assistance

     The Housing and Urban Development Act of 1968 (1968 Act)
transferred traditional special assistance authority to GNMA
from the predecessor, FNMA. Under this traditional special
assistance function, GNMA is authorized to make commitments
to purchase and to purchase mortgages of certain types either
selected by the President or identified by the legislation.

     Section 305(c) of the 1968 Act authorized $5.6 billion
as of March 31, 1976, to make commitments and purchases of
specific types of mortgages selected by the President. Under
this authority, GNMA can make commitments to purchase and can
purchase all types of mortgages, except conventional, when and
as directed by the President.

     Sections 305(e), (f), and (g) of the 1968 Act provide
a total of $2.2 billion to make commitments to purchase and
to purchase specific types of mortgages identified within
those sections. A breakdown of the $2.2 billion by section
of the 1963 Act follows.

     -- Section 305(e)--$225 million for cooperative housing.

    -- Section 305(f)--$224 million for armed services and
       low- and moderate-income housing.

    -- Section 305(g)--$1.75 billion for new low-cost housing.

     The amount of GNMA mortgage commitments and purchases
under each authority is limited by the legislative ceilings
on the total combined amount of commitments outstanding
and mortgages held in GNMA's portfolio under each authority
at any one time. When the total amount of GNMA commitments
and mortgages reaches the ceiling level, GNMA is prohibited
from making any new commitments under that authority. How-
ever, as it disposes of commitments made or sells mortgages
purchased pursuant to that authority, it can then make new
commitments up to the amount of the commitments disposed of
or mortgages sold. This action is referred to as "rolling
over" mortgages and is also applicable to the emergency
special assistance programs discussed below.

     The following chart presents the status of GNMA's
commitments, purchases, and authorization balance, as of
March 31, 1976, for each section of the Act.

              Total                                       Net
Section of    authori-    Purchases    Commitments   authorization
 the Act      zation     outstanding   outstanding      balance
              ------------------- (millions)-----------
  305(c)     $5,551.2    $3,385.4        $1,801.5     e     364.3
  305(e)        225.0       112.5                           112.5
  305(f)        224.0       170.8                -           53.2
  305(g)      1,750.0       408.4           202.1         1,139.5
    Total    $7,750.2    $4,077.1       $2,003.6      $1,669.5
GNMA's fiscal year 1977 budget request indicates it does not
intend to issue commitments during that fiscal year under any
of the above programs.

     Emergency special assistance
      Emergency special assistance was authorized by the
Emergency Home Purchase Assistance Act of 1974 (12 U.S.C.
1723), approved October 18, 1974, and the Emergency Housing
Act of 1975 (12 U.S.C. 2701), approved July 2, 1975. These
acts authorized $7.75 billion and $10 billion, respectively,
in new mortgage commitment and purchase authority over and
above GNMA's traditional special assistance authority. This
authority was granted for a limited, specified period.

     The 1974 Emergency Act (1974 Act) amended the Housing and
Urban Development Act of 1968 by providing that the authority
could be utilized whenever the Secretary of HUD finds infla-
tionary conditions are having a severely disproportionate

effect on the housing indus;try, and that a resulting reduction
in the volume of home construction or acquisition threatens
co affect the economy and to delay the orderly achievement
of national housing goals.    The 1974 Act broadened GNMA's
authority by authorizing the commitment and purchase of
conventional single family mortgages as well as FHA and VA
mortgages. The 1974 Act stipulated that the total amount of
outstanding commitments and purchases under this new authority
should not exceed $7.75 billion outstanding at any one time.
The total commitment authorization was fully released by
June 24, 1975, and fully committed by August 11, 1975.

     The 1975 Emergency Act extended GNMA's purchase authority
under the 1974 Act to July 1, 1976, and authorized an addi-
tional $10 billion, but provided that funds authorized under
the 1975 Emergency Act were subject to release in an appro-
priation act. GNMA's authority was broadened further to
include conventional mortgages on multifamily structures and
condominium units.  The 1976 Appropriation Act only released
mortgage purchase authority of $5 billion, which was available
for commitment through July 1, 1976.  Only $3 billion of the
$5 billion authority provided by the 1976 Appropriation Act
was actually made available to GNMA for commitments in fiscal
year 1976.

Mortgage commitment and
purchase programs

     GNMA classifies specific commitments and purchases of
mortgages by various programs. As of December 31, 1975, GNMA
had a total of 16 programs under which it had issued commit-
ments or purchased mortgages since July 1, 1972.  The following
are examples of 2 of the 16 programs.

     Program Number 19--FHA and VA single and multifamily
mortgages for prefabricated housing and ousing which repre-
sents the development of new and better construction methods.

     Program Number 20--Purchase of FHA and VA single and
multifamily mortgages on properties in Guam.

     Each program represents a specific authorization to make
commitments and purchases of certain types of mortgages
usually at a stipulated interest rate.

Timing and amount of commitments

     The decision to make commitments to purchase and the
total amount to be committed is determined by a combination
of actions by the Congress, the President, the Office of

 Management and Budget (OMB),
                               and the Secretary of HUD.
 input in the decisionmaking                               GNMA's
                              process consists of suggestions
 to the Secretary concerning
                              the status of the housing
 and the need for governmental                           market
 type and amount of mortgages   intervention, including.the
                               to be purchased.
       The actual timing and amount
                                      of funding authority
  apportioned to GNMA is determined
                                      by OMB based on requests
  made by HUD and the President.
                                    HUD's requests are based
  combination of economic indicators,                          on a
                                        including national housing
  starts, interest rates, feedback
  their willingness to participate from builders and lenders on
                                     in a GNMA program, and
  analyses indicating the effects
                                   of various funding levels
 GNMA's outlay ceiling.                                         on
                          The amount initially requested
 and apportioned by OMB may
                             be substantially less than     from
 congressional authorization.                              the
 orized $5 billion of emergency For example, the Congress auth-
                                  special assistance authority
 for conventional, FHA, and
                             VA housing under the 1976
 priation Act, pursuant to                               Appro-
                            the Secretary of HUD's finding
 inflationary conditions are                                   that
                              having a severely disproportionate
 effect on the housing industry,
                                   as discussed on page 11 of
 this report.   However, HUD made only $3
 commitment during fiscal year              billion available for
Determination of mortgage
                          interest rates
     GNMA determines the interest
it makes commitmernts or purchases rates of mortgages for which
                                   under traditional special
assistance based on recommendations
the VA for VA-guaranteed             from the Administrator of
                          mortgages and from the Secretary
HUD for FHA-insured mortgages.                             of
rates vary among traditional     The specified mortgage interest
                              programs.  For instance:
     -- Four of GNMA's programs
                                specify that the mortgages
        have interest rates equivalent
                                       to the maximum FHA
        rate prevailing at the date
                                    of commitment.
     -- Another program permits
        between 7 percent to the interest rates to vary from
                                  maximum allowed FHA rate.

     -- Two other programs specify
                                   a rate of 8 percent.
     The interest rates of mortgages
                                      for which GNMA makes
commitments and purchases
                           under emergency special assistance
are specified in the legislation.
                                    The law now limits the
rate specified in commitments
                               to the lesser of 7.5 percent
or the rate set by the Secretary
                                  of HUD for mortgages insured
under Section 203(b) of the
                             National Housing Act.

Determination of purchase price

     The commitment to purchase mortgages specifies the price
that GNMA agrees to pay the originator when GNMA purchases
mortgages against the commitment issued under both the tra-
ditional and emergency programs. For example, the commitment
states that GNMA will purchase the mortgages at 98. This
means that GNMA will pay the originator 98 percent of the
loan's unpaid balance at the time it is delivered for pur-
chase. In ffect then, GNMA is purchasing the mortgages at
a 2-percent discount. GNMA has made commitments at purchase
prices rangin from 96 to 100 under its current programs.

     According to GNMA officials, the purchase prices are
determined subjectively. In establishing the purchase price
the primary consideration is given to providing for a discount
that will cover GNMA's costs to the extent feasible under
prevailing market conditions. However, according to GNMA
officials, when commitments are being made concurrently under
several programs with different interest rates, the above
consideration may be waived in favor of setting a purchase
price that will maintain a comparable effective interest
rate (combination of purchase price and mortgage interest
rate) among different programs. This is done to maintain a
competitive balance among GNMA's programs so that commitments
under one program do not become more attractive than commit-
ments under its other programs.

     GNMA usually purchases mortgages at a discount. However,
in a few instances, because of a desire to stimulate the
origination of a certain type of mortgage, GNMA has made com-
mitments with a purchase price of 100, which means that no
discount is involved. In these instances, GNMA agrees to
purchase the mortgage at a price equivalent to 100 percent
of the loan's unpaid balance at the time it is delivered for

Fees charged on commitments and purchases
     In issuing commitments and purchasing mortgages, GNMA
generally imposes certain fees on the originator in addition
to the discount. These fees are:

     -- A commitment fee, varying from one-hclf of 1 percent
        to 2 percent of the commitment amount depending on
        the program, imposed at issuance of the commitment.

