Ginnie Mae
Risk Management and Cost Modeling Require Continuing Attention Gao ID: GAO-12-49 November 14, 2011The Government National Mortgage Association (Ginnie Mae) has increased its role in the secondary mortgage market significantly. Ginnie Mae is a wholly owned government corporation in the Department of Housing and Urban Development (HUD). It guarantees the timely payment of principal and interest of mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans, such as Federal Housing Administration (FHA) loans. GAO was asked to (1) describe how Ginnie Mae's volume of MBS and market share have changed, (2) assess the risks Ginnie Mae faces and how it manages these risks, and (3) determine what effect recent changes in Ginnie Mae's market share and volume may have on financial exposure to the federal government, including mission. To address these objectives, GAO analyzed data on volume and market share and assessed their reliability. GAO also reviewed guidance and Ginnie Mae's credit subsidy calculations and estimation model, and interviewed agency officials and others.
From 2007 to 2010, the volume of Ginnie Mae-guaranteed MBS and its share of the secondary mortgage market increased substantially. Ginnie Mae-guaranteed MBS outstanding grew from $412 billion to more than $1 trillion, and market share grew from 5 percent to more than 25 percent. As the demand for FHA and other federally insured or guaranteed mortgages grew during this time, financial institutions increased their issuance of Ginnie Mae-guaranteed MBS to finance these federally insured or guaranteed loans. Ginnie Mae has taken steps to better manage operational and counterparty risks, and has several initiatives planned or underway. The agency may face operational risk--the risk of loss resulting from inadequate or failed internal processes, people, or from external events--and counterparty risk--the risk that issuers fail to provide investors with monthly principal and interest payments. GAO and others, including HUD's Inspector General, have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as operational risks that Ginnie Mae may face. For example, although Ginnie Mae's market share and volume of MBS have increased in recent years, its staffing levels were relatively constant and actual staff levels trailed authorized levels. In addition, between 2005 and 2010, the agency increasingly relied on contractors. Ginnie Mae has identified gaps in resources and conducted risk assessments on its contracts but has not yet fully implemented changes based on these analyses. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement. In response to changing market conditions and increased market share, Ginnie Mae revised its approval and monitoring procedures. Ginnie Mae also has several planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, but these plans have not been fully implemented. It will be important for Ginnie Mae to complete these initiatives as soon as practicable to enhance its operations. The growth in outstanding Ginnie Mae-guaranteed MBS resulted in an increased financial exposure for the federal government as Ginnie Mae fulfills its mission of expanding affordable housing by linking capital markets to the nation's housing markets. Nonetheless, Ginnie Mae's revenues have exceeded its costs and it has accumulated a capital reserve of about $14.6 billion. However, GAO found that in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing certain practices identified in FASAB guidance that GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data which could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae's ability to accurately report to the Congress the extent to which its programs represent a financial exposure to the government. Ginnie Mae should enhance the model it uses to forecast cash flows for the program by (1) assessing potential data sources, (2) conducting sensitivity analyses, and (3) assessing and documenting its modeling approaches and reasons for using management assumptions, among others. In written comments, Ginnie Mae agreed with GAO's recommendation to conduct sensitivity analyses, but neither agreed nor disagreed with the other recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Mathew J. Scire Team: Government Accountability Office: Financial Markets and Community Investment Phone: (202) 512-6794GAO-12-49, Ginnie Mae: Risk Management and Cost Modeling Require Continuing Attention
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
November 2011:
Ginnie Mae:
Risk Management and Cost Modeling Require Continuing Attention:
GAO-12-49:
GAO Highlights:
Highlights of GAO-12-49, a report to congressional requesters.
Why GAO Did This Study:
The Government National Mortgage Association (Ginnie Mae) has
increased its role in the secondary mortgage market significantly.
Ginnie Mae is a wholly owned government corporation in the Department
of Housing and Urban Development (HUD). It guarantees the timely
payment of principal and interest of mortgage-backed securities (MBS)
backed by pools of federally insured or guaranteed mortgage loans,
such as Federal Housing Administration (FHA) loans. GAO was asked to
(1) describe how Ginnie Mae‘s volume of MBS and market share have
changed, (2) assess the risks Ginnie Mae faces and how it manages
these risks, and (3) determine what effect recent changes in Ginnie
Mae‘s market share and volume may have on financial exposure to the
federal government, including mission. To address these objectives,
GAO analyzed data on volume and market share and assessed their
reliability. GAO also reviewed guidance and Ginnie Mae‘s credit
subsidy calculations and estimation model, and interviewed agency
officials and others.
What GAO Found:
From 2007 to 2010, the volume of Ginnie Mae-guaranteed MBS and its
share of the secondary mortgage market increased substantially. Ginnie
Mae-guaranteed MBS outstanding grew from $412 billion to more than $1
trillion, and market share grew from 5 percent to more than 25
percent. As the demand for FHA and other federally insured or
guaranteed mortgages grew during this time, financial institutions
increased their issuance of Ginnie Mae-guaranteed MBS to finance these
federally insured or guaranteed loans.
Ginnie Mae has taken steps to better manage operational and
counterparty risks, and has several initiatives planned or underway.
The agency may face operational risk-”the risk of loss resulting from
inadequate or failed internal processes, people, or from external
events”-and counterparty risk-”the risk that issuers fail to provide
investors with monthly principal and interest payments. GAO and
others, including HUD‘s Inspector General, have identified limited
staff, substantial reliance on contractors, and the need for
modernized information systems as operational risks that Ginnie Mae
may face. For example, although Ginnie Mae‘s market share and volume
of MBS have increased in recent years, its staffing levels were
relatively constant and actual staff levels trailed authorized levels.
In addition, between 2005 and 2010, the agency increasingly relied on
contractors. Ginnie Mae has identified gaps in resources and conducted
risk assessments on its contracts but has not yet fully implemented
changes based on these analyses. To manage its counterparty risk,
Ginnie Mae has processes in place to oversee MBS issuers that include
approval, monitoring, and enforcement. In response to changing market
conditions and increased market share, Ginnie Mae revised its approval
and monitoring procedures. Ginnie Mae also has several planned
initiatives to enhance its risk-management processes for issuers,
including its tracking and reporting systems, but these plans have not
been fully implemented. It will be important for Ginnie Mae to
complete these initiatives as soon as practicable to enhance its
operations.
The growth in outstanding Ginnie Mae-guaranteed MBS resulted in an
increased financial exposure for the federal government as Ginnie Mae
fulfills its mission of expanding affordable housing by linking
capital markets to the nation‘s housing markets. Nonetheless, Ginnie Mae
‘s revenues have exceeded its costs and it has accumulated a capital
reserve of about $14.6 billion. However, GAO found that in developing
inputs and procedures for the model used to forecast costs and
revenues, the agency did not consider certain practices identified in
Federal Accounting Standards Advisory Board (FASAB) guidance for
preparing cost estimates of federal credit programs. Ginnie Mae has
not developed estimates based on the best available data, performed
sensitivity analyses to determine which assumptions have the greatest
impact on the model, or documented why it used management assumptions
rather than available data. By not fully implementing certain
practices identified in FASAB guidance that GAO believes represent
sound internal controls for models, Ginnie Mae‘s model may not use
critical data which could affect the agency‘s ability to provide well-
informed budgetary cost estimates and financial statements. This may
limit Ginnie Mae‘s ability to accurately report to the Congress the
extent to which its programs represent a financial exposure to the
government.
What GAO Recommends:
Ginnie Mae should enhance the model it uses to forecast cash flows for
the program by (1) assessing potential data sources, (2) conducting
sensitivity analyses, and (3) assessing and documenting its modeling
approaches and reasons for using management assumptions, among others.
In written comments, Ginnie Mae agreed with GAO‘s recommendation to
conduct sensitivity analyses, but neither agreed nor disagreed with
the other recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-12-49] or key
components. For more information, contact Mathew J. Scirč at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Ginnie Mae's Market Share and MBS Volume Increased Substantially from
2007 to 2010:
Ginnie Mae Has Been Taking Steps to Better Manage Risks:
Although Ginnie Mae Continues to Fulfill Its Mission, Its Model for
Estimating Costs and Revenues Could Be Improved:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Ginnie Mae's Planned and Proposed Changes to Address
Operational and Counterparty Risk:
Appendix III: Comments from Ginnie Mae:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number of Ginnie Mae Requested, Authorized, and Actual FTEs,
Fiscal Years 2005-2010:
Table 2: Description of Select Contracted Functions at Ginnie Mae and
Total Obligated Amounts, Fiscal Years 2005-2010:
Table 3: Planned and Proposed Changes to Address Operational and
Counterparty Risk, as of September 30, 2011:
Figures:
Figure 1: Securitization of Federally Insured or Guaranteed Mortgages
into Ginnie Mae-Guaranteed MBS:
Figure 2: Volume of MBS Issuance by Type, Calendar Years 20002010:
Figure 3: Number and Types of Institutions Issuing Ginnie Mae-
Guaranteed MBS, Fiscal Years 2005-2010 and Share of Outstanding MBS by
Issuer Type, as of June 30, 2011:
Figure 4: Ginnie Mae Guarantees of New MBS and Cumulative Guaranteed
MBS Outstanding, Fiscal Years 2005-2010:
Figure 5: Federally Insured and Guaranteed Mortgages Pooled into New
Ginnie Mae-Guaranteed MBS, by Agency, Fiscal Years 2005-2010:
Figure 6: Ginnie Mae Guarantees of New MBS Backed by Multifamily Loans
and Reverse Mortgages, Fiscal Years 2005-2010, and Types of Mortgages
Backing New Ginnie Mae-Guaranteed MBS, Fiscal Year 2010:
Figure 7: Volume of Ginnie Mae Structured Products Backed by Ginnie
Mae-Guaranteed MBS, Fiscal Years 2005-2010:
Figure 8: Ginnie Mae's 2011 Proposal for Reorganization:
Figure 9: Amount of Ginnie Mae Contract Dollars Obligated, Fiscal Year
20052010:
Figure 10: Number of New Issuer Applications and Approvals, Fiscal
Years 20052010:
Figure 11: Number of Issuer Reviews and Findings, Fiscal Years 2005-
2010:
Figure 12: Number of Notices of Intent to Default, Fiscal Years 2005-
2010:
Figure 13: Information on Ginnie Mae Issuer Defaults, Fiscal Years
2005-2010:
Abbreviations:
CAR: Contract Assessment Review:
FASAB: Federal Accounting Standards Advisory Board:
FHA: Federal Housing Administration:
FTE: full-time equivalent:
Ginnie Mae: Government National Mortgage Association:
HUD: Department of Housing and Urban Development:
MBS: mortgage-backed securities:
OIG: Office of the Inspector General:
OMB: Office of Management and Budget:
PIH: Public and Indian Housing:
REAP: Resource Estimation and Allocation Process:
RHS: Rural Housing Service:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 14, 2011:
The Honorable Shelley Moore Capito:
Chairwoman:
Subcommittee on Financial Institutions and Consumer Credit:
Committee on Financial Services:
House of Representatives:
The Honorable Judy Biggert:
Chairwoman:
Subcommittee on Insurance, Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
In fiscal year 2010, the Government National Mortgage Association
(Ginnie Mae) supported more than $1 trillion in outstanding federally
insured or guaranteed mortgages by increasing liquidity in the
secondary mortgage market.[Footnote 1] A wholly owned government
corporation, Ginnie Mae guarantees the timely payment of principal and
interest on securities issued by financial institutions and backed by
pools of federally insured or guaranteed mortgage loans. Ginnie Mae
defines its mission as expanding affordable housing by linking capital
markets to the nation's housing markets. Ginnie Mae relies on approved
issuers to issue and service their mortgage-backed securities (MBS),
and on agencies, such as the Federal Housing Administration (FHA) and
the Department of Veterans Affairs (VA), to guarantee the underlying
mortgages against borrower default.
