Managing Money : Let Buyer Be Wary When Investing in Ginnie Maes

QUESTION: Recently you talked about Government National Mortgage Assn., or “Ginnie Mae,” investments and said the principal is not at risk if the buyer stays with the investment until it matures. We have invested in a fund of Ginnie Maes. How do we know when our investment has matured? Is there any way of purchasing Ginnie Maes other than through the funds?--S. A.

ANSWER: Your question underscores the reason investment experts advise their clients to be extraordinarily careful when buying such sophisticated instruments as Ginnie Maes, particularly when the clients are buying the investments through a brokerage house.

A Ginnie Mae is a mortgage-backed, government-guaranteed security that represents a certain pool of residential mortgages. Typically, investors buy these securities in lots ranging in value from as little as $1,000 to upward of millions.

There are three ways of buying Ginnie Maes. You may buy the individual Ginnie Mae securities directly from your brokerage. Commissions on these securities are typically quite low, but the minimum purchase is $25,000. Alternatively, you may buy Ginnie Mae “unit trusts,” which are units in a portfolio of Ginnie Mae securities. These units are available through most brokerage houses. Commissions typically run 4.5%, but the minimum purchase is just $1,000.

In both these cases, principal and interest payments on the mortgages in the specific pool are repaid to shareholders, usually monthly. And the life of the pool of securities ends when the mortgages mature or are prepaid. In both cases, if the investor leaves the Ginnie Maes untouched until expiration, he will be repaid his entire principal, plus whatever interest is generated. However, if an investor chooses to sell the securities prior to maturity and interest rates have risen, the value of the investment will have fallen.

In the third type of Ginnie Mae purchase, investors buy units of what amounts to a Ginnie Mae mutual fund, not units of a Ginnie Mae pool. These mutual funds are actively managed by the brokerage houses that sponsor them. And, like any mutual fund, the Ginnie Mae funds may perform well or poorly. Another key fact to know is that while the Ginnie Mae securities in the mutual fund are government-guaranteed, the mutual fund is not guaranteed. The investor can lose all or part of his principal.

“If you buy a Ginnie Mae security or unit trust, you are guaranteed not to lose your principal if you hold it until it matures. You are investing in a government security,” says Stephen Janachowski, a San Francisco investment adviser. “If you buy into a Ginnie Mae mutual fund, you’re buying the caliber of the management of the fund, and your investment can go down the drain, regardless of the government guarantee.”

Further, your investment in a Ginnie Mae mutual fund never matures, in the strict sense of the word. The fund is constantly being changed and replenished. The investor simply buys units of the fund and then sells them.

Janachowski advises investors to make sure their brokers are selling them the type of Ginnie Mae investment they want. “These investments have been badly mis-sold by brokerage firms that have led investors astray,” he says. “They focus on the government guarantee underlying the Ginnie Mae security but don’t explain the rest.”

Q: I read in your column that a divorced woman can collect on her ex-husband’s Social Security benefits. That’s good news. But now I need more information. What age do you have to be? Are there any other qualifications? If you have been divorced twice, can you collect on both former husbands’ benefits? How do I apply and what documents do I need to submit?--P. I.

A: As we said several weeks ago, a divorced spouse is entitled to receive Social Security benefits accumulated by her ex-husband if they had been married for at least 10 years. By the way, the Social Security Administration treats ex-husbands equally; they may collect on their former wives’ benefits as well.

In addition, the Social Security Administration will award full “divorced spouse” benefits to every former spouse of a person--so long as they were married at least 10 years--regardless of the number of times the former spouse was married. The benefits are not shared or reduced because a person leaves more than one ex-spouse.

However, a person who has been divorced more than once is entitled to collect only a specified benefit amount; no “double dipping” is allowed. The benefit level might be reached with payments from one or more ex-spouses, or from her own benefit entitlement.

Now, for the specifics. If your ex-spouse is alive, you may start collecting benefits at age 62. However, your monthly benefits will be less than if you waited until age 65. If you are disabled, you may start collecting at age 50, whether or not your former spouse is alive.

If your former spouse is dead, you may start collecting benefits at age 60. However, your monthly payments will be less than if you waited until age 65. At age 65, the former spouse of a deceased worker can receive as much as 100% of the deceased’s benefits, according to a Social Security spokesman. However, if the deceased had started collecting benefits before death, the amount the former spouse is entitled to receive is reduced.

As you can see, determining how much an ex-spouse is entitled to receive from Social Security is fairly complicated. The government’s formula takes into account the age of the divorced spouse, whether the other spouse has drawn any benefits and whether any minor children are entitled to benefits. You should also know that a divorced spouse is entitled to receive either his or her own benefits or the deceased person’s benefits--whichever are higher.

For more information about ex-spouse benefits, get the Social Security Administration’s pamphlet No. 05-10084, titled “Survivors’ Benefits.”

You may apply for ex-spouse benefits either by mail, by telephone or in person at your local Social Security Administration office. In Southern California, the toll-free Social Security telephone number is (800) 988-1841. There is no toll-free nationwide number yet, but one is expected to be in place by the end of the year.

No matter what method of application you choose, you should ask for assistance in applying for “divorced widow benefits,” an administration spokesman said. Be prepared to present your marriage license, divorce decree, proof of age, proof of death of your former spouse, if applicable, and both your Social Security number and that of your ex-spouse.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.