     -- A processing fee of one-one undredth of 1 percent
        of the commitment imposed at issuance of the

      -- A purchase and marketing fee or a loss reserve
         marketing fee varying from one-half of 1 percent
         1.5 percent of the unpaid principal balance
         on the program, which is deducted from the
         GNMA pays for the mortgage.

      GNMA's Sellers Guide permits the originator
                                                  to pass
 these fees on to the builder and homebuyer.

 Effect of discount and fees on builders
 and homebuyers

      GNMA's commitment generally requires the mortgage
originator, if he elects to exercise the commitment,
 the mortgage to GNMA at a discount.                   to sell
                                      In order to compensate
 for this discount, the originator will generally
premium from the builder and homebuyer when        receive a
                                             originating the
mortgage.   For instance, if the purchase price under a
ment is 96, the originator is discounting the            commit-
                                               purchase price
of the mortgage to GNMA by 4 percent.   In order to recover
this discount, the originator in making the
charge the borrower 4 points (1 point is equivalent will
1 percent) as a premium for making the loan.          to
4 points on a $30,000 mortgage is $1,200.      A premium  of
                                            In this case,
the builder and the borrower, usually in combination,
the originator the premium of $1,200 when the
                                               mortgage is
originated.   Because GNMA limits the points that can be
by the homebuyer to 1.5 percent of the mortgage           paid
                                                 amount, the
bulk of the premium ($750 in the example) is
                                              paid by the

Illustrative chronology of a commitment

     Presented below is a description and chronology
actions that occur from the time GNMA is directed     of
                                                   to issue
commitments to the time GNMA purchases the
                                           mortgages.    To
simplify the illustration we narrow the scope
                                              from the total
amount available for commitment to GNMA's purchase
                                                    of a
single mortgage.

     In the fall of 1974 the Secretary of HUD decided
GNMA should supplement the construction of             that
                                           homes by making
commitments and purchases of conventional,
                                           FHA-insured and
VA-guaranteed single family mortgages. Pursuant
                                                 to authority
assigned by the Emergency Home Purchase Assistance
1974, the Secretary requested OMB to release       Act of
                                             authority of
$3 billion to GNMA.  OMB released authority to GNMA in
October 1974.

     GNMA announced the offering of $3 billion worth of
commitments to purchase conventional single family mortgages.
In accordance with the Emergency Home Purchase Assistance
Act of 1974, GNMA limited the maximum mortgage amount to
$42,000, except for properties in Alaska, Hawaii, and Guam,
which had higher mortgage limits, and required mortgages to
bear interest at 8 percent. The commitments guaranteed GNMA
would purchase eligible mortgages at 98 percent of their
unpaid principal amount at the time of delivery.

     A builder of single family homes saw the announcement
and contacted a savings and loan (originator) requesting a
GNMA commitment to purchase $5 million worth of mortgages.
The savings and loan contacted GNMA and requested a GNMA com-
mitment to purchase $5 million worth of conventional single
family mortgages.

     Upon GNMA's approval of the commitment request, a notice
signifying a commitment contract was sent o the savings and
loan. The notice stated

     -- the amount of the commitment, $5 million;

     -- the interest rate the mortgages must bear, 8 percent;
     -- the expiration date of the commitment, 12 months after
        approval date; and
     -- other pertinent information, such as fees due.
Upon receipt of the notice the savings and loan paid GNMA a
commitment fee of 1 percent, $50,000 (1 percent of $5 million),
and a processing fee of one-one hundredth of 1 percent, $500
(one-one hundredth of 1 percent of $5 million), for a total of

     The savings and loan issued commitments to the builder
for the amount it requested. The commitment allowed the
builder to advertise the availability of financing at 8 percent
interest rates.

     A buyer agreed to purchase a home and obtained an 8
percent mortgage for $42,000 from the originator. GNMA ex-
pects originators to charge builders and buyers only such
fees as are necessary to cover the costs of originating the
mortgages and participating in GNMA's program (GNMA program
fees and discounts). The originator would carge 3-1/2
points, 1 to be paid by the buyer and 2-1/2 by the builder

 to cover the following: origination fee (1 percent);
 GNMA discount (2 percent); and GNMA purchase and marketing
 fee (one-half of 1 percent).

     After settlement of the mortgage, the savings and loan
delivered the $42,000 mortgage and additional documentation,
such as the certificate of mortgage insurance, to a FNMA
regional office. Upon approval of the mortgage's documenta-
tion by the regional office, GNMA paid the savings and loan
$40,950 (97.5 percent of the $42,000), deducting a 2 percent
discount plus one-half of 1 percent purchase and marketing
fee.  In addition, GNMA allowed the savings and loan to
keep the servicing contract on the mortgage from which the
originator annually receives three-eighths of 1 percent of
the unpaid principal.


     All commitment contracts GNMA issues do not result in
mortgage purchases. From July 1, 1972, through March 31,
1976, commitments totaling about $6.6 billion have been
satisfied by other than the purchase of mortgages in the
following ways:

     -- The originator canceled his commitment contract or
        allowed it to expire.

     -- The originator or other private investor assumed the
        commitment contract.
     These actions release GNMA from its obligation to
purchase mortgages and have the advantage of not increasing
FNMA's borrowing from Treasury. This in turn reduces the
amount of mortgages GNMA must sell to remain within the OMB
outlay ceiling, discussed on page 33.

     Further, since rolling over of mortgages is permitted,
eliminating commitments enables GNMA to make additional
commitments up to the same amount as those commitments it


     GNMA's single family and multifamily commitments to
purchase mortgages expire after 12 months and 24 months,
respectively. Extensions to these time periods can be obtained
before the commitment expiration date. According to GNMA
cials, commitments are not used primarily because the origina-
tors are not able to make enough mortgages to utilize their

full commitment amount because the builders are not able to
complete construction. In fiscal year 1975 under a one-time
arrangement, commitments worth $395.6 million were canceled.
By canceling its commitment contract before expiration,
the originator received a refund of one-half of the commitment
fee paid to GNMA. If the commitment was not canceled, GNMA
would have retained the entire commitment fee.

Assum tion of commitment by originator
or private investor

     The assumption of a GNMA commitment by the mortgage
originator holding the commitment releases GNMA from its
obligation to purchase mortgages made under the commitment.
Under an assumption, also referred to as "buy-back", the
originator agrees to assume the commitment and to retain the
mortgages at the commitment price provided that GNMA pays at
the time the mortgage is fully disbursed a price differential
equal to the excess of the commitment price over the market
price. According to testimony by a GNMA official at hearings
in September 1975 oefore the Subcommittee on Housing and Urban
Affairs of the Senate Committee on Banking, Housing and Urban
Affairs, the price differential payable on each mortgage re-
sults in the same effect on GNMA as if the mortgage had been
purchased by GNMA and sold in the marketplace. For example,
GNMA issued a commitment to purchase a conventional mortgage,
bearing an interest rate of 7.5 percent, from an originator
at 96 and the published GNMA repurchase price was 92. The
originator may (1) assume or "buy-back" the commitment con-
tract, keep the mortgage, and receive the 4 percent (96-92)
differential from GNMA or (2) sell the mortgage to GNMA at
the agreed upon price of 96 and then GNMA could resell it at
92. To effect an assumption, the mcrtgage is not submitted
for purchase pursuant to the commitment contract, but instead
presented for validation.
     A GNMA official told us that the advantages of the
assumption or buy-back of the commitment to GNMA as compared
to the purchase and subsequent resale of mortgages by GNMA
under the commitment were:

     -- Saving administrative expenses, such as transferring
        title to the mortgage to GNMA and carrying the mort-
        gage in inventory.

     -- Eliminate selling expenses associated with disposing
        of mortgages at auctions.

     -- Reduce the amount of GNMA borrowing from the Treasury.

      Another potential advantage, according to a GNMA
 official, is that if mortgage market conditions deteriorate
 (see page 33) GNMA's loss on the sale of mortgages could
 exceed the amount of the price differential that it would
 have paid if the mortgage had been assumed.

     The use of assumptions was initiated in 1969, under the
"tandem plan" agreement between GNMA and FNMA.  Before August
1971, assumption transactions were exclusively between GNMA
and FNMA.  Since August 1971, GNMA has entered into assumption
transactions with the commitment holders and other investors
in addition to FNMA.  From July 1, 1972, through March 31,
1976v FNMA assumed $42.8 million of GNMA commitments.
Initially, the term "tandem plan" referred specifically to
assumptions by FNMA.  However, since August 1971 the term has
been used to refer to any transaction by which originators,
because they pay a price differential, retain their mortgages
rather than deliver them for purchase by GNMA under commitment
contracts.  The terms also refers to programs for the sale of
mortgages from GNMA's portfolio to other investors, such as
savings and loans and mortgage bankers.

     From July 1, 1972, to March 31, 1976, commitments to
purchase FHA and VA mortgages in the amount of $5.4 billion
have been satisfied by assumptions.