The economic crisis and housing downturn of the past 3 years has had a
significant effect on Ginnie Mae. As the conventional mortgage market
tightened and the subprime market contracted, borrowers increasingly
turned to federally insured or guaranteed mortgage loan programs, such
as those offered by FHA and VA, to finance their homes. As a result,
Ginnie Mae's total outstanding MBS volume and market share increased
substantially. Specifically, the volume of new Ginnie Mae-guaranteed
MBS (backed by single-family mortgages), which comprised the majority
of Ginnie Mae-guaranteed MBS, increased from $83.4 billion in 2005 to
$388.9 billion in 2010. In addition, during this time frame, Ginnie
Mae defaulted a large issuer--Taylor, Bean & Whitaker Mortgage
Corporation--due to issues with its financial statements (such as
their timeliness) and the withdrawal by FHA of its mortgagee status,
which resulted in Ginnie Mae acquiring and servicing a $26 billion
loan portfolio.[Footnote 2]
Concerned about the rapid increase in Ginnie Mae's share of the
overall MBS market and potential risks Ginnie Mae faces, you asked us
to examine Ginnie Mae's capacity to manage this growth. The objectives
of this report are to (1) describe how Ginnie Mae's market share and
volume have changed in recent years; (2) assess Ginnie Mae's risks and
how these risks are managed; and (3) determine what effect recent
changes in Ginnie Mae's market share and volume may have on financial
exposure to the federal government, including its ability to meet its
mission.
To address these objectives, we collected and analyzed data on Ginnie
Mae's market share and volume. We used data from Ginnie Mae for 2005-
2011 (third quarter) and from Inside Mortgage Finance for calendar
years 2005-2010.[Footnote 3] We assessed the reliability of these data
by performing electronic testing, reviewing existing information about
the data and systems that produced them, and interviewing agency
officials knowledgeable about the data. We determined that the data
were sufficiently reliable for the purposes of this report. We also
interviewed officials from the Department of Housing and Urban
Development (HUD)--more specifically from Ginnie Mae, FHA, Office of
the Inspector General (OIG), and Public and Indian Housing (PIH); the
Department of Agriculture's Rural Housing Service (RHS); VA; Fannie
Mae and Freddie Mac (government-sponsored enterprises); the Federal
Housing Finance Agency; and the Mortgage Bankers Association.
After assessing Ginnie Mae's risks, we identified operational and
counterparty risk as the key risks facing Ginnie Mae.[Footnote 4] For
operational risk, we focused on risks present in the agency's
management of human capital, contracting, and information technology.
We assessed Ginnie Mae's staffing and organizational realignment
plans; reviewed Ginnie Mae's guidance and other HUD and federal
contracting standards; and analyzed Ginnie Mae's list of contracts,
dollar values of contracts, and range of services. We also reviewed a
nonprobability sample of contracts and contract assessment reviews to
gain an understanding of the types of functions contractors perform
and how these contractors were monitored. The sample of contracts was
selected based on the function of the contract or Ginnie Mae
identified the activities as key business functions that could result
in operational risk if problems occurred with the contract. In
addition, we reviewed documentation related to Ginnie Mae's initiative
to improve its information technology. For counterparty risk, we
assessed Ginnie Mae's MBS policies and guidance, including Ginnie Mae
processes for issuer approval, issuer monitoring, and enforcement.
[Footnote 5] We interviewed Ginnie Mae officials and contractors on
how issuers are approved and monitored and the changes made to these
processes in recent years.
To determine how recent changes in Ginnie Mae's market share and
volume might affect financial exposure to the federal government and
the agency's ability to meet its mission, we reviewed Ginnie Mae's
guidance and financial statements and reviewed Ginnie Mae's credit
subsidy calculations and policy and financial model to determine what
information was included and if the model followed sound internal
control practices for cost estimation of federal credit programs. We
reviewed Ginnie Mae's statutes, Office of Management and Budget (OMB)
budget documents, and the Federal Credit Reform Act of 1990 (FCRA).
Finally, we interviewed officials from Ginnie Mae and its contractor
that conducts modeling, OMB, and FHA. For a detailed description of
our scope and methodology, see appendix I.
We conducted this performance audit from September 2010 to November
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Ginnie Mae operates as a unit of HUD and its administrative, staffing,
and budgetary decisions are coordinated with HUD.[Footnote 6] Ginnie
Mae is organized into five offices and relies on contractors for many
aspects of its work. Contracted functions include certifying new MBS,
administering payments to investors, data collection from issuers and
risk analysis, Ginnie Mae servicing of defaulted loans, internal
control reviews, issuer compliance reviews, and information systems
management. Ginnie Mae staff responsibilities include policy and
management functions and oversight of contractors. We discuss Ginnie
Mae's organization, staffing, and budget in greater detail later in
this report.
Ginnie Mae guarantees the performance of MBS, which are obligations of
the issuers that are backed by mortgages insured or guaranteed by
federal agencies, such as FHA, PIH, VA, or RHS.[Footnote 7] Ginnie Mae
provides an explicit federal guarantee (full faith and credit of the
United States) on these MBS, but it does not issue the MBS or
originate the underlying mortgages. Rather, it relies on approved
financial institutions (issuers) to pool or securitize the eligible
mortgages and issue Ginnie Mae-guaranteed MBS. The issuers can service
the MBS themselves or hire a third party to transmit the monthly
principal and interest payments to investors. Ginnie Mae's explicit
guarantee can lower the cost of borrowing for issuers, which allows
them to offer lower interest rates to mortgage borrowers. Issuers can
obtain these mortgages by originating the loans or purchasing the
loans from another institution. See figure 1 for an overview of Ginnie
Mae securitization.
Figure 1: Securitization of Federally Insured or Guaranteed Mortgages
into Ginnie Mae-Guaranteed MBS:
[Refer to PDF for image: illustration]
Borrowers: take out loans;
Mortgage payments to Servicer.
Lenders[A]: originate loans under guidelines of federal credit
programs: FHA, VA, RHS, or PIH: insure or guarantee loans.
Issuers[A]: (often the lenders or their affiliates) pool loans and
create a mortgage-backed security;
Ginnie Mae: guarantees investors timely payment of principal and
interest on security;
Uses contractors for:
* Administration of MBS;
* Servicing loans in its portfolio;
* Monitoring issuer compliance.
Broker-dealers: market and sell security to investors.
Investors: purchase security and receive monthly pass-through of
principal and interest from borrowers;
Ginnie Mae: guarantees investors timely payment of principal and
interest on security;
Uses contractors for:
* Administration of MBS;
* Servicing loans in its portfolio;
* Monitoring issuer compliance.
Servicers[A]: collect payment and disburse principal and interest to
Investors.
Source: GAO.
[A] Lender, issuer, and servicer functions may be performed by a
single entity.
[End of figure]
Ginnie Mae's guarantee is limited to the risk that issuers cannot make
the required monthly principal and interest payments to investors.
While other federal agencies already insure or guarantee the mortgages
that back Ginnie Mae-guaranteed MBS, the private-sector issuers of
these MBS are responsible for ensuring that investors that purchase
these MBS receive monthly payments on time and in full, even if the
borrower makes a late payment or defaults. Ginnie Mae issuers are
responsible for making these advance payments to investors using their
own funds and for recovering any losses from the federal agencies that
insured or guaranteed the mortgages. If an issuer cannot ensure the
timely payment of principal and interest to investors, Ginnie Mae
defaults the issuer, acquires the servicing of the loans, and uses its
own funds to manage the portfolio and make any necessary advances to
investors. Ginnie Mae charges issuers a monthly guarantee fee, which
varies depending on the product, for guaranteeing timely payment.
[Footnote 8] Issuers also pay a commitment fee to Ginnie Mae each time
they request authority (commitment authority) to pool mortgages into
Ginnie Mae-guaranteed MBS.[Footnote 9]
Investors in Ginnie Mae-guaranteed MBS face the risk that a mortgage
will be removed from the MBS pool prematurely--either due to borrower
default or prepayment of a loan--which reduces the amount of interest
earned on the security.[Footnote 10] However, investors do not face
credit risk--the possibility of loss from unpaid mortgages--because
Ginnie Mae guarantees timely payment of principal and interest.
Ginnie Mae has several different products. Its original MBS program,
Ginnie Mae I, requires that all pools contain similar types of
mortgages (such as single-family or multifamily) with similar
maturities and the same interest rates. The Ginnie Mae II MBS program,
which was introduced in 1983, permits pools to contain loans with
differing characteristics. For example, the underlying mortgages can
have varying interest rates and a pool can be created using adjustable-
rate mortgages. Ginnie Mae's Multiclass Securities Program, introduced
in 1994, offers different types of structured products, including Real
Estate Mortgage Investment Conduits (REMIC) and Ginnie Mae Platinum
Securities. REMICs tailor the prepayment and interest rate risks
associated with MBS to investors with varying investment goals. These
products direct principal and interest payments from underlying MBS to
classes, or tranches, with different principal balances, terms of
maturity, interest rates, and other characteristics. Platinum
Securities allow investors to aggregate MBS with relatively small
remaining principal balances and similar characteristics into new,
more liquid securities. The MBS aggregated into these structured
products retain Ginnie Mae's full faith and credit guarantee. In
addition, Ginnie Mae guarantees the timely payment of principal and
interest on the structured products and charges an additional fee to
the financial institutions that create them.[Footnote 11] Ginnie Mae
also requires that these institutions contractually agree to reimburse
any costs Ginnie Mae may incur to guarantee these products.
