[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Rules and Regulations]
[Pages 33650-33652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11312]



[[Page 33649]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 320



Removal of Regulation Specifying Minimum Face Value of Ginnie Mae 
Securities; Final Rule

  Federal Register / Vol. 70, No. 109 / Wednesday, June 8, 2005 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 320

[Docket No. FR-4856-F-02]
RIN 2503-AA17


Removal of Regulation Specifying Minimum Face Value of Ginnie Mae 
Securities

AGENCY: The Government National Mortgage Association (Ginnie Mae), HUD.

ACTION: Final rule.

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SUMMARY: This final rule removes the regulation that specifies the 
current minimum face amount of any security issued by the Government 
National Mortgage Association (Ginnie Mae). The removal of the 
regulation allows Ginnie Mae to change the current minimum amount of 
$25,000. This final rule follows publication of a proposed rule on 
April 13, 2004. The Department gave careful consideration to the public 
comments and decided to adopt the proposed rule as final without 
change.

DATES: Effective Date: July 8, 2005.

FOR FURTHER INFORMATION CONTACT: Thomas R. Weakland, Senior Vice 
President, Office of Program Operations, or Stephen L. Ledbetter, 
Director, Securities Policy and Research, Government National Mortgage 
Association, Room 6216, Department of Housing and Urban Development, 
451 Seventh Street, SW., Washington, DC 20410; telephone 202-708-2884 
(this is not a toll-free number). Speech-or hearing-impaired 
individuals may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. The April 13, 2004 Proposed Rule

    HUD published a proposed rule on April 13, 2004 (69 FR 19746) that 
invited public comment on the Department's proposal to remove the 
regulatory provision at 24 CFR 320.5(c). That regulation provided that 
``The face amount of any security cannot be less than $25,000.'' The 
proposed rule stated that after this final rule becomes effective, the 
minimum face amount for Ginnie Mae securities would be published in 
Ginnie Mae's Mortgage-Backed Securities Guide. The proposed rule also 
indicated, among other things, that Ginnie Mae would like to offer 
investors different denominations of Ginnie Mae guaranteed securities 
in order to ensure that Ginnie Mae securities remain attractive to 
investors.
    Five public comments were received in response to the proposed 
rule. The Department carefully considered the issues raised in the 
comments, and has decided to adopt the proposed rule as final without 
change. For the convenience of the reader, the comments are summarized 
below with HUD's response immediately following the comment.