      The assumption of commitments, 1/ also referred to as
buy-back, for conventional mortgages was initiated in October

     GNMA experienced difficulties in selling conventional
mortgages.   In September 1975, GNMA decided to sell single
family conventional mortgages worth $350 million through an
auction; however, by contacting savirgs and loans, mortgage
bankers, and other market representatives, GNMA found there
was not demand for such mortgages and, therefore, canceled
the auction.

     A GNMA official told us that, in his opinion, the main
problem with selling conventional mortgages is that GNMA does
not guarantee the payment of principal and interest on these
mortgages to investors, and the cost and time involved for
investors to review each mortgage to determine if it is a

1/   The GNMA/FNMA Conventional Home Mortgage Guide refers to
the assumption of commitments for conventional mortgages as
repurchase option, but to facilitate our discussion we use
the term assumption of commitment.

 good risk is prohibitive. According to a GNMA official, OMB
 believes the Government should not furnish a guarantee because
 of the contingent liability associated with a Government
 guarantee. To eliminate the problem of investors lacking
 sufficient knowledge of the mortgages, GNMA decided to allow
 the originators to buy-back their commitments. GNMA had
 disposed of 23,081 conventional commitment contracts worth
 $783.1 million by this method as of March 31, 15;6.
 Statistics on GNMA commitments, purchases
 and other methods of disposition
      The following table summarizes GNMA's commitment and
 purchase activity from July 1, 1972, through March 31, 1976.

                        Committing and Purchasing Activity
                                 By Dollar Amount
                              FY 1973        FY 1974     FY 1975    FY 1976       Total
                              ------ …-------------    (millions)-------------------
Traditional authority     $4,785.6       $3.028.4      $5,844.6    $ 361.5      $14,020.1
Emergency authority
    Conventional                    -                   4,935.6     2,000.0       6,935.6
    Other                           -              -       98.6       280.2       1,278.8
        Total                       -              -        4.2     2,2e7          T21T
Total commitments         $4,785.6       $3,028.4 $11,778.8        $2,641.7 $22,234.5

Traditional authority     $1,414.7       $1,542.2      $3,056.2    $2,320.9      $8,334.0
Emergency authority
    Conventional                    -                     422.1     2,557.0       2,979.1
    Other                           -                     185.3       605.4         790.7
        Total                       -          -          607.4     3,162.4       3,769.8
Total purchases           $1,414.7       $1,542.2      $3,663.6    $5,483.3     $12,103.8

Other transactions
Cancellations and
  expirations             $         -    $         -   S 395.6      S       -   $ 395.6
Assumptions                2,324.4        1,341.0       1,721.5      783.1       6,170.0
    Total                 $2,324.4       $1,341.0      52,117.1     $783.1      $6,565.6


       The National Housing Act (12 U.S.C. 1721) authorizes
GNMA to guarantee mortgage-backed securities issued to the
public by the new FNMA or by any other GNMA-approved issuer.
The full faith and credit of the United States is pledged to
the payment of all amounts which may be required to be paid
under any such guarantees.  The purpose and effect of the
GNMA guarantee is to encourage established mortgage origina-
tors to expand their allocations for mortgage investment
and to attract nonmortgage-oriented sources of lng-term
investment capital into the field of housing finance.  The
results of the latter are discussed in Chapter 3.

       Application fees, guaranteec, and other charges are
assessed issuers of guaranteed securities to cover costs
incurred by GNMA in connection wiLl the guarantees and to
help offset possible future payments of claims under the
guarantee.  Funds received from these fees and charges are
used to finance GNMA expenditures and, when possible, to
reduce GNMA's outstanding borrowings.  When necessary, GNMA
borrows from the Treasury to meet requirements of claims
under the guarantee.

       The issuer is responsible for administering the
mortgage pools backing the securities, including the collec-
tion of the principal and interest on the mortgages.   In the
event that the issuer defaults in making timely payment of
principal and/or interest to the owner of the garanteed
security,  NMA may make the payment and take title to the
mortgages backing the security.

        Under regulations promulgated by the Secretary of HUD
in May 1970 (24 F.R. 1665), the securities may be issued as
a pass-through or a bond.   On pass-through securities,
principal and interest are paid monthly to the security
owners.   On bond securities, interest is paid semiannually
and principal is paid at maturity.   FNMA and FHLMC have been
the only issuers of bond securities.

       GNMA had guarantees outstanding at March 31, 1976,
of $23.3 billion, of which $19.5 billion was insured from the
beginning of fiscal year 1973 through March 31, 1976.

       All securities to date have been backed by FHA-insured
and VA-guaranteed mortgages; however, the Emergency Home
Purchase Assistance Act of 1974 authorizes the guarantee of
securities backed by conventional mortgages which are
purchased or eligible for purchase by GNMA.  GNMA's risk
through guaranteeing securities backed by FHA or VA mortgages

is limited to the excess of interest expense, attorneys'
fees, and other costs involved in foreclosure, and uninsured
property damage, over and above amounts allowable by FHA or
VA in t    -etKtlement of mortgage insurance and guarantee
claims.  .    risk increases when the securities are backed
by conventional mortgages, since the guarantee of the securi-
ties is tantamount to a guarantee of the mortgages themselves.
As of March 31, 1976, GNMA had not guaranteed any conventional


       GNMA attempts to retard or stop declines in housing
construction and mortgage lending, and to provide suitable
financing for low- and middle-income segments of the popula-
tion by issuing commitments to purchase home mortgages.
The number of housing starts and mortgage interest rates
are two of the most important indicators of the conditions
of the housing industry according to officials at HUD.
The Secretary of HUD continually receives information con-
cerning housing tarts, mortgage interest rates, and other
economic indicators from her advisors, including GNMA.   This
information is also available to the President and the
Cungress for determining when GNMA should be directed to
make commitments.

       GAO observed single and multifamily housing starts
as an indicator of GNMA's responsiveness to declines in home
construction. One of GNMA's goals is to issue commitments
in reaction to declines in housing starts. The generally
below-market interest rate mortgages originators made
pursuant to the commitments are intended o stimulate demand
for more housing.  Also the commitments obtained by builders
from the originators enables them to obtain construction

       The following graphs show the relationship of the
amount of GNMA's commitments for both single and multifaenily
mortgages to the number of single and multifamily housing
starts / each month from July 1972 through December 1975.

1/ Housing starts, representing new privately owned housing,
   seasonally adjusted were obtained from the U.S. Depart-
   ment of Commerce, Bureau of the Census, publication
   "Housing Starts."



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      GNMA believes that as mortgage interest rates increase,
certain segments of the population are prohibited from
purchasing homes because the increasing interest rate
results in higher mortgage payments, which are too costly
for some segments of the population. By encouraging ri-
ginators to make mortgages at below-market interest rates
through commitments to purchase those mortgages, GNMA
intends to enable these marginal borrowers to purchase

       In addition to observing the timeliness of GNMA's
commitments in response to declines in housing starts, we
compared the timing and amounts of GNMA commitments for
single and multifamily mortgages issued with the interest
rates for conventional mortgages, which financial experts
consider to be a reasonable indicator of mortgage interest
rates, from July 1, 1972, through December 31, 1975.

       The following graph presents the amounts of
commitments GNMA issued in relation to the average monthly
interest rates for conventional mortgages. Interest rates
are the average percentage for the month indicated.


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      Based on the, information reviewed and presented in the
graphs, it appears GNMA usually responded to declines in
housing starts and increases in mortgage interest rates by
increasing the amount of commitments issued, therefore making
available below-market interest rate mortgages.    This appears
to be in concert with GNMA's missions of retarding or stopping
declines in home construction and mortgage lending, and pro-
viding financing for segments of the population which may be
unable to purchase housing due to the relatively high interest

                           CHAPTER 3


     GNMA sells mortgages and mortgage-backed securities to
obtain revenues to finance additional mortgage purchases
and to attract additional investment capital to the mortgage

     The amount of mortgages and securities which GNMA sells
and the price received for them are influenced primarily
by OMB-established expenditure ceilings and the condition of
the mortgage market at the time of sale.

     This chapter discusses the amount and source of GNMA's
:evenues, factors influencing the sale of mortgages and
securities, methods of disposition of single and multifamily
mortgages, and the relative success of the various instru-
ments sold by GNMA in attracting additional investment
capital to the mortgage market.

     GNMA finances the purchase of mortgages and related
operations through borrowings from the Treasury and revenues
it receives primarily from the following:

     -- Proceeds from the sale of mrtgages   and mortgage-
        backed securities.

     -- Payments of principal and interest received on
        the mortgages in its portfolio.

     -- Various fees and   charges.

     GNMA's revenues are used to pay current expenditures,
such as mortgage purchases or administrative expenses.
Revenues in excess of those needed to  ay current expenses
are paid to the U.S. Treasury to reduce the level of GNMA's
outstanding borrowings.

