Government National Mortgage Association Research Articles

Selected Issues In The Taxation Of Swaps, Structured Finance and Other Financial Products

This article is based on a paper presented by the author to the Tax Review of New York City on November 16, 1992.The last decade has seen an explosive growth in the use of swaps and other derivative products as part of the asset and liability management strategies of corporations and other institutional investors. Beginning with interest rate and currency swaps, the menu of swap products has expanded to include commodity swaps, equity index swaps, equity swaps, total return swaps, basis swaps, and interest rate caps, floors and collars. According to industry sources, the market for interest rate swaps has grown in notional principal amount from an estimated $3 billion in 1982 to over $3.065 trillion by the end of 1991 (the most recent figures available). Similarly, the outstanding aggregate notional principal amount of currency swaps has grown from $182 billion in 1987 to $807 billion by the end of 1991.At the same time as the swap market has been expanding, the structured finance market, including mortgage and asset securitization, has seen similar growth. Beginning in the 1970s, U.S. government-backed enterprises such as the Government National Mortgage Association ("Ginnie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") sponsored transactions in which pools of residential first mortgages were bundled into pass-through certificates that were then sold to thrifts, banks and other institutional investors. In 1983, Freddie Mac introduced collateralized mortgage obligations ("CMOs"). CMOs, which divided up the cashflows from an underlying pool of mortgages into separate debt securities having different maturity, interest rate and credit characteristics, dramatically broadened the market for mortgage-backed securities. With the enactment of the "Real Estate Mortgage Investment Conduit" ("REMIC") provisions as part of the 1986 Tax Reform Act, the taxation of mortgage pass-through and pay-through securities became subject to a new, self-contained set of rules. Moreover, since the mid-1980s, structured finance techniques originally employed in securitizing mortgages have been applied to a broad range of other financial assets, including stocks, credit card receivables, auto loans, lease receivables, home equity loans, commercial and industrial loans and trade receivables.

Increasing Capital & Liquidity for GNMA Mortgage Servicing Rights

This paper reviews the research literature concerning mortgage servicing rights (MSR) and mortgage finance more generally. We then review the history of financing the acquisition of MSRs in the market for loans guaranteed by the Federal Housing Administration (FHA) and securities guaranteed by the Government National Mortgage Association (GNMA). The paper then focuses on the credit relationship between GNMA and the issuers operating in that market, with particular emphasis on separating the loan servicing function from the investment in the MSR. The paper notes that state law regulation seems to be suppressing competition for GNMA MSRs by limiting participation by smaller investors. The paper makes several proposals as to amendments to the GNMA Acknowledgement Agreement (AA) governing the credit relationship between the FHA, GNMA and the issuer to support the goal of increasing the liquidity of the GNMA MSR market.