Ginnie Mae defines its mission as expanding affordable housing by
linking capital markets to the nation's housing markets. Ginnie Mae
does this by serving as the dominant secondary market vehicle for
government-insured or -guaranteed mortgage loan programs. Ginnie Mae's
guarantee benefits lenders, borrowers, and investors in a number of
ways. First, the guarantee benefits lenders by increasing the
liquidity of mortgage loans, which may lower the cost of raising funds
and allow lenders to transfer the interest-rate risk of a mortgage to
investors.[Footnote 12] Second, the guarantee benefits borrowers by
lowering the cost of raising funds for lenders, which helps lower
interest rates on mortgage loans. Finally, Ginnie Mae's guarantee
provides investors with a fixed-income security that has the same
credit quality as a U.S. Treasury bond.
Ginnie Mae relies on its fee revenues rather than appropriations from
the general fund to pay for its operations and cover costs related to
issuer defaults.[Footnote 13] However, the amount of MBS Ginnie Mae
can guarantee each year is capped by its commitment authority level in
HUD's appropriation. For 2010 and 2011, Ginnie Mae was authorized each
year to guarantee up to $500 billion in MBS.[Footnote 14]
Ginnie Mae guarantees the timely payment of principal and interest on
MBS. For budgetary purposes, Ginnie Mae and other federal agencies
estimate the net lifetime costs (credit subsidy costs) of their
guarantee program and include the costs to the federal government in
their annual budgets. For Ginnie Mae, credit subsidy costs represent
the net present value of expected cash flows over the life of the
securities it guarantees, excluding administrative costs. Cash inflows
consist primarily of guarantee fees charged to MBS issuers and cash
outflows includes advance payments of principal and interest on
delinquent mortgages underlying MBS from defaulted issuers. When
estimated cash inflows exceed expected cash outflows, a program is
said to have a negative credit subsidy rate. When the opposite
happens, a program is said to have a positive credit subsidy rate, and
therefore require appropriations to cover the estimated subsidy cost
of new business. Historically, Ginnie Mae has estimated that its
guarantee program would have a negative credit subsidy rate and, as a
result, generate budgetary receipts for the federal government. These
receipts have resulted in substantial balances in a reserve account,
which is used to help cover unanticipated increases in those costs--
for example, increases due to higher-than-expected issuer defaults or
fraud.
Ginnie Mae's Market Share and MBS Volume Increased Substantially from
2007 to 2010:
In 2010, Ginnie Mae-Guaranteed MBS Represented 25 Percent of the
Market:
According to Inside Mortgage Finance data, from calendar year 2007 to
2010 Ginnie Mae's share of the MBS market increased from nearly 5
percent to 25 percent as the total size of the secondary mortgage
market declined and the role of private-label MBS issuers declined
substantially. The size of the MBS market decreased from $2.16
trillion in new MBS in calendar year 2005 to $1.57 trillion in
calendar year 2010, a decline of nearly one-third (see figure 2).
[Footnote 15] The overall market decline was driven by the housing
downturn and increased defaults and foreclosures. This led to mortgage
lenders tightening their underwriting standards and making fewer
loans. Also, private-label MBS issuers faced a sharp decline in
eligible loans and investor demand. As the demand for FHA and other
federally insured or guaranteed mortgages grew during this time,
financial institutions increased their issuance of Ginnie Mae-
guaranteed MBS to finance these federally insured or guaranteed loans.
[Footnote 16]
Figure 2: Volume of MBS Issuance by Type, Calendar Years 2000-2010:
[Refer to PDF for image: stacked vertical bar graph]
Calendar year: 2000;
Government-sponsored enterprise: $375.8 million;
Private-label: $136.0 million;
Ginnie Mae-guaranteed: $103.3 million.
Calendar year: 2001;
Government-sponsored enterprise: $914.9 million;
Private-label: $267.3 million;
Ginnie Mae-guaranteed: $172.7 million.
Calendar year: 2002;
Government-sponsored enterprise: $1.27 billion;
Private-label: $414.0 million;
Ginnie Mae-guaranteed: $172.1 million.
Calendar year: 2003;
Government-sponsored enterprise: $1.91 billion;
Private-label: $586.21 million;
Ginnie Mae-guaranteed: $217.7 million.
Calendar year: 2004;
Government-sponsored enterprise: $892.3 million;
Private-label: $864.2 million;
Ginnie Mae-guaranteed: $124.4 million.
Calendar year: 2005;
Government-sponsored enterprise: $879.1 million;
Private-label: $1.19 billion;
Ginnie Mae-guaranteed: $85.8 million.
Calendar year: 2006;
Government-sponsored enterprise: $816.9 million;
Private-label: $1.15 billion;
Ginnie Mae-guaranteed: $82.3 million.
Calendar year: 2007;
Government-sponsored enterprise: $1.06 billion;
Private-label: $707.0 million;
Ginnie Mae-guaranteed: $95.5 million.
Calendar year: 2008;
Government-sponsored enterprise: $899.8 million;
Private-label: $58.0 million;
Ginnie Mae-guaranteed: $269.0 million.
Calendar year: 2009;
Government-sponsored enterprise: $1.28 billion;
Private-label: $60.4 million;
Ginnie Mae-guaranteed: $446.2 million.
Calendar year: 2010;
Government-sponsored enterprise: $1.02 billion;
Private-label: $59.9 million;
Ginnie Mae-guaranteed: $385.8 million.
Source: GAO analysis of Inside Mortgage Finance data.
Note: Government-sponsored enterprise refers to Fannie Mae and Freddie
Mac.
[End of figure]
As Ginnie Mae's market share increased, the number of Ginnie Mae
issuers generally stayed the same although their numbers declined from
2007 to 2008 and increased in 2009 and 2010 (see figure 3). Moreover,
for the three quarters of 2011, 371 financial institutions
participated in the Ginnie Mae-guaranteed MBS program. While most were
mortgage banks, the issuers with the largest Ginnie Mae-guaranteed MBS
portfolios were commercial banks. As of June 30, 2011, three
commercial banks accounted for nearly two-thirds of the dollar amount
of outstanding Ginnie Mae-guaranteed MBS. According to Ginnie Mae
data, concentration among issuers generally has remained the same.
More specifically, in 2005, 20 issuers accounted for 92 percent of
Ginnie Mae single-family MBS issuance; in 2010, 26 issuers accounted
for 94 percent of single-family MBS.
Figure 3: Number and Types of Institutions Issuing Ginnie Mae-
Guaranteed MBS, Fiscal Years 2005-2010 and Share of Outstanding MBS by
Issuer Type, as of June 30, 2011:
[Refer to PDF for image: vertical bar graph and associated pie-chart]
Number of issuers:
Fiscal year: 2005;
Mutual savings banks: 7;
Credit unions: 7;
Others: 20;
Savings and loans: 42;
Commercial banks: 55;
Mortgage banks: 282;
Total: 413.
Fiscal year: 2006;
Mutual savings banks: 6;
Credit unions: 9;
Others: 17;
Savings and loans: 42;
Commercial banks: 56;
Mortgage banks: 266;
Total: 396.
Fiscal year: 2007;
Mutual savings banks: 6;
Credit unions: 9;
Others: 18;
Savings and loans: 41;
Commercial banks: 56;
Mortgage banks: 253;
Total: 383.
Fiscal year: 2008;
Mutual savings banks: 7;
Credit unions: 7;
Others: 18;
Savings and loans: 35;
Commercial banks: 60;
Mortgage banks: 215;
Total: 342.
Fiscal year: 2009;
Mutual savings banks: 9;
Credit unions: 8;
Others: 24;
Savings and loans: 34;
Commercial banks: 64;
Mortgage banks: 228;
Total: 367.
Fiscal year: 2010;
Mutual savings banks: 9;
Credit unions: 12;
Others: 26;
Savings and loans: 29;
Commercial banks: 59;
Mortgage banks: 246;
Total: 381.
Shares of outstanding Ginnie Mae-guaranteed MBS by issuer type (June
30, 2011):
Commercial banks: 71%;
Mortgage banks: 22%;
Savings and loans: 5%;
Others: 0.8%;
Credit unions: 0.4%;
Mutual savings banks: 0.2%.
Source: GAO analysis of Ginnie Mae data.
Note: Shares of outstanding MBS do not add to 100 percent due to
rounding.
[End of figure]
Ginnie Mae-Guaranteed MBS Volume Increased to More than $1 Trillion:
According to Ginnie Mae data, as Ginnie Mae's share of the secondary
mortgage market increased, the volume of Ginnie Mae-guaranteed MBS
outstanding increased from $412 billion in 2005 to more than $1
trillion in 2010 (see figure 4). Concurrently, new guarantees of
Ginnie Mae-guaranteed MBS increased from about $89.3 billion to nearly
$413 billion.[Footnote 17] To accommodate the securitization of an
increasing volume of federally insured and guaranteed mortgages,
Congress increased the statutory cap on Ginnie Mae's commitment
authority from $200 billion to $500 billion over the same period.
Figure 4: Ginnie Mae Guarantees of New MBS and Cumulative Guaranteed
MBS Outstanding, Fiscal Years 2005-2010:
[Refer to PDF for image: combined stacked vertical bar and line graph]
Fiscal year: 2005;
Ginnie Mae II guarantee of new MBS: $41.94 billion;
Ginnie Mae I guarantee of new MBS: $47.4 billion;
Ginnie Mae-guaranteed MBS outstanding: $405.25 billion.
Fiscal year: 2006;
Ginnie Mae II guarantee of new MBS: $42.29 billion;
Ginnie Mae I guarantee of new MBS: $38.33 billion;
Ginnie Mae-guaranteed MBS outstanding: $410.2 billion.
Fiscal year: 2007;
Ginnie Mae II guarantee of new MBS: $39.8 billion;
Ginnie Mae I guarantee of new MBS: $45.27 billion;
Ginnie Mae-guaranteed MBS outstanding: $449.71 billion.
Fiscal year: 2008;
Ginnie Mae II guarantee of new MBS: $112.93 billion;
Ginnie Mae I guarantee of new MBS: $107.71 billion;
Ginnie Mae-guaranteed MBS outstanding: $597.21 billion.