     The following table summarizes, by activity, GNMA's
revenues used to make mortgage commitments and purchases
during fiscal years 1972-75.

                               Fiscal year                           Percent
                        1973      1974     1975             Total    of total
                        ------ (millions)------
Receipts from:
  Mortgage loan
  repayments and
  other credits     $     293.6 $     253.5 $     313.2 $    860.3    14.74
  Interest on
  mortgage loans          164.5       149.0       225.2      538.7     9.23
  Mortgage sales        1,583.0     1,502.8     1,296.2   4,382.0     75.07
  Commitment fees           1.8           1.1       4.8        7.7       .13
  Other revenues
  (see note a)             15.4          16.1     16.8        48.3      .83
  Total receipts    $2,058.3 $1,922.5 $1,856.2 $5,837.0              100.0

a/ Includes purchase and marketing fees, recovery of prior
   years expenses, etc.

     As can be seen in the previous table, more than 75
percent of GNMA's revenues during the period of fiscal
years 1972-75 resulted from the sale of mortgages and
mortgage-backed securities. Like all other revenues the pro-
ceeds from the sale are used to pay expenses and to reduce
the amount of GNMA's outstanding borrowings from the Treasury.
The sale of the mortgages and securities also enables GNMA
to substitute private for Government financing.

Timing sales to market conditions

     GNMA generally purchases mortgages with interest rates
below the prevailing market rate for a higher price than
private investors would be willing to pay. Therefore, in
the absence of a significant decrease in prevailing market
interest rates, when GNMA offers mortgages and mortgage-
backed securities for sale to private investors, they are
generally purchased at a lower price than GNMA paid to
acquire the mortgage, which results in a loss to GNMA. The
degree of loss GNMA suffers can be reduced by timing sales to
take advantage of favorable market conditions. GNMA
mortgages and securities must compete for investors with

other financial instruments.  As a result, the price GNMA
receives from the sale of its mortgages and securities is
greatly influenced by the effective rate of return (yield)
of competing financial instruments.

     Prevailing market interest rates for mortgages reflect
the yield that an investor would realize through the origina-
tion of a mortgage.  An investor interested in investing
his money in mortgages has the option of originating a new
mortgage or purchasing an existing mortgage in the secondary
mortgage market.  If the existing mortgage was made at an
interest rate higher than the prevailing market rate, the
purchaser will generally have to pay a premium to acquire
the existing mortgage because it offers a higher rate of
return than could be realized from originating a new mortgage.
Conversely, when an existing mortgage carries an interest
rate below the prevailing market rate, the purchaser will
generally purchase the existing mortgage only if the price
is discounted to provide a rate of return comparable to that
available through the origination of a new mortgage.

     GNMA mortgages and the opportunity to originate
mortgages must compete for investors with other market
instruments.  Thus, all mortgages, both new and existing,
must provide yields comparable to other market instruments
if they are to attract investors.  Prevailing mortgage
interest rates generally reflect the yield necessary for
mortgages to be competitive.

     The difference, therefore, between the interest rate of
GNMA mortgages and the prevailing market rate is a major
determinant of the price that GNMA will receive from the sale
of mortgages and securities.  The greater the difference
(prevailing rate exceeding GNMA mortgage interest rate), the
greater the loss that GNMA will incur from the sale.  This
is illustrated in the following table by showing the discount
required to sell $1 million worth of 7.5 percent mortgages
with 12-year maturities under different market interest

                              Prevailing market interest rates

                         8              8.5                9        9.5

Value of GNMA
  mortgages         $1,000,000    $1,000,000       $1,000,000   $1,000,000

Interest rate -
GNMA mortgage           7.5             7.5               7.5       7.5

Percent discount
required to pro-
vide comparable
yield on mort-
gages at the pre-
vailing market
rate                    3.8             7.4           10.9         14.1

Amount of
discount               $38,000          .74,000      $109,000     $141,000

Selling price         $962,000      $926,000       $891,000       $859,000

Therefore, in order to minimize its losses, it is extremely
important that GNMA avoid selling mortgages at times when
prevailing market interest rates, and thus, yields sought by
investors, are excessively high in comparison to the interest
rates of mortgages in the GNMA portfolio.

     To observe GNMA's sales activity in relation to the
prevailing market interest rate for mortgages, we developed
the following graph. The graph presents GNMA sales by
month and the average monthly interest rates on conventional
first mortgages covering the period July 1972 through
December 1975.


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      Generally the graph indicates that GNMA increased
 sales of mortgages and securi ies when mortgage interestits
 rates were relatively stable or declining and decreased
 sales when mortgage interest rates were increasing.      its
 fore, within the confines of the OMB outlay ceiling,  There-
 appears to have timed its mortgage and security sales.GNMA
 relatively well.

 OMB outlay ceiling

      The sale of mortgages and mortgage-backed securitie
heavily influenced by OMB-imposed limitations on GNMA's    is
net outlays for the fiscal year. Net outlays represent
difference between GNMA's expenditures (i.e., mortgage the
purchases, interest on Treasury borrowings, and operating
costs), and revenues (i.e., mortgage portfolio revenues
proceeds from sales). The level of GNMA's outstanding and
borrowings will be increased by the amount that its
tures exceed its revenues and these net outlays add
national debt.                                      to the

     GNMA, in developing its budget request, estimates
expenditures for the fiscal year, its anticipated      its
sources other than sales, the level of sales revenues,     from
its total outlay ceiling. Important factors in GNMA's  and
mate of sales revenues are the prices it can expect    esti-
                                                    to receive
for mortgages and securities sold and the knowledge
                                                    that OMB
expects GNMA to sell as many mortgages as is feasible.

     GNMA's budget request is reviewed by the Secretary
HUD and incorporated into the total HUD budget. OMB      of
the GNMA budget considering its appropriateness given reviews
current economic conditions, such as housing starts    the
impact of GNMA's outlays on the national debt, and   and the
a total outlay ceiling.

     Once OMB approves the total outlay ceiling, GNMA
attempts to sell to meet that ceiling. GNMA  continually
attempts to identify a demand for its mortgages and
when a demand is identified.                        sells

     While it is impossible to predict that interest rates
will eventually decrease, past history (see chart
                                                  of interest
rates on page 32) shows that there have been periods
decreases in interest rates have occurred.           where

     GNMA's flexibility to hold mortgages during periods
when interest rates are relatively high is restricted,
ever, by OMB's required end of the fiscal year outlay how-
ceiling. If the outlay ceiling remains firm, GNMA
forced to sell mortgages at excessively high yields may be

attract investors in a high interest rate market.  During
fiscal year 1975 a critical situation developed whereby
adherence to the outlay ceiling would have required GNMA
to sell substantial amounts of mortgages or securities during
periods of unfavorable market conditions.

     Ducing the fiscal year GNMA's expenditures exceeded
their initial budget estimates due to substantial purchases
made pursuant to the Emergency Home Purchase Assistance Act
of 1974.  Therefore, GNMA needed to sell about $3.2 billion
worth of mortgages during the fiscal year to stay within
the budgeted outlay ceiling.  However, prevailing market
interest rates during fiscal year 1975 were generally in
excess of 8.75 percent. To avoid the potential large
losses that would result from GNMA mortgage sales, OMB
allowed GNMA to increase its budget outlay ceiling by $1.9
billion. GNMA, therefore, only had to sell mortgages
totaling $1.4 billion in fiscal year 1975 for which it
received revenues of $1.3 billion.

     FNMA and FHLMC sell mortgages in the secondary mortgage
market and exercise complete control over their sales opera-
tions.  According to FNMA and FHLMC officials, they generally
do not sell  hen the yields of mortgages in their portfolios
are less thar the yields required by investors.


     GNMA disposed of single and multifamily mortgages for
total revenues of $9.1 billion during the period July 1,
1972, through March 31, 1976.  These mortgages had an unpaid
principal balance of $10.2 billion.  However, the amount for
which the mortgages were sold should not be deducted from
the unpaid principal balance of the mortgage to arrive at
the loss to GNMA because GNMA generally acquired the
mortgages at a discount.  A discussion of the sales of single
and multifamily mortgages follows.

Disposition   f single family mortgages

     During the period July 1, 1972, through March 31, 1976,
GNMA's sale of single family mortgages produced revenues of
$8.2 billion. The sale of these mortgages was made under a
variety of methods.  The following table shows the unpaid
principal balance of mortgages sold by method of sale for
fiscal years 1973 through March 31, 1976.

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     During fiscal year 1976 single family mortgage
dispositions have been made by

     -- whole loan auctions,
     -- security auctions,
     -- portfolio repurchases, and
     -- negotiated sale to FNMA.

