Ginnie Mae Bonds, Student Loans, Finding a Planner

QUESTION: I like the yields on GNMA bonds. What are the risks?
—Frank Summers, Santa Ana, Calif.

Anyone tracking bonds backed by “Ginnie Mae” mortgages (from the Government National Mortgage Association) is likely wondering, “What mortgage meltdown?”

Ginnie Mae creates mortgage-backed securities consisting primarily of loans guaranteed by the Federal Housing Administration, which typically backs loans to folks with shaky credit and small down payments. These bonds have had an impressive run: The Barclays Capital U.S. MBS Fixed Rate GNMA index has an 8.6 percent one-year total return, compared with 8 percent for the intermediate Treasury bond index.

Despite their government backing, Ginnie Mae bonds carry slightly more risk than Treasurys. When a mortgage is paid back early (because the homeowner has moved, refinanced or was foreclosed upon), for instance, you’ll get your money back but miss out on future interest payments. You could then buy a new GNMA bond, but if mortgage rates have fallen, you’re stuck with a lower yield. “That’s a heightened risk right now,” says Ronald Reardon, a principal in Vanguard’s fixed-income department, noting that the Obama administration wants to keep mortgage rates low. If you decide to go this route, consider a low-fee mutual fund. And beware that the recent Ginnie Mae rally may be on the verge of downsizing.

QUESTION: My son, who graduated in 2005, has $60,000 in private student loans. Can he consolidate them?
—Bill Lee, Iola, Kan.

Yes, though it’s not as easy as it used to be. Private student loans can be consolidated only through private student-loan providers that specifically offer the service—and now, thanks to the credit crunch, that’s just four firms, says Mark Kantrowitz, publisher of FinAid.org, which offers a list of providers on its Web site.

Interest rates on private loans are variable and tied to another rate, like the three-month London Interbank Offering Rate (currently 0.66 percent), plus an additional 4 to 14 percent. It takes a 100-point improvement in a borrower’s credit score to garner better terms, though. Also, private loans can’t be consolidated with Federal student loans, which carry lower fixed rates.

QUESTION: How do you choose a financial planner? I don’t know where to start.
—Tania Giordani, Chicago

Start with a recommendation from someone in a similar financial situation, then tackle the due diligence. Believe it or not, anyone can call himself a financial planner or adviser, though he’ll need certain credentials for some tasks. Almost anyone offering to buy and sell securities for your account, for instance, needs to be a registered investment adviser with the Securities and Exchange Commission. Some planners work for insurance firms, which means they’re beholden to state insurance laws. Certified financial planners have met certain work requirements, passed an exam and agreed to follow the CFP Board of Standards’s ethics code.

Cost is also a consideration. Some planners charge a fee (either a flat fee or a percentage of assets), others are paid by commission, and some use a combo approach. “Obviously, if you want advice, you should expect to pay for it,” says Barbara Roper, director of investor protections for the Consumer Federation of America. “Just make sure the advice benefits you, not the salesperson.”

Finally, a preliminary meeting is usually free of charge. Ultimately, it comes down to chemistry. If it feels like a fit, you’ve found your planner.