Fiscal year: 2009;
Ginnie Mae II guarantee of new MBS: $277.64 billion;
Ginnie Mae I guarantee of new MBS: $141.3 billion;
Ginnie Mae-guaranteed MBS outstanding: $836.76 billion.
Fiscal year: 2010;
Ginnie Mae II guarantee of new MBS: $171.73 billion;
Ginnie Mae I guarantee of new MBS: $241.23 billion;
Ginnie Mae-guaranteed MBS outstanding: $1.04 trillion.
Source: GAO analysis of Ginnie Mae data.
[End of figure]
The increases in annual volume were due to increases in the volume of
mortgages insured by FHA or guaranteed by VA, PIH, or RHS that were
pooled into Ginnie Mae-guaranteed MBS (see figure 5). Of the agencies,
FHA accounted for most of the increases in annual volume. FHA-insured
loans pooled into Ginnie Mae-guaranteed MBS increased from $63.8
billion in 2005 to $330.2 billion in 2010--and more recently, to $182
billion during the first three quarters of 2011. Furthermore, in 2010,
nearly all single-family mortgages insured by FHA or guaranteed by VA
were pooled into Ginnie Mae-guaranteed MBS.
Figure 5: Federally Insured and Guaranteed Mortgages Pooled into New
Ginnie Mae-Guaranteed MBS, by Agency, Fiscal Years 2005-2010:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2005;
RHS: $2.1 billion;
VA: $23.4 billion;
FHA: $63.8 billion;
Total: $89.3 billion.
Fiscal year: 2006;
RHS: $2.1 billion;
VA: $23.2 billion;
FHA: $55.2 billion;
Total: $80.5 billion.
Fiscal year: 2007;
RHS: $2.5 billion;
VA: $23.2 billion;
FHA: $59.2 billion;
Total: $84.9 billion.
Fiscal year: 2008;
RHS: $5.4 billion;
VA: $35.3 billion;
FHA: $179.7 billion;
Total: $220.4 billion.
Fiscal year: 2009;
RHS: $12.8 billion;
VA: $66.3 billion;
FHA: $339.4 billion;
Total: $418.5 billion.
Fiscal year: 2010;
RHS: $17.4 billion;
VA: $64.9 billion;
FHA: $330.2 billion;
Total: $412.5 billion.
Source: GAO analysis of Ginnie Mae data.
Note: Due to their relatively small volume, the figure does not
include PIH mortgages, which accounted for nearly $40 million of
Ginnie Mae-guaranteed MBS volume in 2005 and $516 million in 2010.
[End of figure]
In addition to issuing guaranteed MBS from loans for single-family
homes, Ginnie Mae issuers increasingly produced MBS backed by other
mortgage products, such as multifamily loans and reverse mortgages on
single-family homes (see figure 6).[Footnote 18] More specifically,
the volume of reverse mortgages backing Ginnie Mae-guaranteed MBS
increased significantly starting in 2009 when Ginnie Mae instituted
its reverse mortgage securities program, which was the main
securitization program available for FHA reverse mortgage loans during
this time. During the first three quarters of 2011, financial
institutions issued more than $8 billion in Ginnie Mae-guaranteed MBS
backed by reverse mortgages.
Figure 6: Ginnie Mae Guarantees of New MBS Backed by Multifamily Loans
and Reverse Mortgages, Fiscal Years 2005-2010, and Types of Mortgages
Backing New Ginnie Mae-Guaranteed MBS, Fiscal Year 2010:
[Refer to PDF for image: vertical bar graph and associated pie-chart]
Fiscal year: 2005;
Multifamily loans: $5.9 billion.
Fiscal year: 2006;
Multifamily loans: $5.7 billion.
Fiscal year: 2007;
Multifamily loans: $3.8 billion.
Fiscal year: 2008;
Reverse mortgages: $1.2 billion;
Multifamily loans: $3.8 billion.
Fiscal year: 2009;
Reverse mortgages: $5.1 billion;
Multifamily loans: $5.1 billion.
Fiscal year: 2010;
Reverse mortgages: $11.8 billion;
Multifamily loans: $12.3 billion.
Types of mortgages backing new Ginnie Mae-guaranteed MBS in FY 2010:
Single-family mortgages: 94.3%; $388.9 billion;
Multifamily loans: 3.0%; $12.3 billion;
Reverse mortgages: 2.9%; $11.8 billion.
Source: GAO analysis of Ginnie Mae data.
Note: Multifamily loans include loans for construction and purchase.
Single-family mortgages include loans on manufactured homes but do not
include reverse mortgages.
[End of figure]
The volume of structured products backed by Ginnie Mae-guaranteed MBS
increased as the total volume of MBS has increased since 2005. For
instance, the volume of REMICs issued by financial institutions
approved to issue Ginnie Mae structured products increased in 2009 and
2010 (see figure 7).[Footnote 19] During the first three quarters of
2011, financial institutions issued $102 billion in REMICs, $27
billion in Platinum Securities, and $670 million in Callable Trusts.
Ginnie Mae's fee revenues also increased from these products, from
$20.7 million in 2005 to $63.4 million in 2010. As of June 30, 2011,
Ginnie Mae had received $45.2 million in fee revenues from structured
products for 2011. Fees from these products represent a small but
growing share of annual revenue for Ginnie Mae (from 2.6 percent in
2005 to 6.3 percent in 2010).
Figure 7: Volume of Ginnie Mae Structured Products Backed by Ginnie
Mae-Guaranteed MBS, Fiscal Years 2005-2010:
[Refer to PDF for image: combined vertical bar and multiple line graph]
Fiscal year: 2005;
Ginnie Mae guarantee of new MBS: $83.43 billion;
REMICs: $37.2 billion;
Platinum Securities: $20.6 billion;
Callable trusts: $0.
Fiscal year: 2006;
Ginnie Mae guarantee of new MBS: $74.95 billion;
REMICs: $23.5 billion;
Platinum Securities: $14.5 billion;
Callable trusts: $0.3 million.
Fiscal year: 2007;
Ginnie Mae guarantee of new MBS: $81.23 billion;
REMICs: $32.2 billion;
Platinum Securities: $11.9 billion;
Callable trusts: $0.45 million.
Fiscal year: 2008;
Ginnie Mae guarantee of new MBS: $215.7 billion;
REMICs: $43.4 billion;
Platinum Securities: $43.1 billion;
Callable trusts: $0.19 million.
Fiscal year: 2009;
Ginnie Mae guarantee of new MBS: $408.62 billion;
REMICs: $79.9 billion;
Platinum Securities: $88.7 billion;
Callable trusts: $0.
Fiscal year: 2010;
Ginnie Mae guarantee of new MBS: $388.82 billion;
REMICs: $182.2 billion;
Platinum Securities: $51.9 billion;
Callable trusts: $2.33 million.
Source: GAO analysis of Ginnie Mae data.
[End of figure]
Ginnie Mae Has Been Taking Steps to Better Manage Risks:
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people, and systems or from external
events. We and others, including HUD's OIG, have identified limited
staff, substantial reliance on contractors, and the need for
modernized information systems as operational risks that Ginnie Mae
may face.[Footnote 20] Ginnie Mae also faces counterparty risk when an
issuer fails or defaults, which would require the agency to service
the underlying loans and ensure that investors receive monthly
principal and interest payments. Ginnie Mae has taken a number of
steps to address both types of risks. A complete listing of Ginnie
Mae's planned changes to address operational and counterparty risk can
be found in appendix II.
Ginnie Mae Has Taken Steps to Address Operational Risks:
To help mitigate operational risk, Ginnie Mae has developed strategies
to address staffing gaps, realigned its organizational structure,
conducted risk assessments on its contracting, and started to improve
outdated information systems.
Addressing Staffing Gaps:
Although Ginnie Mae's market share and volume of MBS has increased in
recent years, its (noncontractor) staff levels have been relatively
constant during this time despite requests for increased staffing
authority.[Footnote 21] For example, in 2004, when Ginnie Mae's MBS
market share was 7 percent, HUD conducted a Resource Estimation and
Allocation Process (REAP) study, which suggested that Ginnie Mae's
staff be increased from 70 to 76 full-time equivalent (FTE) positions.
However, Ginnie Mae officials told us that its authorized staff levels
were not increased to the levels suggested in the REAP study until
2010 when the agency was given authority for 78 FTEs.[Footnote 22]
Between 2005 and 2009, Ginnie Mae's authorized staff level fluctuated
between 67 and 72.2 FTEs.[Footnote 23] Moreover, its actual staff
levels trailed its authorized staff levels. Table 1 illustrates the
number of requested, authorized, and actual FTEs from 2005 to 2010.
Table 1: Number of Ginnie Mae Requested, Authorized, and Actual FTEs,
Fiscal Years 2005-2010:
Fiscal year[A]: 2005;
Requested FTEs[B]: 76;
Authorized FTEs: 67;
Actual FTEs employed at the beginning of the fiscal year: 66;
Actual FTEs employed at the end of the fiscal year: 65.
Fiscal year[A]: 2006;
Requested FTEs[B]: 76;
Authorized FTEs: 69;
Actual FTEs employed at the beginning of the fiscal year: 65;
Actual FTEs employed at the end of the fiscal year: 66.
Fiscal year[A]: 2007;
Requested FTEs[B]: 69;
Authorized FTEs: 67.3;
Actual FTEs employed at the beginning of the fiscal year: 66;
Actual FTEs employed at the end of the fiscal year: 64.
Fiscal year[A]: 2008;
Requested FTEs[B]: 73;
Authorized FTEs: 69;
Actual FTEs employed at the beginning of the fiscal year: 64;
Actual FTEs employed at the end of the fiscal year: 61.
Fiscal year[A]: 2009;
Requested FTEs[B]: 78;
Authorized FTEs: 72.2;
Actual FTEs employed at the beginning of the fiscal year: 61;
Actual FTEs employed at the end of the fiscal year: 59.
Fiscal year[A]: 2010;
Requested FTEs[B]: 90;
Authorized FTEs: 78;
Actual FTEs employed at the beginning of the fiscal year: 59;
Actual FTEs employed at the end of the fiscal year: 70.
Source: Ginnie Mae.
[A] In 2008, funding was not provided to support the authorized FTE
ceiling because, according to Ginnie Mae officials, HUD reported an
incorrect figure to Congress for the amount needed to fund salaries at
the authorized level. In 2009, funding was not available until the
second half of the year due to a continuing resolution in place for
the 2009 budget.
[B] Requested FTEs is the number of FTEs Ginnie Mae submits to HUD.
However, the number HUD presents to OMB may not reflect Ginnie Mae's
original request.