     Security auctions
     GNMA currently disposes of single family FHA and VA
mortgages primarily through security auctions. Under the
security auction method, GNMA selects a number of mortgages,
referred to as a block, bearing the same interest rate from
its portfolio.  Each block must contain mortgages with a
minimum aggregate unpaid principal balance of $1.1 million
and must be serviced by only one mortgage servicer.  The
titles of mortgages in each block are transferred back to
the originator and GNMA issues securities that are backed
by portions of blocks and/or blocks of mortgages. Each
issue of securities has a face value equivalent to the
aggregate unpaid principal of the block of mortgages backing

     When it holds a security auction, GNMA generally offers
a number of security issues for sale and requires the bidders
to submit bids for the total amount of the security issues
being offered.  Bids on individual security issues are not
accepted.  GNMA sells on an all-or-nothing basis to save the
administrative costs of handling numerous bids and to assure
the sale of all the security issues.

     GNMA began holding security auctions in January 1975,
and through March 31, 1976, it has sold $3 billion through
this method producing revenues of $2.8 billion.   Although the
amount of securities sold and the revenues resulting from the
sale are shown, the loss cannot be computed from these two
figures because of the varying discounts at which GNMA
obtained the mortgages.  The amount of securities is the
unpaid principal balance that the securities represent, which
is generally not the cost to GNMA of the mortgages since most
mortgage purchases involve a discount and fees, as discussed
on page 14.  The foregoing also relates to the other
instances in the report where we show the amount of a sale
of GNMA mortgages and the revenues received in the sale.
This represents 42.6 percent of all FHA and VA single family
mortgages sold between July 1, 1972, and March 31, 1976, and
85.9 percent of all FHA and VA single family mortgages sold
since January 1, 1975.  All of these securities were purchased
by two large syndicates and immediately offered for sale by
the syndicates as individual securities.

       GNMA officials told us
  the following advantages overthat the securities auction has
                                 whole mortgage sales:
       -- It provides GNMA greater
          achieving a yield on its investment that it is
          accurately reflects current          which more
                                       market conditions
          than is possible through the
          price.                        administratively set

       -- It provides GNMA with a highier
          securities are tradeable and    yield because
          attractive than mortgages.    are, therefore, more

       Whole loan auctions
       In certain situations, GNMA
                                    is unable to dispose of
 single family FHA and VA mortgages
 This can occur when GNMA does        through security auctions.
 of mortgages from a single     not hold a sufficient amount
                             originator at the same interest
 rate to put together a block
                               of these mortgages with the
 required minimum aggregated
 Another situation is when GNMA       balance of $1 million.
 through a security auction      wants  to sell mortgages
                             but the mortgage originator
 not to participate.                                      elects
      When either of these situations
                                         exists, GNMA will
 generally sell these mortgages
 to the highest bidders. A wholethrough whole loan auctions
 the submission of bids for the     loan auction provides for
                                 immediate purchase of a
mortgage or package of mortgages.
maximum price he will pay for         The investor's bid is the
sell the mortgage(s) to the     the  mortgage(s).   GNMA will
highest bid will produce the highest bidder provided that the
                              minimum yield acceptable to
      During the period July 1, 1972,
single family mortgages worth           through March 31, 1976,
method producing revenues of   $4.1   billion  were sold by
                              $3.7 billion. This accountsthis
for 44.9 percent of the value
sold during this period.       of all single family mortgages

     Mortgage repurchases from

     As discussed in chapter 2, GNMA
in selling conventional mortgages      experienced difficulty
GNMA's optional repurchase program to  private investors.
has substantially reduced the        (assumption of commitments)
GNMA must purchase; however, number of conventional mortgages
                              GNMA had still purchased
conventional mortgages totaling
1976. To reduce its portfolio $3 billion as of March 31,
GNMA offered these mortgages    of conventional mortgages,
                              back to their originators at

current market prices determined by GNMA during January
and February 1976. Since GNMA had purchased the mortgages
at prices close to par (100) from the originators, the
repurchase by the originators of the mortgages at current
market rates, which were below par, resulted in the origin-
ators paying less to GNMA for the mortgages than GNMA paid
to the originators. AS of March 31, 1976, GNMA had sold
mortgages totaling $1.1 billion by this method, producing
revenues of $1 billion.

     Negotiated sale to FNMA

     In March 1976 GNMA sold conventional single family
mortgages to FNMA totaling about $775.5 million for revenues
of $715.8 million. GNMA and FNMA negotiated the price for
conventional mortgages which originators had delivered to
GNMA but which GNMA had not completely reviewed.

     GNMA made the ale because, according to GNMA officials,
FNMA paid a better price for the mortgages than repurchasers
were paying. GNMA officials used a comparison of the yield
based on FNMA's price with the yield paid by repurchasers for
conventional mortgages.

Disposition of multifamily mortgages
     GNMA has had difficulty in selling its multifamily
mortgages. A GNMA official suggested the reasons for this were
the 40-year maturities of the mortgages and the high yield
required by savings and loans on such mortgages. In attempts
to sell multifamily mortgages, GNMA has tried four different
methods: whole loan auctions; tandem; option sales; and an
option auction. The methods that GNMA used to dispose of
mortgages in 1975 and 1976 are discussed in the following.

     The following table shows the unpaid principal balance
of multifamily mortgages sold by method of sale and fiscal
year for the period July 1, 1972, through March 31, 1976.
GNMA received revenues of $897.3 million for these mortgages;
however, as discussed on page 34, the revenues received
should not be deducted from the unpaid principal balance to
arrive at a loss to GNMA.


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       Whole loan auction
        Before October 1975 GNMA sold
                                       its multifamily mortgages
  primarily through the whole
                               loan auction method.   Through
  October 1975 a GNMA official
                                estimated GNMA had been able
  sell only about 35 percent                                  to
                              of the total multifamily
  it had purchased.   Between July 1, 1972, and March mortgages
  a total of 373 multifamily                           31, 1976,
                              mortgages worth $676.1 million
  had been sold by this method
                                producing revenues of $561.4

       Option sales

        In October 1975 GNMA initiated
                                         the sale of FHA
  multifamily mortgages by the
                                 option sales method.    Under this
  method GNMA administratively
  could immediately purchase     set a price  at which  an investor
                              a multifamily mortgage or,
  fee, obtain a project mortgage                            for a
                                   purchase option. The option
  extended the investor's right
                                  to purchase the subject mort-
 gage within 60 days at the
                              established price.
       The option sale lasted only
                                     1 week.   GNMA closed sales
 when market interest rates
                             began declining.     Because of the
 uncertain market situation, the continued
                                               sale of the mort-
 gages at an administratively
                                set price could have resulted
 in the sale of mortgages at
                               unreasonably  large discounts.
 Ninety-four mortgages worth
 method producing revenues     $220.8 million were sold by
                            of $167.0 million.               this

      Option auction

      On March 4, 1976, GNMA began
mortgages through an auction        selling multifamily
                              method which it terms an "option
auction."   Announcements of such auctions
by GNMA to submit mortgage                  provide invitations
                            bids and mortgage option applica-
tions. When accepted, a mortgage
to the bidder the right to         option application extends
                            purchase the mortgages at the
specified on the option application                        price
accepting both types of bids          within 2 months.  By
competition between investors,GNMA hopes to increase the
                                thus providing GNMA with higher
prices for its mortgages.

      All bids and cption applications
                                        are evaluated on an
open competitive basis, but
                             GNMA reserves the right of
tion.   Bids and options are evaluated                    rejec-
each other; however, a bid              in competition with
                            for a specific mortgage might
accepted in preference to an                                be
                              option application which speci-
fies he same mortgage and
                            a higher ',urchase price.
mortgages receiving both bids                          For the
administratively determined    and option applications, GNMA
would be accepted when the   that the option applications
                            option bids exceeded  the purchase

 bids by at least 1.85 percentage points.  For example,
 one project mortgage GNMA received an option applicationfor
 of 82.4000 and a mortgage bid of 81.0100.                 bid
                                            (By a bid of
 82.4000, the bidder is agreeing to pay 82.4 percent
                                                     'of the
 unpaid principal.)  Since the option application exceeded
 the mortgage bid by only 1.3900, the mortgage bid was
 accepted over the option application.

     GNMA was pleased with the results of the March 4, 1976,
auction in which it accepted $156.2 million worth of
bids for 116 mortgages worth $188.1 million and option
for 49 mortgages totaling $115.9 million.


     All of GNMA's methods of selling mortgages or securities
involve its estimation of the current market price.
mortgage-backed securities, whole loan, option auctions,
the negotiated sale to FNMA the estimated current market ad
price is used s a guideline in determining the minimum
acceptable bid. The actual selling price for those
is determined by the bids received.  However, for the
remaining two methods of disposition--the single family
conventional repurchase method and the multifamily option
sale method, the slling price is determined by GNMA's
mation of the current market price rather than by competitive

     GNMA estimates the current market price by reviewing
mortgages, securities, and other instruments comparable
those it is offering for sale.  For example, when GNMA decides
to sell mortgage-backed securities it reviews the current
yields being offered by GNMA securities trading in the
ary market, Treasury bonds, mortgages sold by FNMA,
FHLMC's participation certificates. These instruments
similar to GNMA's securities in that they provide limited
risk and are highly marketable.