The Fall and Rise of Fannie and Freddie: Securitization after the Meltdown

This article analyzes the rise and fall of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Owners Loan Corporation (“Freddie Mac”). It explains why they should be revived, and suggests regulatory measures under which they can go forward on a sound basis.During the New Deal, the Administration and Congress perceived a need for a secondary market for mortgages, which had existed during the 1920s but collapsed with the 1929 crash. The market enabled mortgage originators to sell their mortgages, sometimes packaged into mortgage-backed securities, providing them with cash to lend to new borrowers. Congress attempted to fill this niche in housing finance by creating Fannie Mae in 1938.In 1966 Fannie Mae reinvented mortgage-backed securities to help finance the Vietnam War. These mortgage-backed certificates were so successful that Fannie Mae was divided in 1968 into the Government National Mortgage Association (“Ginnie Mae”), which remained a government agency, and the continuing Fannie Mae, which was privatized. In 1970, Freddie Mac was created, and also engaged in buying mortgages and packaging them into mortgage-backed securities.Both enterprises lacked meaningful regulation. They were not required to register with the SEC until after accounting scandals in 2002 showed that they needed oversight. They lacked even internal supervision until the Office of Federal Housing Enterprise Oversight (“OFHEO”) was established in 1992-but OFHEO was understaffed and weak. Outside auditors also failed to draw attention to major accounting problems.The lack of regulation was compounded by political pressures on both organizations to lower their standards to make housing more accessible. Originally, they would accept mortgages only with at least 20% down payments, but this fell to 3% by 2000. After the 2000, standards fell further as the associations began to purchase “subprime” loans with little prospect of repayment. When these loans began to default, both were unable to continue business as usual, and were forced into conservatorship.Conservatorship raises the question of whether Fannie and Freddie are necessary, or should be liquidated. This article argues that they are necessary. Experience has shown that purely private secondary mortgage markets are more sensitive than other securities markets to economic downturns-just when they are most needed to keep mortgage originating institutions lending. Moreover, the sheer volume of mortgages securitized by Fannie and Freddie-more than half the market after 2000-indicates that private securitization alone is insufficient.This leaves the question of how Fannie and Freddie should be regulated to keep them from relapsing after they leave conservatorship. The answer is effective regulation. This should have several key elements: (1) It must take into account the special characteristics of mortgage-backed securities; (2) it must provide minimum standards for capitalization of Fannie and Freddie, the characteristics of the mortgages they are permitted to buy; (3) there must be an outside financial regulator such as the Federal Reserve to enforce the regulatory rules; and there must be transparency both at the institutional level and in connection with the mortgage-backed securities to be sold, that can best be provided by the SEC.

The Likely Impact of the U.S. Recession on Negotiations with North Korea

IntroductionThe last six-party talk in Beijing ended on December 11, 2008, when negotiators were unable to reach an agreement on the issue of verification over the accuracy of the nuclear inventory given by North Korea in June 2008. The sticking point was North Korea's refusal to let international inspectors take samples from soil and waste at its nuclear facilities, which the United States had maintained was critical to reach an agreement. Complicating the issue, however, is the rapidly declining U.S. economy, as indicated by the real gross domestic product (GDP) that fell rapidly beginning in the fourth quarter of 2008. This paper reviews the state of the U.S. economy, measuring how serious the economic recession is, and then speculates on how the state of the U.S. economy may affect the future of negotiations with North Korea. The paper concludes with some suggestions on the direction North Korea and the United States might consider taking in the middle of the U.S. economic recession.History of the Credit Crunch of 2008Although there is no consensus on its exact duration, the beginning of the is believed to be in the early 1980s. The good times of the Great Moderation are characterized by significant reduction in fluctuations and improvements in aggregate output, employment, and inflation. for the Great Moderation include (a) improved monetary policy, (b) financial innovation, (c) increased global integration, (d) better inventory controls, and (e) good luck in the form of smaller exogenous shocks. As Federal Reserve Chair Ben S. Bernanke opined during his discussion of the Great Moderation at the 2004 meetings of the Eastern Economic Association, Explanations of complicated phenomena are rarely clear cut and simple, and each ... probably contains elements of truth.1 It may be premature to give credit to any or all of these explanations. It is yet to be known whether the latest Great Moderation is in a temporary halt or is over until the next Great Moderation appears on the horizon many years from now. The end of the Great Moderation did not begin with subprime mortgages. The end started long before the Great Moderation even began.Securitizing mortgages in the United States has a long history. 1968, the Government National Mortgage Association (Ginny Mae) was allowed to securitize FHA/VA mortgages backed by the U.S. government for resale in a secondary market. 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) started selling government-backed mortgage-backed securities (MBS). One writer noted, In 1981, the Federal National Mortgage Association (Fannie Mae) began issuing MBS, and soon after 'private-label' securitized products emerged for prime loans without the backing of the government.2 1982, the Alternative Mortgage Transaction Parity Act allowed variable-rate mortgages as an alternative to fixed-rate mortgages. 1986, the Tax Reform Act ended tax deduction for interest on loans with the exception of mortgage loans. All these changes played a role in leading to the 2008 credit crunch. It is important to note that these changes, standing alone, are nothing wrong. But they were abused during the early years leading to the 2008 credit crunch.During the Great Moderation of the 1990s and the early part of the 2000s, the rate of inflation was low and the economy grew steadily. During the same period, countries in Asia and the Middle East started to save an enormous amount of money. From 1996 to 2007, industrialized countries went from a current account surplus of $14 billion to a current account deficit of almost $500 billion. At the same time, noted a White House report, developing countries went from a current account deficit of $82 billion to a surplus of $760 billion.3 The influx of this capital lowered interest rates. These new wealthy were not satisfied with low interest earnings, and they searched for high-yielding assets. …