[End of table]
Most recently, Ginnie Mae's internal control reviews for 2009 and 2010
identified a control deficiency due to employee vacancies.[Footnote
24] In 2009, the report found multiple vacancies in certain positions
relevant to internal controls, such as an internal control manager and
monitoring analysts. The report also found that the vacancies caused
employee workloads to increase, which could lead to negative
performance. In 2010, the report stated that while key senior-level
positions had been filled, vacancies had brought actual FTE levels
below the level recommended in the 2004 REAP study, mainly in the
Office of Mortgage-Backed Securities. In 2011, the reviews had no
findings related to employee vacancies.
As part of a broad effort to address and mitigate its operational
risks related to staffing levels, Ginnie Mae has incorporated some
principles consistent with our internal control and management tool.
[Footnote 25] Internal control and human capital guidance states that
agencies should develop strategies that are tailored to address gaps
in the number and deployment of staff, evaluate their organizational
structure, and make changes based on changing conditions. Consistent
with this guidance, Ginnie Mae has identified skill gaps in staff
resources, developed a plan to hire additional staff, and made changes
to its organizational structure.
In 2010, Ginnie Mae officials presented HUD senior management with a
staffing justification that identified skill gaps in its current
staffing. Ginnie Mae officials reported needing 160 staff to develop
or enhance policies, procedures, and related systems to properly
manage risks and bring some contracted services in-house, such as
project management. The staffing justification stated that Ginnie Mae
did not have sufficient or dedicated staff to mitigate certain risks
internally. To identify these gaps in staffing, Ginnie Mae created a
matrix that identified certain roles that were not fully staffed. For
example, the matrix identified that Ginnie Mae needed:
* dedicated staff to design, develop, and leverage risk-related
analytic tools to reduce dependency on recommendations of contractors
to manage Ginnie Mae's risk;
* dedicated staff to develop exit and replacement strategies for
critical, underperforming contractors;
* dedicated staff to manage and oversee operational risks;
* dedicated staff to establish and manage loss reserves and portfolio
modeling; and:
* sufficient staff to develop and maintain systems manuals used by
employees and Ginnie Mae issuers and servicers.
In 2011, Ginnie Mae received approval to support a staffing level of
108 FTEs.[Footnote 26] Ginnie Mae had developed a plan to hire
additional staff in two phases. For the first phase, Ginnie Mae
focused on staffing 25 priority positions, of which 9 were in the
Office of Mortgage-Backed Securities, 5 in the Office of Finance, 4 to
assist the Chief Risk Officer, 2 in the Office of Capital Markets, 3
in the Office of Management Operations, 1 in the Office of Program
operations, and 1 in the Office of the President and Executive Vice
President.[Footnote 27]
The President's 2012 budget request included $30 million for
additional administrative expenses, including hiring up to 249 FTEs.
According to Ginnie Mae officials, the increase would allow the agency
to implement its second phase of hiring and increase its staffing
levels. However, Ginnie Mae officials explained that in July 2011 they
reassessed and revised the budget request after determining that the
requested $30 million would be sufficient to hire only 137 FTEs.
[Footnote 28] According to Ginnie Mae officials, additional
flexibility provided in the budget request will enable Ginnie Mae to
strengthen risk management and oversight, move in-house some functions
performed by contractors, and provide flexibility for future needs.
More specifically, if Ginnie Mae does not receive the authority
requested in its revised 2012 request, officials told us the agency
would be forced to use its limited resources across its many-risk
management efforts and would have little capacity to conduct
preventative analysis, therefore leaving Ginnie Mae to rely on a more
reactive approach.
Ginnie Mae initially proposed realigning its organizational structure
to support increased staffing levels in November 2010, and amended its
proposal in March 2011 based on comments received by HUD senior
management. Ginnie Mae proposed the revisions to create a new office
and add divisions under an existing office so that new staff could be
more effectively integrated into the agency. For example:
* The proposed structure created an Office of Enterprise Risk to be
headed by the Chief Risk Officer. The Chief Risk Officer position and
a Risk Committee were created in 2008 in response to a 2007 HUD OIG
report identifying a potential conflict of interest between Ginnie
Mae's issuer approval and issuer monitoring functions.[Footnote 29]
* The proposed structure added two divisions in the Office of Program
Operations, which manages day-to-day functions for Ginnie Mae's MBS
and structured product programs. The Project and Data Management
Division will oversee and direct initiatives across Ginnie Mae, such
as the implementation of new disclosure information. The Operations
Division will focus on managing operations, such as pooling loans and
creating securities, and will direct Ginnie Mae's contractors who
maintain and operate a large part of Ginnie Mae's securitization
process.
Figure 8 illustrates the proposed reorganization.[Footnote 30] As of
August 2011, officials had received HUD approval to implement the new
structure and have notified Congress and HUD's union and await their
responses to begin implementation.
Figure 8: Ginnie Mae's 2011 Proposal for Reorganization:
[Refer to PDF for image: organizational chart]
Top level:
Ginnie Mae: Office of the President and Executive Vice President.
Second level, reporting to Office of the President and Executive Vice
President:
* Communications and External Relations Division (moved and renamed);
* Information Management Division (moved).
Third level, reporting to Office of the President and Executive Vice
President:
* Office of Finance:
- Treasury Division;
- Budget Division;
- Controller's Division;
* Office of Mortgage-Backed Securities:
- Single Family Division (renamed);
- Multifamily Division;
- Asset Management and Monitoring Division (renamed);
* Office of Enterprise Risk (new);
* Office of Capital Markets;
* Office of Program Operations:
- Project and Data Management Division (new);
- Operations Division (new);
- Program Development and Implementation Staff (previous place within
the organizational structure);
* Office of Management Operations:
- Procurement Management Division;
- Administrative Management Division;
- Information Management Division (previous place within the
organizational structure) (moved to second level);
- Marketing Staff (previous place within the organizational
structure); (renamed and moved to second level; now Communications and
External Relations Division).
Source: Ginnie Mae.
[End of figure]
Increased Reliance on Contractors:
Between 2005 and 2010, as Ginnie Mae's volume and issuer activity
increased and staff levels remained largely the same, the agency
increasingly relied on contractors. In 2005, we reported that in 2004
approximately 81 percent of Ginnie Mae's activities were contracted
out and concluded that ensuring the agency had sufficient staff
capabilities to plan, monitor, and manage its contracts was essential.
According to Federal Procurement Data System-Next Generation data,
from 2005 through 2010, Ginnie Mae obligated approximately $599
million on contracts[Footnote 31]. As shown is figure 9, while the
amount of obligations had been increasing since 2005, they increased
significantly in 2009 and 2010. Contract obligations in 2010 were more
than 14 times the obligations in 2005 due, in part, to increases in
volume and market share, expenses related to servicing nonperforming
loans in defaulted issuers' portfolios, and the need to use contracts
to implement planned improvements to technology systems. Further, the
number of active contracts and orders increased from 18 in 2005 to 37
in 2010.[Footnote 32]
Figure 9: Amount of Ginnie Mae Contract Dollars Obligated, Fiscal Year
2005-2010:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2005;
Contract dollars obligated: $16.8 million.
Fiscal year: 2006;
Contract dollars obligated: $52.8 million.
Fiscal year: 2007;
Contract dollars obligated: $71.4 million.
Fiscal year: 2008;
Contract dollars obligated: $63.6 million.
Fiscal year: 2009;
Contract dollars obligated: $154.9 million.
Fiscal year: 2010;
Contract dollars obligated: $239.6 million.
Source: GAO analysis of Federal Procurement Data System-Next
Generation data.
Note: All dollars have been adjusted to constant dollars to reflect
inflation based on the 2010 price index from the Bureau of Economic
Analysis.
[End of figure]
According to Ginnie Mae officials, they have contracted out many
functions because the agency has flexibility to use agency revenues to
procure contractors. That is, statutorily Ginnie Mae has more
flexibility to spend funds for contracting expenses because they can
be funded from agency revenues without annual appropriations. To pay
for staff, Ginnie Mae has to seek annual appropriations that have to
be approved by HUD, OMB, and Congress. As a result, Ginnie Mae has
relied on contractors to develop and operate information technology
systems, manage and dispose of acquired mortgage portfolios, and
conduct monitoring reviews of issuers. According to Ginnie Mae
officials, throughout its history the agency has operated with a
business model that includes a small staff that is largely supported
by contractors because of the difficulty in securing annual
appropriations and not being able to use agency revenues to pay for
staff. Officials explained they have not conducted a formal benefit-
cost assessment of using contractors but believe such a heavy reliance
on contractors may not be cost-effective.
Ginnie Mae depends on contractors to provide a variety of services,
including those related to guaranteeing MBS, such as collecting data
from issuers and processing monthly principal and interest payments to
investors. In addition, Ginnie Mae relies on several contractors to
take over the servicing responsibilities on pooled loans when issuers
default. Table 2 illustrates some core functions at Ginnie Mae
performed by contractors and the total amounts obligated from 2005 to
2010.[Footnote 33]
Table 2: Description of Select Contracted Functions at Ginnie Mae and
Total Obligated Amounts, Fiscal Years 2005-2010:
Contracted function: Servicing of loans in its single-family,
manufactured housing, and mulitfamily portfolio[B];
Description of contracted services: Four contractors perform default
services, which include servicing current, delinquent, and defaulted
loans, foreclosure services, management and disposition of acquired
property, and preparation and submission of insurance or guarantee
claims to FHA, VA, RHS, and PIH;
Total obligated amounts, fiscal years 2005-2010[A]:
* Single-family housing: $143.59 million;
* Single-family housing: $70.35 million;
* Manufactured housing: $14.32 million;
* Multifamily housing: $5.95 million.
Contracted function: Administration of MBS program (front office);
Description of contracted services: Performs pool processing and
certification, central payment, and transfer agent services functions;
Total obligated amounts, fiscal years 2005-2010 [A]: $129.11 million.
Contracted function: Administration of MBS program (back office);
Description of contracted services: Provides back-office support for
Ginnie Mae to operate its securitization program, including its review
of new issuer applications, the monthly collection of data from
issuers, and risk analysis and monitoring;
Total obligated amounts, fiscal years 2005-2010[A]: $105.81 million.
Contracted function: Structured products transaction financial advisor;
Description of contracted services: Assists Ginnie Mae in the review
and execution of each multiclass securities transaction, including the
review of each transaction to ensure compliance with Ginnie Mae
policies and procedures;
Total obligated amounts, fiscal years 2005-2010[A]: $32.92 million.