     In analyzing the yields of other comparable instruments,
GNMA officials weigh the yields' significance cn the
                                                      basis of
their knowledge of market conditions, including the
of active investors.                                 desires
                      An additional factor which impacts on
the establishment of the price is GNMA's desire to
                                                    sell a
sufficient amount of mortgages or securities to meet
outlay ceiling at year end.  Based on the aforementioned
factors, GNMA subjectively sets the minimum acceptable
or sales price.  GNMA officials told us that there is no set
formula for establishing the exact price.  Similarily, an
official at FNMA advised us that FNMA does not have
                                                     a set
formula fr establishing prices of mortgages it plans
                                                       to sell.

FHLMC officials, however, stated that FHLMC does have set
formulae based on the yields of mortgages in its portfolio
plus a guarantee and management fee.


     Many variables and subjective considerations enter into
a comparison of the reasonableness of the yields of financial
instruments. Because of these variables, we were not able
to answer the question: Are the yields on GNMA mortgages
and securities reasonable?

     To provide some indication of the reasonableness of the
prices GNMA is receiving from its sales of mortgages and
securities, we compared the yields provided by GNMA mortgages
and securities with the yields provided by other selected
financial instruments.

      Each instrument we identified has its own characteristics
(i.e., low risk, highly marketable, monthly payments, etc.),
the combination of which make the instrument distinct from
other instruments. We were unable to identify any instruments
with exactly the same characteristics as GNMA's conventional
single family mortgages, FHA multifamily mortgages, or
mortgage-backed securities.   (FHA and VA single family mort-
gages are not presented because of the limited number of such
sales since the implementation of security auctions.)   The
yield an investor requires to purchase an instrument varies
depending on his perception of the advantages and disadvantages
of the nstrument's characteristics. Thus, different types
of instruments attract different types of investors.

     According to our discussions with financial experts, to
determine a range of reasonable yields for GNMA's mortgages
and securities would be extremely difficult, and at best only
an estimate. Each istrument's characteristics which differ
from those of GNMA's instruments would have to be weighted to
establish comparability. Assigning weights to an instrument's
characteristics is extremely subjective; for example, state-
ments by several financial authorities on the value of a
Government guarantee to an investor vary from zero to one-half
of 1 percent, depending on the status of he economy and the
investors involved.

     Although we were unable to make an unqualified conclusion
as to the reasonableness of GNMA's yields, we did select
several instruments with some characteristics similar to those
of GNMA's mortgages and securities and generally found their

 yields to average within 50 basis points 1/
                                             of GNMA's
 mortgages and securities yields.

      Because GNMA's conventional single family mortgages,
 multifamily mortgages, and mortgage-backed securities       FHA
 or VA single family mortgages) have some significantly  (FHA
 ent characteristics, we compared each one separately     differ-
                                                       with other
 instruments having similar
 cussed in the remainder of characteristics.   The yields dis-
                            this section represent monthly
 averages for all issues sold during the month
 instruments with various face interest rates and represent
                                               and maturities of
 10 years or more.

GNMA mortgage-backed securities

     Mortgage-backed securities sold by GNMA were
to (1) Treasury Bonds, (2) mortgage-backed securities
teed by GNMA but sold by originators, and (3)          guaran-
                                              the composite
of Federal Insured Securities (insured securities
                                                   issued by
various Federal agencies) for the period January
March 1976. These securities were selected        1975 through
have at least the following similar characteristics: they all

     -- Guaranteed by the Government.

     -- Marketability (are easily resold to other
     -- Payments of principal and interest are made
      Mortgage-backed securities sold by GNMA provided
to investors similar to those of mortgage-backed       yields
guaranteed by GNMA and sold by originators, and
of long-term Government securities in that they the composite
                                                 averaged only
10.3 and 30.9 basis points higher respectively.
securities' yields, however, were significantly GNMA
U.S. Treasury Bond yields, averaging 154.7 basis higher than
monthly for the period reviewed. A GNMA official points
private economist suggested several reasons        and a
                                             for this. They
stated GNMA securities

     -- are relatively new to the market, thus investors
        are not as comfortable with them;

     -- are subject to fluctuating payments caused
                                                   by lump
        sum payments on defaulted or repaid mortgages
        within the pool; and

1/ A basis point is equal to .01 percent.

      -- have inconsistent maturities due to
                                             defaults and
         early repayments.
      On the other hand the GNMA official said
                                               that Treasury
 bonds are subject to none of these restrictions
 Government guarantee and other attractive       yet have the
                                           characteristics of
 GNMA securities.

 GNMA's multifamily mortgages

      FHA multifamily mortgages sold by
 to FHLMC's Participation Certificates GNMA were compared
                                        and the composite of
 Federal Insured Securities for the period
 1976. FHLMC's Participation Certificates May 1975 to March
 by the Government but are guaranteed by    are not guaranteed
 similar to GNMA's mortgages in their low FHLMC  and are
 ability and monthly repayments of principal        of market-
 The composite is similar to GNMA's mortgages and interest.
 represent instruments insured by the Government. that both

     GNMA's multifamily mortgages provided
from 25 to 115 basis points higher than     yields which range
Certificates and 28 to 159 basis points FFILMC's Participation
                                         more than the composite
of long-term Government securities.
economist suggested that GNMA mortgages GNMA official and an
because they                             require higher yields

     -- have varying maturity dates due to
                                           defaults and
        early repayments,
     -- require evaluation by a knowledgeable
        assess their soundness, and           staff to

     -- are difficult to resell and thus provide
        liquidity.                               little

     These officials said that the impact
factors on selling price is a subjective of these and other
therefore, difficult to quantify. Also, determination and,
were conducted, thus providing limited    only eight sales
GNMA's conventional single
family mortgages
     GNMA's conventional mortgages' yields
compared to the yields of FHLMC's Participationinvestors were
and Aaa corporate securities 1/ for the          Certificates
                                        6 months such sales

1/ These are securities of companies
                                     that specialists in the
financial community consider to be the
                                       most credit worthy.

had been made at March 31, 1976. All thrce instruments lack
a Government guarantee which means there is some risk
involved to the investor. FHLMC's Participation Certificates
are similar to GNMA's conventional mortgages in that both
make payments monthly which include principal and interest,
the mortgages involved are primarily conventional, and the
instruments are considered difficult to market. Some Aaa
corporate securities make monthly payments but others are
paid quarterly or annually.

     GNMA's conventional mortgages provide yields which
average 26.0 basis points more each month than FHLMC's
Participation Certificates and 27.8 basis points more than
Aaa corporate securities.

     An additional objective of GNMA is to attract new capital
into the mortgage market. One way this is accomplished is
by encouraging new (nontraditional) investors to invest in the
mortgage market.

     Traditional mortgage investors are organizations which
regularly originate and/or purchase mortgages, such as
savings and loans, mortgage bankers, and FNMA. Participa-
tion by these members does not assume the addition of any
new capital into the mortgage market since they are already
active in mortgage financing.

     Nontraditional mortgage investors are organizations
such as pension and State retirement funds, which do not
normally invest in home mortgages because of legal and/or
policy restrictions. These restrictions vary by organiza-
tion but generally require instruments purchased to have

     -- a high degree of marketability,

     -- limited risk, and
     -- limited servicing and management requirements.
     To determine the success of various GNMA instruments in
attracting nontraditional sources of mortgage investment
capital, we identified initial investors by type and degree
of participation for GNMA securities and mortgages sold from
July i, i972, through March 31, 1976. However, any conclu-
sions drawn from the results of our survey must be qualified
because some of these traditional organizations, such as
mortgage bankers, may resell the mortgages they purchase to
nontraditional investors. Conversely, some nontraditional
investors sell to traditional investors. Our analysis showed

 that GNMA has been more successful
                                     in attracting nontraditional
 investment capital through the sale
 GNMA-held mortgages and by guaranteeing securities backed by
 mortgage originators than through the     securities issued by
 gages. The results of our analysis      sale of individual mort-
                                      are presented in the

 GNMA securities
       A GNMA official said that various regulations
 permit GNMA securities to qualify as                    and rulings
 pension and retirement funds, Federal  legal   investments   for
                                         credit unions, national
 banks and other members of the
 many State-chartered banks and Federal   Reserve System, and
                                 insurance companies. All
 such institutions, together with corporations,
 trusts, and individuals, are investors             partnerships,
 In addition, GNMA securities are guaranteed  the  securities.
Government, are treated as a mortgage            by the Federal
                                         for tax
are highly marketable--three characteristics purposes, and
tional investors find attractive and              which nontradi-
                                       in some cases require.
      The syndicates which sell GNMA securities
GNMA-held mortgages furnished the amounts           backed by
sold by class of purchaser for three         of   securities  they
million, which was 15.0 percent of     sales   totaling   $457.7
                                     total mortgage-backed
securities sold from January 1, 1975,
The following table lists percentages through March 31, 1976.
                                        of the three offerings
purchased by initial investors.