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

Freddie Mac

AbstractCredit & Lending (MIC: 8.6 SIC: 6111 NAIC: 522292)Freddie Mac is a stockholder‐owned, government‐sponsored enterprise established by Congress to provide a continuous flow of funds for residential mortgages. Co.'s participation in the secondary mortgage market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage‐related securities held in its retained portfolio. Through its credit guarantee activities, Co. securitizes mortgage loans by issuing Mortgage Participation Certificates to third‐party investors. Co. also resecuritizes mortgage‐related securities issued by it, or the Government National Mortgage Association, as well as non‐agency entities.

Freddie Mac

AbstractCredit & Lending (MIC: 8.6 SIC: 6111 NAIC: 522292)Freddie Mac is a stockholder‐owned, government‐sponsored enterprise established by Congress to provide a continuous flow of funds for residential mortgages. Co.'s participation in the secondary mortgage market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage‐related securities held in its retained portfolio. Through its credit guarantee activities, Co. securitizes mortgage loans by issuing Mortgage Participation Certificates to third‐party investors. Co. also resecuritizes mortgage‐related securities issued by it, or the Government National Mortgage Association, as well as non‐agency entities.

An Arbitrage‐Free Estimate of Prepayment Option Prices in Fixed‐Rate GNMA Mortgage‐Backed Securities

In an efficient market, the no‐arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed‐rate Government National Mortgage Association (GNMA) mortgage‐backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time‐series cross‐sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black‐Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out‐of‐the‐money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.

Elective Mortgage Prepayment: Termination and Curtailment

Mortgage‐prepayment risk underlies the structuring of mortgage‐backed derivative securities, such as tranched real estate mortgage investment conduits. This prepayment comes either from mortgage termination or from curtailment, where the borrower retains the existing mortgage and prepays a portion. There are differences in cash flows from the two types of prepayment. In termination, the loan disappears from a pool, and the scheduled payment to investors in the pool is reduced. In curtailment, the loan survives, and the scheduled payment is unchanged but the term is reduced. There are implications for structuring mortgages and derivative securities. The prepayment decision is embedded in an in‐tertemporal household utility maximization framework where choices are made between refinancing, making the regular payment, default or curtailment. Empirical results are presented for Government National Mortgage Association (GNMA) pools, and an algorithm is presented that separates the termination and curtailment components, facilitating the development of derivative securities.

Mortgage‐Backed Futures and Options

This paper empirically tests valuation models for the mortgage‐backed futures‐options contracts that traded on the Chicago Board of Trade (CBOT) from June of 1989 until March of 1992. A simple contingent‐claim model is shown to produce call option values on mortgage‐backed futures (MBF) contracts that are unbiased estimates of actual futures‐options prices. The ability of the MBF contract to hedge positions in current coupon Government National Mortgage Association (GNMA) securities relative to the effectiveness of cross‐hedging GNMA positions with T‐note and T‐bond futures contracts is also examined.