Contracted function: Issuer compliance and financial statement reviews;
Description of contracted services: Performs issuer and financial
statement reviews in accordance with Ginnie Mae guidance;
Total obligated amounts, fiscal years 2005-2010[A]: $12.02 million.
Contracted function: Policy and financial analysis model and budget
support;
Description of contracted services: Provides support for running the
existing model, developing the new model, and supporting the Ginnie
Mae budget process;
Total obligated amounts, fiscal years 2005-2010 [A]: $9.09 million.
Contracted function: Technical advisory services;
Description of contracted services: Provides support for Ginnie Mae's
plan to modernize its operational infrastructure and maintains
compliance with information technology development rules and standards;
Total obligated amounts, fiscal years 2005-2010: $8.59 million.
Contracted function: Contractor reviews;
Description of contracted services: Performs reviews of contracts that
have expended more than $1 million in a fiscal year in accordance with
procedures developed by Ginnie Mae;
Total obligated amounts, fiscal years 2005-2010[A]: $3.84 million.
Contracted function: Internal control reviews;
Description of contracted services: Conducts internal control reviews
in accordance with OMB requirements;
Total obligated amounts, fiscal years 2005-2010[A]: $3.17 million.
Sources: Ginnie Mae and GAO analysis of Federal Procurement Data
System-Next Generation data.
[A] All dollars have been adjusted to constant dollars to reflect
inflation based on the 2010 price index from the Bureau of Economic
Analysis.
[B] The amounts for servicing loans include obligation amounts and
does not include revenue or reimbursement amounts Ginnie Mae may have
received for this function.
[End of table]
Ginnie Mae has used its own staff and third-party assessments of
contracts to oversee its contractors but plans to provide additional
staff resources to supplement the third-party assessments. According
to HUD's contractor monitoring guide and handbook on procurement
policies and procedures, a Government Technical Representative (GTR)
should be assigned to oversee and monitor the contractor's
performance. For example, the guidance requires that GTRs monitor the
contract for timeliness and review invoices for accuracy.[Footnote 34]
Since 1993, Ginnie Mae has relied on third-party contractors to
conduct Contract Assessment Reviews (CAR) in accordance with
procedures developed by Ginnie Mae. In general, the CARs guidance
outlines that the third-party contractor should focus on determining
whether the contractors complied with the terms of their contracts,
conducted appropriate billing, and maintained adequate internal
controls to minimize risk to Ginnie Mae. The CAR reports also provide
information on any potential risks to Ginnie Mae based on other
completed audits and reviews. These reviews are to be conducted on
contracts that have expended more than $1 million.
Ginnie Mae officials explained they had plans to supplement these
reviews in 2011 with the hiring of additional Ginnie Mae staff to
conduct on-site reviews and oversight concurrent with, and
independently of, the third-party contractors. However, due to changes
to its budget, implementation of this plan has been put on hold until
2012 or 2013. Officials explained that in previous years staffing
limitations required waiting until the following review to address
issues identified in the previous review. In some instances, there
might be a significant time lag between reviews. One review might
cover a 15-month period while another would cover a 9-month time
frame. Ginnie Mae officials explained the timing of the reviews often
depended on the time needed to procure the contractors rather than on
a set schedule.
Based on our nonprobability sample of 33 CAR reports from 2005 to
2010, the reports produced some findings. These findings included
questionable costs, information technology controls, and accounting
controls. For instance, one contractor did not have proper procedures
to review timesheets and improperly billed Ginnie Mae for $2,621. The
contractor agreed to develop formalized procedures and reimburse
Ginnie Mae for the improper payment. Additionally, in a few instances
the third party conducting the review had difficulty accessing
necessary files to complete contractually required procedures. Ginnie
Mae officials explained that they now work to address any access
issues with contractors at the beginning of the contractor's reviews.
While our review of a sample of CARs identified some findings, the
2010 HUD OIG management letter discussed problems relating to one
contractor and recommended associated improvements in internal
controls, including assessing the effectiveness of CAR procedures.
More specifically, in October 2009 Ginnie Mae identified accounting
irregularities at its servicer of manufactured home loans. Agency
officials subsequently asked the contractor that performs internal
control reviews to do a more in-depth review of the servicer,
including a file review.[Footnote 35] The internal control review
confirmed the servicer had not completely or accurately processed
manufactured home loan transactions for Ginnie Mae. As a result,
Ginnie Mae officials explained they developed a corrective action plan
and decreased the size of the portfolio managed by the servicer from
$26 million in August 2010 to about $4.7 million in August
2011.[Footnote 36] The HUD OIG management letter suggested that
internal control over Ginnie Mae's manufactured housing servicer
needed improvement and stated one of the causes for the finding was
that the prior year CAR did not include procedures to review specific
loan-level details. The HUD OIG made four recommendations--the one
specific to CAR procedures stated Ginnie Mae should assess the
effectiveness of and update CAR procedures if needed.[Footnote 37]
Ginnie Mae officials told us that they have addressed the HUD OIG
recommendations and have updated review procedures for this servicer
and its other servicers of single-family and multifamily properties.
Subsequent to these reviews, Ginnie Mae began to take other steps to
address operational risks related to contracting that are consistent
with the principle identified in our internal control and management
tool to consider risks associated with major suppliers and
contractors.[Footnote 38] More specifically, Ginnie Mae has conducted
risk assessments of its contracts and potential operational risks, and
plans to review the proposed recommendations and determine how to
implement them.[Footnote 39] However, as of October 2011, none of the
recommendations have been implemented. In December 2010, the Chief
Risk Officer staff analyzed Ginnie Mae contracts and identified
approximately 12 contracts that could pose operational risk to Ginnie
Mae. The purpose of the risk assessment was to assess the inherent
risks associated with activities its top contractors executed and to
determine what controls the agency had in place or should have in
place to mitigate risks.[Footnote 40] The potential risks to Ginnie
Mae included (1) lack of a contingency plan if the contractor ceased
work with Ginnie Mae, (2) poor internal controls, (3) nonperformance
under contract terms, and (4) failure of operations.[Footnote 41] The
analysis included short-term recommendations related to better
management of internal controls--for example, increasing training
requirements for GTR staff on areas of the greatest risk exposure to
Ginnie Mae such as cost overruns and inadequate recordkeeping. Long-
term recommendations included increasing the number of Ginnie Mae
staff to reduce the dependency on a few key staff. Targeted
recommendations included developing:
* a transition plan to automate manual processes that might lead to
operational errors to help address the risk of failure of operations
and:
* formal contract reporting on projects with performance metrics to
help avoid nonperformance under contracts.
Ginnie Mae also contracted with a firm to provide recommendations for
enhancing its risk-management capabilities. In June 2011, the
contractor's study recommended that Ginnie Mae systematically assess
staff overseeing its contracts to identify any gaps in expertise--for
example, by annually using a checklist or other mechanism to identify
expertise. In addition, the study suggested that Ginnie Mae develop a
system to track any contract-related incidents so that any issues
would be handled promptly. The study noted that as Ginnie Mae
continues to grow, establishing formalized processes for contract-
related incidents would be important.
Although Ginnie Mae has conducted risk assessments on its contracts,
it has not yet implemented the recommendations from these assessments.
According to Ginnie Mae officials, they have deferred implementing the
recommendations from the December 2010 risk assessment because staff
working for the Chief Risk Officer also have been conducting another
assessment on ways to improve contract management and procurement
processes. Officials explained that once this review was complete,
they would review recommendations from all three assessments and
develop a plan to implement them collectively. Ginnie Mae officials
also explained that during 2012, the Chief Risk Officer plans to work
with senior management to assess the recommendations in the June 2011
study and prioritize their implementation relative to other competing
projects currently underway at the agency, such as technology
improvements and updates to its statistical model used to forecast
cash flows to and from the program. We discuss technology improvements
in the following paragraphs and the statistical model in the next
section of this report.
Concurrent with its other risk assessments, Ginnie Mae began to change
its procurement practices in an effort to reduce its reliance on
contractors for critical functions.[Footnote 42] More specifically, as
part of senior management performance plans for the 2011 calendar
year, managers have been directed to develop and put in place a
contracting environment that leverages contractors and Ginnie Mae
staff more effectively. For instance, some senior management
performance plans include a directive to conduct a needs assessment
for every contract that is new, has the option to extend, or has
ended. These assessments consider whether the contract should be
recompeted to bring targeted services or work products in-house,
thereby reducing contractor expenses and reliance. Officials explained
they also plan to include this directive in 2012 calendar year
performance plans. Officials also told us that these needs assessments
are required for all contract actions. As of August 2011, of the nine
contracts for which needs assessments might be conducted, four have
been completed. According to Ginnie Mae officials, the results of the
assessments for two contracts identified possible ways to bring
certain functions in-house, such as one contract for project
management, which may save $600,000. In 2012, Ginnie Mae officials
expect to complete 17 needs assessments.
Senior managers also told us they have been reviewing current contract
provisions to make sure Ginnie Mae staff understood all the elements
of a contract. For example, management reviewed one contract with a
large technology component and found that the system documentation and
user manuals had not been consistently updated. According to
officials, Ginnie Mae recognizes the need for updated documentation
and is in the process of modernizing the data system used by the
contractor, which includes new system documentation and user manuals.
Actions to Improve Information Systems:
Ginnie Mae has been working on an ongoing initiative to improve its
information technology systems. According to officials, Ginnie Mae has
been working on the first phase of its business process improvement
initiative for the last few years based on a plan developed in
conjunction with OMB. The main goal of the initiative is to modernize
the agency's technology by consolidating processes and eliminating
redundant systems. Some of the weaknesses included outdated data
systems, a reliance on paper-based processes, and a lack of integrated
data systems. According to our internal control management and
evaluation tool, management should derive critical operating data from
its information management function and support efforts to make
improvements in the systems as technology advances.[Footnote 43]
According to Ginnie Mae, the first phase of the initiative resulted in
the creation of nine new information technology system initiatives.
Seven of these initiatives have been in place since October 2009. For
instance, one system allows Ginnie Mae to receive enhanced reporting
and provide status information to issuers. Another allows Ginnie Mae
issuers to provide pool information electronically. According to
Ginnie Mae, these systems let Ginnie Mae modernize its technology by
merging legacy systems into a centralized database. Ginnie Mae
officials further explained that they have been modernizing the
pooling information system so that it can be integrated with the
enterprise-wide data system. In addition, Ginnie Mae has been drafting
a strategy document for its ongoing initiative to look for additional
business improvement opportunities in its information technology
systems.