Types of investors                                       Percent
Traditional mortgage investors:
     Thrift institutions (i.e., savings
     Commercial banks                   and loans)        23.91
Nontraditional mortgage investors:
     Insurance companies (note a)
     Pension and State Retirement Funds                    5.05
     Credit Unions                                        52.72
     All others (i.e., bond funds, investment              1.14
          Grand total
a/ Insurance companies are traditional
   mortgages but invest in a few single investors in multifamily
                                         family mortgages.

     GNMA identified the initial investors in pass-through
securities /sold by issuers and guaranteed by GNMA for the
$23.3 billion worth of mortgage-backed securities outstanding
as of March 31, 1976. The following table lists the
percentage of securities purchased by initial investors.

Types of investors                                    purchased
Traditional mortgage investors:
     Thrift institutions (i.e., savings and loans)     41.17
     Commercial banks                                   4.52
     Mortgage bankers                                  19.58
          Total                                        65.27
Nontraditional mortgage investors:
     Pensions and State Retirement Funds                8.29
     Individuals                                        1.19
     Credit Unions                                      3.08
     All others (i.e., bond funds, investmentu
       firms)                                          22.17
          Total                                        34.73
          Grand total                                 100.00
GNMA mortgages

     GNMA does not attract nontraditional mortgage investors
through either its auctions of FHA-insured or VA-guaranteed
mortgages or its sale of nonguaranteed conventional mortgages.

     Our analysis of a statistical sample 2/ of FHA and VA
mortgage sales totaling about $4 billion made between July 1,
1972, and June 30, 1974, showed that mortgage bankers pur-
chased 89 percent of such mortgages and FNMA purchased 11
percent. Our analysis of five sales totaling $511.3 million
made between July 1, 1974, and March 31, 1976, showed that
mortgage bankers and thrift institutions purchased about 91
and 9 percent, respectively.

     Investors in conventional mortgages were either FNMA
or originators who bought back their mortgages through

1/ Investors in GNMA securities sold as bonds could not be
   identified by GNMA.
2/ The sample has a confidence level of 95 percent.

 repurchases from GNMA's portfolio (GNMA's
                                            Repurchase Program).
 Of all sales of conventional mortgages
                                         totaling $1.8 billion
 made through March 31, 1976, FNMA purchased
                                              about 41 percent,
 with thrift institutions (i.e., savings
                                          and loans), mortgage
 bankers, and commercial banks purchasing
                                           the remaining 59


     GNMA is also responsible for managing
                                            and liquidating
certain federally owned mortgages with
effect on the home mortgage market and a minimum  adverse
                                       a minimum loss to the
Government.  These mortgages were originally owned
                                                    by the
dissolved Reconstruction Finance Corporation
                                              and HUD, and
were transferred to GNMA upon its creation.

     Liquidation of the mortgages is accomplished
regular principal repayments, by sales
                                         of mortgages to
private investors, and by prepayments
                                        and foreclosures.    GNMA
has not purchased or sold any mortgages
                                          under this function
since fiscal year 1973 when 68,558 mortgages
                                               with a principal
value of $716.6 million were sold at
million.                              a  discount of $93.9
          The mortgage portfolio under the management
liquidating function had an outstanding
                                          balance of $340.9
million on March 31, 1976.


     GNMA manages the assets and liabilities
                                             of three trusts
and is the guarantor of payments on the
                                        participation certi-
ficates the trusts issued.  The three trusts are the Govern-
ment Mortgage Liquidation Trust, the
                                     Federal Assets Liquidation
Trust, and the Federal Assets Financing
     The agencies participating with GNMA
                                          as trustors in one
or more of the three trusts are (1) the
                                        Farmers Home Admini-
stration, (2) the Department of Health,
                                        Education, and Welfare,
(3) the Department of Housing and Urban
                                        Development, (4) the
Veterans Administration and (5) the Small

     These participating agencies conveyed
                                            title to assets
(mortgages and housing-related debt instruments)
                                                  to the three
trusts for which the GNMA is trustee;
retained control and administration of however, the agencies
                                        these assets.   Then
the trustee issued and sold to private
                                        investors participation
certificates backed by these assets.
                                       The last sales were
in 1968.  The agencies used the proceeds from these
                                                      sales to

reduce funds borrowed from the Treasury and to reduce the use
of Government funds for their programs. Certificates
outstanding at June 30, 1975, totaled $4.2 billion.

     As trustee, GNMA receives from the trustor agencies the
principal and interest collected on the assets, less the
agencies' service charges. These funds are used to pay
interest on the participation certificates, pay trust expenses,
and retire participation certificates at maturity. If these
funds are not adequate, GNMA requests additional funds
from the trustor agencies. Specific appropriations are avail-
able to the trustor agencies for payment of participation
sales insufficiencies.

     In the Government Mortgage Liquidation Trust, five
issues of participation certificates, totaling $1.8 billion,
have been sold since the trust was established. The last
issue was sold in 1966. During fiscal year 1975 certificates
totaling $110 million were redeemed. The outstanding
balance of the certificates was $770 million at June 30,
1975. The certificates will mature at various times through
1981. Collections received during the fiscal year were
sufficient to cover interest due on the certificates.

     In the Federal Assets Liquidation Trust, four issues
of participation certificates, totaling $3.2 billion, have
been sold since it was established. The last issue was
sold in 1968. During fiscal year 1975, no certificate
redemptions were made. The outstanding balance of the
certificates was $1 billion at June 30, 1975. The certifi-
cates mature at various times through 1987. Because net
interest earned on the assets and cash deposits held for
the trustors were less than the interest expense incurred on
the certificates, additional contributions of $7.6 million
were made to the trust by the trustors.

      In the Federal Assets Financing Trust, four issues of
participation certificates, totaling $4.3 billion, have
been sold since the trust was established. The last issue
was sold in 1968. The certificates will mature at various
times through 1988. During fiscal year 1975, certificates
totaling $12.4 million were reacquired. The outstanding
balance of the certificates was $2.4 billion at June 30,
1975. Because net interest earned on the assets and cash
deposits held for the trustors were less than the interest
expense incurred on the certificates, additional contribu-
ticns of $31.1 million were made to the trust by the trustors.

                        CHAPTER 4


     This chapter discusses several alternatives for
improving GNMA's present practices of disposing of mortgages
and mortgage-backed securities.  They are

     -- selling the Association's mortgages directly to
        the Federal Financing Bank, and

     -- obtaining greater benefit from mortgage-backed
        securities by (1) permitting investors to bid on
        individual security issues rather than on all of
        the security issues offered and (2) reducing
        the minimum amount of the security issue to some
        amount less than $1 million.

     These alternatives were discussed in our testimony on
September 20, 1976, before the Senate Committee on Banking,
Housing and Urban Affairs.  In a report dated November 29,
1976, (CED-77-16) to the Secretary of HUD, we recommended
that the desirability of implementing the alternatives be


     The sale of GNMA mortgages to the Federal Financing
Bank would allow GNMA to adhere to the OMB-imposed outlay
ceiling while at the same time eliminate the need to sell
the mortgage in the private market under unfavorable condi-
tions, thereby providing a potential opportunity to minimize

     The Federal Financing Bank was created by the Federal
Financing Bank Act of 1973 (P.L. 93-224), as part of the
Department of the Treasury.  It is authorized to purchase
and sell, on its own terms, any obligations or guarantees
issued by any executive department, independent Federal
establishment, corporation, or other entity created by the
Congress, which is owned in whole or in part by the United
States and authorized to sell obligations.  Its purpose is
to lower the cost of borrowing for those Federal agencies
that raise funds in the private market by selling various
financial instruments directly to private investors.  This
is possible because the Bank is able to pay a bette: price
for these securities than could be received in the financial
markets.  Participation by eligible agencies is voluntary.

     The Bank funds its purchases either by issuing its own
obligations or by selling its securities directly to the

Treasury, which, in turn, would sell its own obligations to
raise the funds. Because the Bank is a part of the
Treasury its obligations are expected to sell at close to
the rates obtained on Treasury offerings, which are the
most attractive Federal financial instruments and the least
costly form of Federal borrowing. For the most part, the
Bank's purchases have been funded through the sale of its
own securities directly to the Treasury.

     GNMA was authorized to sell mortgages and mortgage-backed
securities to the Federal Financing Bank by amendments in
1974 and 1975 to the National Housing Act.

     The Emergency Home Purchase Assistance Act of 1974
added a new section to the National Housing Act authorizing
GNMA to sell mortgage-backed securities to the Bank. The
Emergency Housing Act of 1975 further amended the National
Housing Act by authorizing GNMA to sell mortgages and
securities to the Bank and by directing the Bank to purchase
any such mortgages or securities offered by GNMA. The 1975
amendment follows:

     "*   * The Association may offer and sell any
     mortgages purchased or securities guaranteed
     under this section to the Federal Fnancing Bank,
     and such Bank is authorized and directed to
     ourchase any such mortgages or securities offered
     Ly the Association."