II. Discussion of Public Comments Received on the Proposed Rule

    One commenter expressed its support for the proposed rule. The 
commenter stated that empowering Ginnie Mae to set its minimum 
denominations on a flexible basis will help the marketability of Ginnie 
Mae mortgage-backed securities (MBS) to the benefit of FHA and VA 
borrowers. Other commenters raised questions or comments about the 
proposed rule as follows:
    Comment: Removing the $25,000 minimum denomination limit will drain 
insured deposits out of depository institutions; this could harm the 
liquidity of community banks, and thus weaken their ability to respond 
to the credit needs of their communities.
    HUD Response: Ginnie Mae MBS are not generally considered 
substitutes for insured deposits. Unlike insured deposits, the cash 
flow of an MBS depends on the cash flow of an underlying pool of 
mortgages. For example, while a certificate of deposit and an MBS may 
have identical stated maturities, their effective durations will likely 
be substantially different. In addition, the duration of the MBS is 
generally more sensitive to changes in interest rates. Due to these 
fundamentally different cash flow characteristics, the Ginnie Mae MBS 
investor base is quite different from a community bank's depositor 
customer base. Removing the $25,000 minimum denomination limit on 
Ginnie Mae MBS should thus have little impact on the ability of 
community banks to raise funds through the use of insured deposits.
    It is also important to note that the fundamental premise of the 
Ginnie Mae business model is to help community banks and other 
participating institutions respond to the credit needs of their 
communities. The Ginnie Mae guarantee allows community banks to raise 
funds more easily and cheaply by creating more liquid Ginnie Mae 
securities. Because banks know they can pool their loans as Ginnie Mae 
MBS and sell them for a good price, they can use these proceeds to make 
additional loans in their communities. Any change in the minimum 
denomination that benefited investors by enhancing the liquidity of 
Ginnie Mae securities would benefit community banks as well, allowing 
them to respond more effectively to the credit needs of their 
communities by offering lower rates to the low- and moderate-income 
borrowers that are at the core of Ginnie Mae's mission.
    While a lower minimum denomination is not likely to substantially 
increase the investor base of Ginnie Mae MBS, it will result in 
increased flexibility for current Ginnie Mae investors. For example, a 
lower minimum would make it easier for existing investors to reinvest 
principal and interest payments on their Ginnie Mae MBS into more 
Ginnie Mae MBS. This would have the effect of increasing the demand for 
Ginnie Mae securities, which ultimately results in lower rates for low- 
and moderate-income borrowers.
    Comment: The investors attracted to smaller denominations of Ginnie 
Maes are likely to be individuals who may be less sophisticated than 
current investors and less able to anticipate the multiple risks to 
which all mortgage-backed security investors are exposed. The proposed 
change could expose a class of individuals to risks that they are not 
equipped to manage. Moreover, some investors might mistakenly believe 
that securities issued in small denominations have the same risk 
characteristics as instruments covered by deposit insurance.
    HUD Response: The current $25,000 minimum denomination does not 
prevent small investors from buying Ginnie Mae securities. Small 
investors can already invest in Ginnie Mae securities in amounts 
substantially less than $25,000; indeed, investors can invest $1,000 or 
less in mutual funds that hold all Ginnie Mae MBS. Through mutual funds 
and other similar vehicles, those same investors can invest in 
corporate bonds, stocks and other securities that are much more risky 
than Ginnie Mae MBS.
    The purpose of the $25,000 minimum denomination requirement was not 
to protect less sophisticated investors; it was implemented primarily 
to limit the operational complexities and expenses associated with the 
market as it existed in 1970, when all Ginnie Mae MBS were issued as 
physical securities. This was not just the case for Ginnie Mae 
securities. For example, the U.S. Department of the Treasury and the 
Federal Reserve converted Treasury securities to a book-entry system 
over a 20-year period, starting in 1966, in order to lower the 
substantial costs associated with safekeeping and transferring