AN EMPIRICAL ANALYSIS OF THE PRICING OF MORTGAGE‐BACKED SECURITIES

EQUILIBRIUM PRICES OF FIXED-RATE securities have recently been calculated for a limited set of parametric specifications of investors' preferences, production technologies, and economic uncertainty. For instance, in one example, Cox, Ingersoll and Ross (1978) solve for the equilibrium bond prices implied by a linear technology and the assumption that investors exhibit logarithmic utility. Subsequently, Dunn and McConnell (1981b) adopted these assumptions in order to calculate and study the prices of Government National Mortgage Association (GNMA) mortgage-backed securities. The distributions (and, therefore, the magnitudes and time paths) of the asset prices calculated from these models depend in an important way on the underlying specifications of the economic environment. Consequently, inferences about the time series behavior of individual and relative prices of fixed-rate securities may not be robust to alternative model specifications. Therefore, before proceeding with tests of explicit pricing equations, it seems worthwhile to investigate empirically whether the restrictions on asset prices implied by particular classes of preference functions are consistent with the data, without imposing the auxiliary restrictions associated with the specification of technology and uncertainty. The primary purpose of this paper is to test a discrete time, consumptionbased model of prices of GNMA securities and U. S. Treasury bonds in which the specification of preferences is more general than the logarithmic form and in which minimal structure is imposed on the stochastic processes generating consumption and returns. By focusing on the necessary conditions for intertemporal utility maximization, we are able to estimate the parameters characterizing preferences and test restrictions on the temporal behavior of the prices of GNMAs and U.S. Treasury bonds, without having to solve for the stochastic equilibrium. Our estimates of the preference parameters hopefully will provide guidance for structuring analyses of bond pricing models, which require that preferences be specified a priori. In addition, the issue of whether the relative prices of GNMAs

A Comparison of Alternative Models for Pricing GNMA Mortgage‐Backed Securities

SINCE THE ISSUANCE OF the first Government National Mortgage Association (GNMA) mortgage-backed pass-through security in February 1970, the total amount of GNMAs issued has grown to over $105 billion. In terms of their trading volume, GNMA securities are the most actively-traded class of long-term fixedrate instruments. However, this gross volume statistic masks the fact that GNMAs are not homogeneous securities. They differ by coupon interest rate and remaining term to maturity. There is also a widely-held belief [12] and some evidence [7] that GNMAs differ according to their expected prepayment rates. The bulk of the trading volume in GNMAs is comprised of newly-issued securities. New securities are generally issued at the Federal Housing Administration (FHA) maximum interest rate and have terms to maturity of 30 years. While most GNMA trading is comprised of new issues, the bulk of the outstanding securities is comprised of old securities whose coupon rates may differ from the current FHA ceiling and whose remaining terms to maturity are less than 30 years. This raises a pricing problem for GNMA security dealers, portfolio managers, financial institutions that hold large portfolios of GNMA securities, and other potential GNMA investors. Up-to-date market price quotes are available for new issues, but quotes for old ones are not so readily available. Thus, potential traders confront the problem of pricing these infrequently traded securities. The problem of pricing GNMA securities was initially addressed by Curley and Guttentag [5]. They presented a model for the pricing of GNMAs that was an imaginative and important extension of the then widely-used average life procedure. The particular innovation of their model was to incorporate estimates of the prepayment probabilities to determine expected future cash flows. Through simulation and sensitivity analysis, Curley and Guttentag (hereafter C & G) compared prices generated by their model with those generated by the traditional average life procedure. In his discussion of the C & G paper, Brealey [1] encouraged the authors to extend their model to incorporate uncertainty and to value explicitly the call options attached to the underlying mortgage loans. In a previous paper [6], we