Ginnie Mae Has Taken Steps to Revise Some of its Counterparty Risk
Management Processes:
To manage its counterparty risk, Ginnie Mae has processes in place to
oversee issuers that include approval, monitoring, and enforcement. In
response to changing market conditions and increased market share,
Ginnie Mae revised its approval and monitoring procedures. In
addition, Ginnie Mae has several planned initiatives to enhance its
management of counterparty risk; however, many have not yet been fully
implemented.
Strengthened Approval Procedures:
Issuers are subject to the requirements outlined in the Ginnie Mae MBS
guide and all participant memorandums, some of which have been made
more stringent in recent years due to changes in industry and market
conditions.[Footnote 44] In September 2008, Ginnie Mae issued a notice
to participants that it was raising the issuer approval standards and
requirements due to industry and market conditions. For example, newly
approved issuers became subject to a 1-year probationary period, which
begins after their first issuance or acquisition of a servicing
portfolio. Before this time, new issuers had no probationary period.
In addition, for newly approved and already existing issuers, the
Office of Mortgage-Backed Securities monitors required risk
thresholds, such as delinquency levels and loan matching statistics.
[Footnote 45]
New and existing single-family issuers also must meet increased net
worth and liquid asset thresholds.[Footnote 46] Initially, new issuers
in the single-family and reverse mortgage program had to have a
minimum net worth of $250,000. In 2008, the minimum increased to $1
million. In October 2010, the minimum net worth requirement was raised
to $2.5 million.[Footnote 47] At the same time, Ginnie Mae announced a
new liquid asset requirement, which requires single-family issuers to
maintain liquid assets that are 20 percent of the issuer's Ginnie Mae
required net worth requirement. According to the policy memorandum
Ginnie Mae issued, the increased liquid asset requirement is intended
to help ensure funds would be available when cash was needed for
mortgage buyouts or to pay for potential indemnification requests from
federal guarantee programs.[Footnote 48] Existing single-family
issuers had until October 2011 to meet the increased net worth and
liquid asset thresholds.
Corresponding to changes in Ginnie Mae's market share, the number of
new issuer applications and approvals increased from 2008 to 2010 (see
figure 10). For the first three quarters in 2011, the agency received
73 new applications, approved 32 new issuers, and 85 applications were
denied or withdrawn. Ginnie Mae's process for screening applications
includes a review of the applicant's net worth and its performance as
an FHA lender. In addition, the applicant may be required to undergo a
special servicer review if the applicant is not an approved Fannie Mae
or Freddie Mac seller or servicer, or Ginnie Mae believes the
applicant warrants a more in-depth review. According to Ginnie Mae
officials, the special servicer review (conducted by Ginnie Mae staff
and its contractors) began in 2008 as an on-site review of the
financial, management, and operational capacity of selected new
applicants and existing issuers. As of June 30, 2011, the agency had
conducted 32 special servicer reviews on new applicants since 2008,
for which 27 were approved and 5 rejected. Officials explained one of
Ginnie Mae's goals is to decrease the approval time for issuers from
approximately 1 year to 6-8 months. They plan to hire additional staff
to review applications and have one of their contractors help obtain
the necessary documentation from issuers. However, the creation of
these new positions has been on hold due to decreases in the FTE
levels for 2011 and potential budget decreases for 2012. Ginnie Mae
also has been considering raising its application fee to deter issuers
that might have little intention of issuing MBS but think approval
from a federal entity would reflect well on their business.
Figure 10: Number of New Issuer Applications and Approvals, Fiscal
Years 2005-2010:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2005;
New issuer applications: 23;
New issuer approvals: 14.
Fiscal year: 2006;
New issuer applications: 22;
New issuer approvals: 19.
Fiscal year: 2007;
New issuer applications: 30;
New issuer approvals: 8.
Fiscal year: 2008;
New issuer applications: 57;
New issuer approvals: 28.
Fiscal year: 2009;
New issuer applications: 157;
New issuer approvals: 38;
Applications denied or withdrawn: 48.
Fiscal year: 2010;
New issuer applications: 91;
New issuer approvals: 43;
Applications denied or withdrawn: 95.
Source: GAO analysis of Ginnie Mae data.
Note: Ginnie Mae did not track the number of applications denied
before 2009. From 2010 through the third quarter of 2011, Ginnie Mae
had 69 applications under review. In 2010, new issuer approvals and
denied or withdrawn applications may exceed new applications because
of a lag in the timing of the reviews from prior fiscal years.
[End of figure]
Ginnie Mae officials also told us they planned to expand the number of
issuers by marketing Ginnie Mae and its products to smaller financial
institutions, such as credit unions and state housing finance agencies
because the concentration of the MBS portfolio among a few issuers
represents some level of risk to Ginnie Mae. For instance, if one
large issuer were to fail, Ginnie Mae would be responsible for
servicing more mortgages than if a small issuer failed. Officials said
that the risk posed by concentration may be mitigated because these
issuers generally were regulated at the federal level.
Modified Monitoring Procedures:
Monitoring processes for issuers include the approval process for
commitment authority, reviews of quarterly and monthly summary
reports, and on-site reviews of issuers. Ginnie Mae has modified some
of these processes in recent years by requiring issuers to request
commitment authority more frequently and developing additional
quarterly and monthly summary reports. The agency also plans to add
other monitoring tools.
According to Ginnie Mae officials, the agency uses its ability to
limit or modify commitment authority requests as a primary risk-
management tool (by limiting commitment authority, the agency reduces
the flow of funds to the issuer). To deal with increased demand, in
2005, Ginnie Mae created two processes for granting commitment
authority--streamlined and nonstreamlined requests. Issuers that meet
required risk thresholds set by Ginnie Mae go through the streamlined
process, which limits the number of approvals needed for the request.
[Footnote 49] Issuers that do not meet these thresholds or are on
Ginnie Mae's watch list would be considered under the nonstreamlined
process, which requires additional scrutiny by Ginnie Mae staff and
additional approvals by Ginnie Mae management.[Footnote 50] Before
2005, the agency used the same process for those that did and did not
meet required risk thresholds. Officials explained the change was made
to increase the efficiency of the process for issuers who met required
thresholds.
Whether streamlined or not, officials explained requests for
commitment authority now require more frequent approvals. Before 2008,
issuers generally would request commitment authority annually.
However, Ginnie Mae issuers currently apply for commitment authority
in an amount equal to the securities they plan to issue during the
next 4 months. Therefore, issuers generally must request the authority
every 2 to 3 months, which allows Ginnie Mae to take an in-depth look
at the issuer's performance and compare it against its required risk
thresholds. In 2010, Ginnie Mae also revised its guidance to require
that streamlined requests receive management-level review rather than
just a staff-level review in the Office of Mortgage-Backed Securities.
The commitment authority process has been subject to internal reviews
from 2006 through 2011, but these reviews found no material
weaknesses. Specifically, Ginnie Mae's annual internal control review
generally examines the commitment authority process. Although control
deficiencies--that is, less serious findings that identify an internal
control that might not be designed to prevent or detect and correct
issues--were identified from 2008 through 2011, officials explained
the deficiencies did not result in any issuer being granted commitment
authority that should not have received it. For instance, in 2008,
Ginnie Mae was unable to locate the files for the sample of 25 files
selected by the internal auditor to conduct its review. In 2009-2011,
the required commitment authority checklist was not always completed
according to guidance.[Footnote 51] To address the 2008 finding,
Ginnie Mae officials explained that management was directed to enforce
the guidance and the filing system was changed. For the 2009-2011
findings, Ginnie Mae updated procedures in its manual and amended the
checklist twice.
Since 2007, according to Ginnie Mae, one of the two contractors that
manage the administration of the MBS program has created 30 new
monthly and quarterly monitoring reports, which staff from the Office
of Mortgage-Backed Securities review.[Footnote 52] Ginnie Mae
officials explained that these reports were generally created because
new programs, such as the reverse mortgage program, were developed
that required new monitoring requirements, or enhancements were
identified to existing monitoring processes, which required additional
reporting. Among other new reports, in 2008 the contractor created a
monthly summary report addressing active issuers. The report
summarizes issuer risks (in areas such as default and financial
condition) and results of issuer compliance reviews.[Footnote 53]
However, Ginnie Mae has not updated its guidance to reflect this new
report.
Officials explained that Ginnie Mae staff rely on the summary
information prepared by the contractor that combine information on all
issuers rather than creating individualized reports. In fact, our
analysis of 10 issuer files revealed that Ginnie Mae staff had not
prepared monthly management worksheets for any of these issuers as
Ginnie Mae's guidance requires.[Footnote 54] Ginnie Mae officials said
they plan to revise guidance in 2012 to reflect the move from staff
preparing reports for individual issuers to reliance on contractor-
prepared summary reports.
In addition, Ginnie Mae officials explained that they have been
enhancing data systems to assess counterparty risk. More specifically,
according to the Chief Risk Officer, the agency's highest priority is
to develop a counterparty risk-management system by March 2012. The
new system aims to help Ginnie Mae identify its total counterparty
risk exposure with all entities, such as issuers and contractors. The
system would include information on issuers, such as rating data and
risk calculations, and an algorithm to predict issuer default. In
addition, the system would incorporate a scorecard to help Ginnie Mae
have a comprehensive view of issuers, including information on issuer
required risk thresholds.
Ginnie Mae also monitors issuers through on-site reviews conducted by
a contractor. Ginnie Mae has implemented two new types of reviews
since 2008 to provide additional monitoring of new and existing
issuers and increased the frequency of reviews on new issuers.
Previously, there were two types of issuer reviews--basic and special.
[Footnote 55] In 2010, Ginnie Mae added a findings resolution field
review, which differs from the other reviews because the issuer is not
given prior notice of the review. The purpose of this review is to
test whether corrective actions for prior findings have been
implemented. According to Ginnie Mae officials, seven finding
resolution field reviews have been conducted since the review was
implemented.
According to Ginnie Mae's January 2011 revisions to its MBS guide, new
issuers are subject to on-site basic or special reviews by contractors
after 6 months of the start of their Ginnie Mae issuance activity, and
then annually for 2 years from the start of activity. Before this
revision, contractors reviewed new issuers 6 months after their
issuance activity started but did not conduct the annual reviews. Our
review of information on the frequency of new issuer reviews indicated
that of the five new issuers whose issuance activity began between
December 2010 and March 2011, none had been reviewed after 6 months of
program participation as required. According to Ginnie Mae officials,
two reviews were completed in September 2011 (3 months late) and the
other three were delayed due to scheduling issues and competing
priorities.
