Ginnie Mae's largess may grow smaller

It's springtime -- and flocks of green-walleted mortgage refinancers can be found all over the United States. Everybody benefits from mortgage refinancing, right? Families enjoy lower mortgage payments and more disposable income. Banks rake in a new set of closing costs. And many real estate agents get business from people deciding to enter the housing market or to trade up.

It seems almost un-American to grouse when a family reduces its mortgage rate from, say, 14 percent to under 10 percent. But Ginnie Mae investors may indeed be grousing soon.

Why? If you own shares in a mutual fund that invests in the bonds of the Government National Mortgage Association (Ginnie Mae), you'll no doubt watch your yield fall in the months ahead.

This is because, with mortgage rates now below 10 percent in many parts of the country, homeowners have been rushing to roll their old, high-interest loans into new ones at lower rates. If these mortgages are financed by Ginnie Mae -- and a great many are these days -- the old high-yield bonds in the funds' portfolios are being liquidated and replaced with lower-yield ones.

Ginnie Mae itself has experienced such a surge of refinancing activity that it reached its yearly credit ceiling of $65.3 billion April 4 -- eight months ahead of schedule. On May 2, President Reagan signed into law a bill (flown to him at the Tokyo economic summit) raising the ceiling to $126 billion and freeing up more money for lower-interest mortgages. A buyer-beware situation

The refinancing rush means that mutual funds with a brace of old bonds in their stables are -- or will be -- watching them disappear. They can't keep them, since Ginnie Maes, unlike US Treasury bonds, are ``callable'' at any time.

Ginnie Mae mutual funds are thus forced to buy new bonds at lower rates. Result: a lower yield if you own shares in a Ginnie Mae fund.

This, in fact, fairly clearly underscores the key difference between Ginnie Mae funds and real government-bond funds -- a difference that has been obscured by unscrupulous advertising on the part of some mutual fund companies recently.

Ads for the popular Ginnie Mae funds have been touting them as ``100 percent government guaranteed.'' But unlike a US Treasury bond, the federal government guarantees a Ginnie Mae only against default. It does not guarantee that the interest will be paid at a fixed amount every quarter for a specific number of years.

Government protection, of course, is nice to have, even if mortgage defaults are not common in the United States.

But it's plainly misleading to imply that the government is guaranteeing anything else. Yields could decline significantly. Portfolio managers could make mistakes. The government won't come along and dutifully bail them out, as it does failing banks and savings-and-loans. `Overzealous salespeople'

Ginnie Mae president Glenn Wilson faults misleading ads and ``overzealous salespeople'' for pushing Ginnie Mae funds on people who are not really aware of what they are buying.

He notes that the broker-dealers handling government securities are exempt from supervision by the Securities and Exchange Commission or other regulatory bodies. Thus, Ginnie Mae's only recourse on the misleading ads is to educate the public.

Mr. Wilson flatly reminded the National Association of Securities Dealers earlier this year: ``We don't guarantee a specific yield, rate of return, or the reputability of brokers.''

So when you read an ad that talks about the yield of a Ginnie Mae fund these days, keep in mind that that was the past yield. This is true of all mutual funds, of course, but doubly important with the Ginnie Maes right now.

Ginnie Maes take about 60 days to work their way through the system, a Ginnie Mae spokesman says, and the mortgage refinancing rush began in earnest only this year. So by summer the lower rates should be showing up in fund yields. A year from now, the yields aren't going to look so hot.

Stephen P. Conway, president of Conway Financial Advisors of Boca Raton, Fla., says that, while he is not negative on properly managed Ginnie Mae funds, he thinks many of them have been ``advertising a yield nobody is going to get.''

Instead of using the ``one-year trailing yield,'' Mr. Conway says, these funds should talk about their ``current seven-day yield.'' That's difficult to calculate, but keep in mind that the return on your investment will be based on the future, not the past.

``Anybody with a 14 percent mortgage is paying it off,'' either by moving or refinancing, he says. ``So the life expectancy of a Ginnie Mae with a 14 percent coupon is less than 3 years.''

William Donoghue, whose Moneyletter publication in Holliston, Mass., follows the mutual fund industry, contends that ``in a period of a massive decline in interest rates, such as the one we are witnessing, the drawbacks to Ginnie Mae funds stand out like sore thumbs. Ginnie Mae yields are uncertain and . . . unpredictable right now. Government guarantees have no relation to any of this: Default is not the issue.''

The time to invest in Ginnie Mae funds, he says, is when interest rates are on the rise and the funds' yields are stable and assured.

On the other hand, if interest rates do rise, nobody is going to rush out to refinance. Almost everybody is going to sit pretty with these old, low-interest mortgages. Since mortgages commonly run 15 or 30 years, Ginnie Maes held by a mutual fund will remain there for years to come. Resale prospects won't be great. That will devalue the principal in the fund.

And with US interest rates having fallen as far as they have, the next move could well be upward.