Futures Trading and Volatility in the GNMA Market

FUTURES MARKETS FOR AGRICULTURAL commodities have existed for well over 100 years. Recently there has been a major expansion of futures trading into nontraditional areas, particularly interest-bearing securities and foreign currenciesthe so-called futures. The introduction of exchange traded futures contracts for Treasury Bills, GNMA pass-through certificates, and other securities has created new hedging, arbitrage, and speculative opportunities for the investors, issuers, and dealers who are active in the cash markets for these securities. Futures trading has also opened these markets to participation by new classes of traders, particularly private and smaller institutional investors. Through the process of arbitrage, a financial futures market will be closely linked to the cash market for the underlying securities. An important concern of the regulatory authorities is what effect opening a futures market is likely to have on an existing cash market. The purpose of this paper is to analyze the impact of futures trading in Government National Mortgage Association (GNMA) passthrough certificates on price volatility in the cash market for these securities. There are several major ways in which opening futures trading can increase efficiency and smooth price variations in a cash market. Most importantly, futures provide a mechanism for those who buy and sell the actual security or commodity to hedge themselves against unfavorable price changes. Through the futures market, risk can be spread across a large number of investors, and transferred away from those hedging spot positions to professional speculators who are more willing and able to bear it. This risk transfer may substantially improve the functioning of the spot market because it reduces the need to incorporate risk premia in cash market transactions to compensate for the risk of price fluctuations. Second, futures market may increase the informational efficiency of a cash market. Since futures prices are determined in a unified, highly visible market by traders who specialize in gathering and evaluating information, the futures market is expected to be an market, in the sense that prices will reflect the best estimate of true future values given the information currently available. If anything, an informationally efficient futures market should lead to more efficient pricing in the cash market. The importance of both of these effects will depend upon the structure of the existing cash market. The more developed and integrated is the cash market, the

The Hedging Performance of the New Futures Markets

ORGANIZED FUTURES MARKETS in financial securities were first established in the U.S. on October 20, 1975 when the Chicago Board of Trade opened a futures market in Government National Mortgage Association 8% Pass-Through Certificates. This was followed in January, 1976 by a 90 day Treasury Bill futures market on the International Monetary Market of the Chicago Mercantile Exchange. In terms of trading volume both have been clear commercial successes and this has led to the establishment, in 1977, of futures markets in Long Term Government Bonds and 90-day Commercial Paper and, in 1978, of a market in One-Year Treasury notes and new GNMA markets. The classic economic rationale for futures markets is, of course, that they facilitate hedging-that they allow those who deal in a commodity to transfer the risk of price changes in that commodity to speculators more willing to bear such risks. The primary purpose of the present paper is to evaluate the GNMA and TBill futures markets as instruments for such hedging. Obviously it is possible to hedge by entering into forward contracts outside a futures market, but, as Telser and Higinbotham [19] point out, an organized futures market facilitates such transactions by providing a standardized contract and by substituting the trustworthiness of the exchange for that of the individual trader. In the futures market, price change risk can be eliminated entirely by making or taking delivery on futures sold or bought, but few hedges are concluded in this manner.' The major problem with making or taking delivery is that there are only four delivery periods per year for financial security futures so it is often

Hedging Possibilities in the Flotation of Debt Securities

considerable uncertainty about just what the final cost of debt will be. Until recently, about the only recourse available to a borrower was to rush the flotation procedure along and to maintain adequate financial flexibility so it would be possible to postpone the debt issue should rates become too high. Recent developments in the commodities markets have opened up an alternative strategy. Since October of 1975, futures contracts on Government National Mortgage Association pass-through certificates (GNMAs) have been traded on the Chicago Board of Trade. More recently, futures contracts have become available in other debt instruments, specifically Treasury bills, Treasury bonds, and commercial paper. In principle, a firm can cross-hedge (hedge a position in one commodity with an offsetting position in a different but presumably related commodity) its constructive long position in its own soon-to-be-issued bonds by going short in a related interest rate futures contract. Such cross-hedging against corporate debt securities has been seriously advanced as a potential use of GNMA futures contracts [1].