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physical securities.\1\ These costs were partly responsible for 
Treasury increasing the minimum denomination for Treasury bills from 
$1,000 to $10,000 in 1970.\2\ The move to a book-entry system made it 
easier for Treasury to resume allowing Treasury securities to be 
offered to investors in smaller denominations; in 1998, Treasury 
lowered the amounts for Treasury bills and notes from $10,000 and 
$5,000, respectively, to $1,000.
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    \1\ In an article published in the December 2004 volume (Vol. 
10, No. 3) of FRBNY Economic Policy Review, Kenneth D. Garbade of 
the Federal Reserve Bank of New York points out that ``the cost of 
safekeeping a bearer municipal bond in the mid-1980s was about $6 
per year, and [the] safekeeping costs for bearer Treasury bonds in 
the mid-1960s were comparable.'' Obviously, this fee would be 
prohibitively expensive on a low minimum denomination security.
    \2\ See Chapter 7 of Instruments of the Money Market, edited by 
Timothy Q. Cook and Robert K. Laroche, Federal Reserve Bank of 
Richmond.
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    Similarly, Fannie Mae maintained a $25,000 minimum denomination for 
its MBS until it moved from physical to book-entry certification. 
During the period when Fannie Mae allowed both, it had two different 
minimum denominations: $25,000 for a ``Certificate in definitive form'' 
\3\ and $1,000 for a ``Certificate in book-entry form.'' Today, both 
Fannie Mae and Freddie Mac MBS are book-entry securities, and, 
consistent with market norms, have $1,000 minimum denominations. It 
should be noted that Ginnie Mae eliminated the option for Ginnie Mae 
MBS to be issued as physical securities as part of its conversion of 
the settlement of all Ginnie Mae securities from the Depository Trust & 
Clearing Corporation to the Federal Reserve's book-entry system in 
2002.\4\
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    \3\ See, for example, the prospectus dated November 12, 1987, 
for Fannie Mae Guaranteed Mortgage Pass-Through Certificates.
    \4\ Although all Ginnie Mae securities are issued in book-entry 
form, investors still have the option, after initial issuance, to 
convert their securities to physical form.
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    Ginnie Mae investors are protected from unknowingly taking risks by 
a statutory and regulatory framework that includes requirements that 
broker-dealers be registered with the Securities and Exchange 
Commission (SEC). In addition, most broker-dealers are required to join 
a self-regulatory organization (SRO). A primary mission of both the SEC 
and the SROs is to create and enforce rules for broker-dealers designed 
to protect investors. The SEC's principal method for protecting 
investors is to ensure that they are provided with timely, 
comprehensive and accurate information with respect to prospective 
investments. SROs put additional requirements on their members. For 
example, broker-dealers are required to have reasonable grounds for 
believing that investments are suitable for customers, and they have a 
fundamental responsibility for dealing fairly with their customers. 
These investor protections will continue to apply for broker-dealers 
selling Ginnie Mae MBS regardless of what the minimum denomination 
requirement is.
    Comment: Just because HUD allowed Fannie Mae and Freddie Mac (the 
GSEs) to offer small denomination securities, that is no justification 
for allowing Ginnie Mae to do the same.
    HUD Response: This comment appears to be alluding to questions that 
have recently been raised with respect to certain products offered by 
the GSEs that are specifically targeted at retail investors. However, 
these products--Investment Notes for Fannie Mae and FreddieNotes[reg] 
for Freddie Mac--are senior debt products that are part of their term 
note funding programs; they do not represent interests in or receive 
payments from mortgages. Thus, unlike Ginnie Mae MBS, these products 
have cash flows that are similar to certain types of deposit products, 
and may appeal to retail investors as higher-yielding substitutes for 
federally-insured deposits. In contrast, as discussed above, Ginnie Mae 
MBS are not generally considered substitutes for insured deposits.

Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Regulations 
Division, Office of General Counsel, Room 10276, 451 Seventh Street, 
SW., Washington, DC 20410-5000.

Environmental Impact

    This rule removes an existing regulation. The rule does not direct, 
provide for assistance or loan and mortgage insurance for, or otherwise 
govern or regulate, real property acquisition, disposition, leasing, 
rehabilitation, alteration, demolition, or new construction, or 
establish, revise, or provide for standards for construction or 
construction materials, manufactured housing, or occupancy. Therefore, 
in accordance with 24 CFR 50.19(c)(1), this rule is categorically 
excluded from the requirements of the National Environmental Policy Act 
(42 U.S.C. 4321 et seq.).

Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
establishes requirements for federal agencies to assess the effects of 
their regulatory actions on state, local, and tribal governments and on 
the private sector. This rule does not impose a federal mandate on any 
state, local, or tribal government, or on the private sector, within 
the meaning of the Unfunded Mandates Reform Act of 1995.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. There are no anti-
competitive discriminatory aspects of the rule with regard to small 
entities, and there are no unusual procedures that will have to be 
complied with by small entities. The rule removes an existing 
regulation. Accordingly, the undersigned certifies that this rule will 
not have a significant economic impact on a substantial number of small 
entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the executive order. This rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments and does not preempt state law within the 
meaning of the executive order.

List of Subjects in 24 CFR Part 320

    Mortgages, Securities.
    Accordingly, for the reasons described in the preamble, HUD amends 
24 CFR part 320 as follows:

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PART 320--GUARANTY OF MORTGAGE-BACKED SECURITIES

0
1. The authority citation for part 320 continues to read as follows:

    Authority: 12 U.S.C. 1721(g), 1723a(a), and 42 U.S.C. 3535(d).


Sec.  320.5  [Amended]

0
2. Amend Sec.  320.5 by removing and reserving paragraph (c).

    Dated: May 23, 2005.
Michael J. Frenz,
Executive Vice President, Government National Mortgage Association.
[FR Doc. 05-11312 Filed 6-7-05; 8:45 am]
BILLING CODE 4210-66-P