      However, through the end of fiscal year 1976 GNMA had
not sold any mortgages or securities to the Bank. Officials
at the Bank and GNMA advised us that during early 1975 GNMA
anl Bank officials held several meetings with respect to the
details of such sales.   However, GNMA and Bank officials dis-
agreed on how long the Bank would hold the mortgages. GNMA
favored a sale to the Bank which would then resell the mort-
gages to the private market in the near future while the Bank
favored long-term holding of the mortgages. According to cor-
respondence between GNMA and OMB in July 1975, OMB made the
decision that mortgages would not be sold to the Bank at tnat
time.   Instead OMB increased HUD's outlay ceiling so that GNMA
would not be forced to sell the mortgages at that time.

     In a memorandum dated June 27, 1975, from OMB to HUD
approving the increase in HUD's outlay ceiling by el.9
billion for fiscal year 1975, OMB stated that

     "Unfortunately, an increase in the allowance is
     necessary because of GNMA's inability to dispose
     of the mortgages purchased under the FHA-VA and
     conventional tandem plans as originally planned."

The memorandum also stated that OMB did not learn of GNMA's
inability to sell these mortgages until May 27, 1975, and
that options availabl- to dispose of mortgages were
unattractive which made an increase in the outlay ceiling

      Because of the OMB-imposed outlay ceiling, GNMA may
find it necessary to sell mortgages in the private finan-
cial market even though market conditions might not be
particularly favorable at the time of the proposed sale
(i.e., interest rates increasing). By selling its mort-
gages and mortgage-backed securities directly to the Federal
Financing Bank rather than to private investors, GNMA could
get a better price for the mortgages and securities, and
the Bank could hold them and wait for more favorable market
conditions before selling.

      In addition to the opportunity of minimizing the
 Federal Government's loss, the use of this alternative could
 have a positive influence on GNMA's efforts to encourage
more mortgage originations. Generally, GNMA needs to sell
mortgages to finance its mortgage commitment and purchase
activities which are undertaken to stimulate mortgage
originations. However, the majority of GNMA mortgages
offered for sale are purchased by mortgage bankers and
savings and loans who are the principal mortgage originators.
 (See p. 47.)  Consequently, at approximately the same time
GNMA is making commitments and purchasing mortgages to
stimulate mortgage originations, it is selling existing
mortgages to the principle mortgage investors. The net
result is that the sale of existing GNMA mortgages to mort-
gage originators reduces the amount of capital available
for mortgage originations and may very well be counter-
productive. The sale of the mortgages directly to the
Federal Financing Bank provides the opportunity to delay
and possibly preclude the sale of mortgages so that they
would not be in competition with GNMA's market stimulation

     Two possible negative features of the sale of mortgages
to the Federal Financing Bank are:

    -- Because the Bank finances its purchases by
       Treasury borrowings, the purchases of mortgages
       by the Bank would result in a direct increase
       in the public debt.

    -- If market conditions continued to worsen (i.e.,
       interest rates continued to rise), the Federal
       Financing Bank might be forced to sell the

       mortgages at a greater loss than GNMA would
       have incurred in order to avoid long-term

     In our letter dated May 25, 1976, to the Chairman,
Senate Subcommittee on Housing and Urban Affairs, we dis-
cussed the matter of indirect costs as a result of Federal
financing of certain housing programs. We pointed out
that financial experts at several Federal agencies told us
that there were no techniques or models that could measure
the indirect costs to the Federal Government as a result
of direct borrowing. They said that much more study
and research remained to be done on the development of
economic analytical techniques concerning indirect costs.

     The sale of securities backed by GNMA held mortgages
is preferred by GNMA to the sale of individual mortgages
because they

     -- are more marketable and, thus, easier to sell;

     -- attract a higher price than would the mortgages
        themselves; and

     -- attract nontraditional mortgage investors.
     GNMA sells its securities through closed bid auctions.
Since January 1975, GNMA has held 17 such auctions by which
it sold $3 billion worth of securities for $2.8 billion (a
discount of 9.1 percent).

     On the other hand, during the same period, GNMA sold
$501.8 million worth of single family mortgages through
whole loan auction sales, for which it received $455.1
million (a discount of 9.3 percent). GNMA officials cited
two reasons for not selling these mortgages as mortgage-
backed securities. They said that their procedure requires
that issued securities have a minimum face value of $1
million ad that

     -- issuers net worth, in assets acceptable to GNMA,
        is sufficient to meet specified Government

     -- the mortgages are insured by FHA or guaranteed by VA,

      --the issuers provide for servicing and timely
        payment of interest, and

      -- issuers comply with other similar regulations.

GNMA holds mortgages from many different originators but not
always in sufficient quantity to satisfy the $1 million mini-
mum requirement.  In addition, GNMA officials said that some
originators elect not to participate in a security issue.

     According to a GNMA official, the most commonly traded
mortgage-backed securities, issued by mortgage originators
and guaranteed by GNMA, are securities valued at $100,000 and
$1 million.  Thus, if GNMA were able to sell securities
valued at $100,000 it might be able to dispose of more of
its mortgages through security sales and reduce the number
of mortgages that it had to sell.   The benefits of reducing
the minimum value would be twofold:   GNMA should be able to
get a better price by disposing of the mortgages as securi-
ties; and by se'ling them as securities it makes them attract-
ive to nontraditional mortgage investors.   GNMA oficials
indicated that GNMA could have sold as securities some of
the $501.8 million worth of mortgages it sold through whole
loan auctions since January 1975 if the minimum value
requirement was $100,000.


      When GNMA holds a security auction, it is offering a
 number of security issues for sale with the requirement that
 the potential investor must submit a bid for the entire
block.   As of March 31, 1976, this requirement has had the
effect of limiting competition on security auctions to two
large syndicates.   At this date only two large syndicates
have submitted bids at GNMA security auctions and thus all
of the securities offered were purchased by the two
syndicates.   The blocks of securities sold at these auctions
have ranged from $69.0 million to $305.G million. The
purchasing syndicates resold the securities in smaller
amounts to private investors, acting in effect as middlemen
between GNMA and the private investors. In most cases,
according to GNMA officials, the syndicates had obtained
commitments from the private investors for the purchase of
the securities before the sydicates' purchase of the securi-
ties from GNMA.   For all security sales through March 31,
1976, the syndicates paid GNMA $2.8 billion for the
securities and resold them for a gross profit of $15.5
million (.56 percent of the purchase price), or an average
gross profit of $912,000 per auction.

     According to GNMA officials, GNMA intends to continue
selling its securities in the above manner because it feels
that through the syndicates marketing efforts it (1) can
reach investors at a reasonable cst with minimal administra-
tive effort on GMA's part, (2) is assured of receiving a
fair market price for its securities, and (3) receives a
higher price by selling all the securities together.

     The opportunity exists for GNMA to increase its revenues
on the sale of mortgage-backed securities if it revises its
bidding procedures to permit potential investors to bid on
individual security issues rather than requiring the indivi-
dual investor to bid on the entire block of security issues.

     This contention   is based upon the   following factors:

     -- Mortgage-backed securities guaranteed by GNMk
        have become well known and are readily marketable
        in the financial market.  As of March 31, 1976,
        GNMA was guaranteeing approximately $23 billion
        worth of such securities held by investors.

     -- The additional administrative cost to GNMA
        would be minimal.  The acceptance of bids on
        individual security issues should result in a
        larger number of bids to be evaluated; how-
        ever, the only factor to be considered is the
        bid price, which should require only a minimal
        additional effort by GNMA.  In addition GNMA
        already prints and issues the securities to
        the investors who purchase the securities from
        the syndicates.

     -- According to a GNMA official, the prices
        received for GNMA-guaranteed securities are
        generally the same regardless of the seller
        involved (i.e., GNMA, mortgage investor, or
        syndicate).  This is because prior issues of
        GNMA securities are constantly sold in the
        financial market and investors can choose the
        best yielding securities.  Thus, it is highly
        probable that GNMA could obtain the same prices
        that the syndicates obtain when they sell the
        GNMA securities.

     We recognize a possible negative effect        ;_ NMA
conducting such  sales could   be  the  failure to    cract
nontraditional lenders.    As  discussed   on page 46,  it appears
to us that the syndicates   have   been  more successful   selling
to nontraditional lenders,    such  as  State pension  and  retire-
ment funds, than  have the  originators    in GNMA's  guaranteed

mortgage-backed securities program. This could be accounted
for by the fact that the State retirement funds prefer to
purchase securities in large amounts ($50 million to $80
million in some cases), something individual originators
cannot offer but the syndicates can offer.  In this regard,
GNMA could tailor the size of its offerings to take advan-
tage of individual investor preferences.

     According to several GNMA officials, GNMA has never
attempted to determine the cost and feasibility of permitting
investors to bid on individual security issues. In view of
the fact that the syndicates' average gross profit per
auction has been about $912,000, GNMA should determine the
feasibility of permitting investors to bid on individual
security issues.