ESTIMATES OF THE EFFECTIVENESS OF STABILIZATION POLICIES FOR THE MORTGAGE AND HOUSING MARKETS1

FEDERAL GOVERNMENT agencies and government-related agencies have been very active in the last 10 years in attempting to stabilize short-run fluctuations in mortgage and housing markets. The agencies include GNMA (Government National Mortgage Association), FNMA (Federal National Mortgage Association), and FHLMC (Federal Home Loan Mortgage Corporation). An agency issues commitments to a private lender, with the commitments providing the private lender an option to resell to the agency a quantity of new mortgage loans at a specified interest rate over periods ranging from several months to over a year. The private lender then may either take-down the commitment, in which case it sells mortgages to the agency, or cancel the commitment. If the commitment is takendown, the agency may either hold the mortgages in its own portfolio or sell them (frequently to one of the other agencies). The agency's portfolio of mortgages is itself funded through capital market debt issues. The objective of the agencies' counter-cyclical policies has been to issue commitments and purchase mortgages (and sell mortgages) with timing designed to stabilize the mortgage and housing markets.2 The ability of the agencies to stabilize mortgage and housing markets has been much debated. Allan Meltzer, for example, has argued strongly that the agencies have essentially no net effect on mortgage and housing markets; through a variety of mechanisms, the actions of the agencies are fully offset by reactions of the private sector lenders in the opposite direction.3 On the other hand, both Congress and the agencies have revealed a strong belief in the efficacy of their actions. For example, during the 1974-75 recession, the agencies purchased over $12 billion in mortgages, and issued an even greater amount of new commitments. In our view, the fact lies between these extremes, and depends critically on the relevant time span. Empirical evidence now has been accumulated showing that the agencies, in fact, have essentially no effect on mortgage and housing markets over extended periods; beyond say a year, private sector reactions do fully offset the intervention of the agencies.4 On the other hand, available quarterly econometric

An Analysis of Yield Spreads between Ginnie Mae Pass-Throughs and Aaa Corporate Bonds

The Government National Mortgage Association (GNMA) guaranteed its first mortgage-backed, passthrough security in February of 1970. In the past seven years, the security has become an accepted investment vehicle for many financial institutions. The first section of this paper describes several institutional aspects of the security's growth and acceptance. Because the decision to purchase the GNMAguaranteed security frequently hinges upon the relative yields available on alternative instruments, the next section details a model of the yield spread between the GNMA securities and a common alternative, Aaa corporate bonds. The third section presents the results of an empirical test of this model, using a 1971-1976 time series of data, while the last section provides a brief summary, reiterates the most

Distribution Effects of GNMA Home Mortgage Purchases and Commitments Under the Tandem Plans

Since January 1974 the Government National Mortgage Association (GNMA) has been authorized to purchase regular mortgages on new single-family homes at interest rates one or two percentage points below the market. In spite of a large volume of commitments and purchasesX housing starts reached an eight-year low at the end of 1974 and the recovery has been slow thereafter. Although single-family starts were less depressed than multifamily starts, preliminary indications (see [7] ) are that programs have had little effect raising starts. They are, however, conveying large income transfers. This study seeks to estimate the interest savings to mortgagors and any possible benefits to mortgagees which are likely to be conferred by the programs described below. Tandem or piggy-back procedures were first introduced 1968 partly to minimize the effect of federally assisted mortgage credit programs on the unified budget balance. Since the net lending of government agencies represents an outlay above the line, GNMA's acquisition of below-market interest rate mortgages increased the budget deficit by the full amount of the purchase price. Under tandem, these mortgages were resold to the private market at a price sufElciently below par to afford a normal return to investors. Thus only the discount or the present value of the interest subsidy represented an outlay and the cycle could continue in tandem with further purchases. Tandem activities were first limited to mortgages insured by the Federal Housing Administration (FHA) that involved either interest rates well below the market

Interest Rate Futures: New Tool for the Financial Manager

O ne of the many problems facing the financial manager today is how to deal with the possibility of wide fluctuations in interest rates. For years, buyers and sellers of a wide variety of commodities have used the futures markets to offset much of the risk of future price fluctuations. Until recently, however, there was no effective, inexpensive way for the financial manager to hedge against the possibility of rising or falling future interest rates. Fortunately, in October 1975, the Chicago Board of Trade opened a futures market in Government National Mortgage Association pass-through certificates (GNMA's), and in January 1976, the International Monetary Market of the Chicago Mercantile Exchange provided a market for futures trading in 3-month Treasury Bills (T-bills). The purpose of this article is to review the operations of these two futures markets and to demonstrate how futures trading in either GNMA or T-bill securities might be used to reduce the risk of future interest rate fluctuations.