Existing issuers are subject to on-site basic or special reviews by
contractors no less than once every 3 years, but may be reviewed more
frequently based on their ability to meet performance thresholds and
other factors. For example, an issuer review may be prompted by an
issuer's portfolio size, monthly reporting portfolio statistics, a
sudden increase in issuance activity, monitoring of delinquency
reporting, previous review results and findings, a request from the
Risk Committee, or other information received by Ginnie Mae indicating
potential risk to the agency. We reviewed a March 2011 schedule for
reviews of 196 issuers and found that 174 reviews were conducted
within the 3-year time frame. According to Ginnie Mae officials, the
22 issuers not reviewed were not active issuers during the 3-year time
frame.[Footnote 56] Ginnie Mae officials explained that each year its
contractor develops a schedule of the issuer reviews to be conducted
in each quarter based on the factors identified earlier in this
report. Currently, officials explained they work with the contractor
that maintains the database on issuer reviews to develop the schedule
with which issuers will be reviewed during the next time frame.
However, they plan to enhance the development process by creating an
additional factor for consideration--a scoring system that summarizes
the results of prior issuer reviews--and coordinating with the Chief
Risk Officer. Officials were unclear on the timeline for implementing
this plan due to competing priorities with technology improvements.
From 2005 to 2010, Ginnie Mae issued 3,971 findings from the basic and
special issuer reviews. As of June 2011, 3,699 were cleared (93
percent), and 268 were referred (7 percent) to Ginnie Mae by the
contractor for final resolution because they had not been cleared
within the required time frame (see figure 11). Findings from the
issuer reviews fall into three risk categories (high, medium, and
low).[Footnote 57] High-risk findings must be addressed within 21 days
of the review, medium-risk findings within 45 days, and low-risk
findings within 120 days. Findings are reflected as "cleared" if an
issuer submits a resolution plan that includes evidence that the
original cause of the finding has been corrected and a policy,
procedure, or action was implemented to prevent the recurrence of the
finding. Findings are considered "open" if they are not addressed in
these time frames. Ginnie Mae can take a variety of enforcement
actions against issuers, which we discuss in detail in the following
paragraphs.
Figure 11: Number of Issuer Reviews and Findings, Fiscal Years 2005-
2010:
[Refer to PDF for image: 2 vertical bar graphs]
Issuer Reviews, FY 2005-2010:
Fiscal year: 2005;
Issuer Reviews: 102.
Fiscal year: 2006;
Issuer Reviews: 93.
Fiscal year: 2007;
Issuer Reviews: 88.
Fiscal year: 2008;
Issuer Reviews: 102.
Fiscal year: 2009;
Issuer Reviews: 120.
Fiscal year: 2010;
Issuer Reviews: 97.
Findings, FY 2005-2010:
Fiscal year: 2005;
Referred: 32;
Cleared: 834;
Total: 866.
Fiscal year: 2006;
Referred: 49;
Cleared: 708;
Total: 757.
Fiscal year: 2007;
Referred: 58;
Cleared: 668;
Total: 726.
Fiscal year: 2008;
Referred: 42;
Cleared: 512;
Total: 554.
Fiscal year: 2009;
Referred: 45;
Cleared: 489;
Total: 534.
Fiscal year: 2010;
Referred: 42;
Cleared: 488;
Total: 530.
Source: GAO analysis of Ginnie Mae data.
[End of figure]
According to Ginnie Mae officials, they do not have a database in
place for tracking the resolution or timing of individual findings.
However, they have been developing this capability through their
information technology systems and expect it to be completed by June
2012, unless delayed by other priorities. To monitor the resolution or
timing of findings, officials stated they received a weekly report
from the contractor that lists all reviews completed over a certain
period. The report includes the number of findings from each review
and actions pending from issuers to close out any findings. If a
finding has been referred to Ginnie Mae, the issuer is flagged in the
system used to monitor issuers.
Ginnie Mae's internal control reviews from 2008 to 2011 repeatedly
identified that the guidance used to conduct the issuer reviews should
be updated to mitigate the risk of the current field review process
not incorporating tests that address changing risks in the MBS market.
Ginnie Mae officials told us that they have not updated the guidance
because the internal control review was not specific about what risks
were not being identified by the issuer reviews. However, they said
that they have made changes to their issuer reviews and monitoring
procedures--such as the unannounced on-site reviews and remote
monitoring procedures on the movement of funds--during this time that
were not reflected in updates to their guidance.[Footnote 58]
Officials expected to update their guidance by the end of 2012. They
explained the delay in updating the guidance in 2009 was due to the
increase in the number of new issuers in 2008 and 2009, the need to
conduct more issuer reviews on both new and existing issuers, and a
delay in adding more funds to the contract to update the guidance.
Enforcement Procedures Include Planned Updates:
As mentioned previously, issuers found to not be in compliance are
placed on Ginnie Mae's watch list or are subject to more scrutiny
during the commitment authority approval process. In addition, Ginnie
Mae may declare the issuer in default and terminate the issuer. As of
June 2011, 27 single-family active issuers (of 165) were on the watch
list. These 27 single-family issuers had an average portfolio size of
about $4.8 billion. Issuers on the watch list generally receive a
quarterly monitoring letter detailing the reason for being on the
watch list and are given 30 days to respond and take action. According
to Ginnie Mae officials, they do not track how long issuers stay on
the watch list.
Ginnie Mae's desk manual on operational procedures and its MBS guide
list the types of enforcement actions it can take against noncomplying
issuers. However, Ginnie Mae officials explained they plan to update
this guidance by December 2011 because the violations listed may
warrant a wide range of responses based on the severity of the
violations. For example, if an issuer is defaulted by one of the
government-sponsored enterprises, this action would warrant a more
severe response than missing a deadline to post a letter of credit.
However, the guidance currently does not distinguish among types of
violations based on severity. Based on its monitoring of issuers,
Ginnie Mae may issue a notice of intent to default if an issuer has
violated the guidelines identified in the MBS guide, such as a missed
pass-through of monthly principal and interest payment to an investor.
Officials explained the most common enforcement actions used against
issuers were the notice of intent to default an issuer. From 2005 to
2010, Ginnie Mae issued 46 notices of intent to default (see figure
12). Officials told us that they issued most of the notices because
issuers committed an operational error, such as a missed payment, and
that issuers rectified the errors in a timely manner. Once an issuer
receives a notice of intent to default, the issuer has 30 days to
respond. If the issuer does not respond in 30 days, Ginnie Mae takes
action on the violation based on the information available. In the
first three quarters of 2011, Ginnie Mae issued seven notices of
intent to default.
Figure 12: Number of Notices of Intent to Default, Fiscal Years 2005-
2010:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2005;
Number of Notices of Default: 6.
Fiscal year: 2006;
Number of Notices of Default: 3.
Fiscal year: 2007;
Number of Notices of Default: 12.
Fiscal year: 2008;
Number of Notices of Default: 9.
Fiscal year: 2009;
Number of Notices of Default: 10.
Fiscal year: 2010;
Number of Notices of Default: 6.
Source: GAO analysis of Ginnie Mae data.
[End of figure]
During 2005-2010, Ginnie Mae defaulted 21 issuers. Officials said the
reasons for defaults have included suspensions by FHA, terminations by
Fannie Mae, bankruptcy, or failure to submit audited financial
statements. When an issuer is defaulted, Ginnie Mae takes over
responsibility for servicing that issuer's portfolio.[Footnote 59]
Currently, Ginnie Mae has a large portfolio of single-family loans it
is responsible for servicing due in part to the default of Taylor,
Bean & Whitaker Mortgage Corporation in 2009.
Although Ginnie Mae Continues to Fulfill Its Mission, Its Model for
Estimating Costs and Revenues Could Be Improved:
Ginnie Mae defines its mission as expanding affordable housing by
linking capital markets to the nation's housing markets. Ginnie Mae
has been fulfilling its mission by securitizing the growing volume of
federally insured and guaranteed mortgage loans. Changes in the
housing market and the economic downturn have increased the volume and
market share of Ginnie Mae-guaranteed MBS significantly in the last 5
years. Although Ginnie Mae's portfolio of guaranteed MBS outstanding
has grown, increasing the financial exposure to the federal
government, it has mechanisms in place to help offset this financial
exposure. As mentioned previously, Ginnie Mae charges issuers a
guarantee fee and has accumulated reserves over the years. In
addition, the mortgages that back Ginnie Mae-guaranteed MBS are fully
or partially insured against default by another federal agency, such
as FHA, VA, RHS, or PIH. Finally, Ginnie Mae has a number of practices
in place to mitigate its operational and counterparty risks and has
enhanced or plans to enhance these practices. Nevertheless, the
methods by which Ginnie Mae measures the expected costs and revenues
stemming from its growing commitments may not take full advantage of
available data and techniques for accurately assessing program costs.
Ginnie Mae's Revenues Have Covered Losses from Issuer Defaults:
According to Ginnie Mae's financial statements, income to Ginnie Mae,
mainly in the form of a guarantee fee paid by issuers, exceeded Ginnie
Mae's costs by an average of about $700 million each year from 2006
through 2010.[Footnote 60] As of September 30, 2010, excess revenues
allowed Ginnie Mae to accumulate a capital reserve of about $14.6
billion.[Footnote 61] Ginnie Mae has not required appropriations from
the general fund to cover any losses.[Footnote 62]
Ginnie Mae uses fee revenue to cover the cost of issuer defaults by
making timely payment of principal and interest to investors in Ginnie
Mae-guaranteed MBS when an issuer is unable to do so. Although Ginnie
Mae forecasts the severity of defaults, a higher-than-expected
delinquency and default rate on those mortgages could require Ginnie
Mae to make payments to investors using its accumulated reserves.
Additionally, while mortgages backing Ginnie Mae-guaranteed MBS
generally must be insured or guaranteed by another federal agency,
such as FHA, borrower defaults may result in lower fee and claim
payments to Ginnie Mae in some instances.[Footnote 63]
* For instance, if the number of borrowers who prepaid or stopped
paying their mortgages was greater than Ginnie Mae expected, guarantee
fees paid by issuers would be less than expected.
* For delinquent loans it acquires from defaulted issuers, Ginnie Mae
makes advances of principal and interest to cover any late payments on
those mortgages in the MBS pools. If the borrower made late payments
and eventually defaulted, Ginnie Mae might not recover the entire
value of the loss, although the mortgage was insured. For example, for
FHA-insured mortgages, Ginnie Mae has to incur the cost to foreclose
on a defaulted borrower but receives only a percentage of the
associated costs.
During 2005-2010, Ginnie Mae defaulted 21 issuers and took over the
portfolio for approximately $28.8 billion in mortgages (see figure
13). While the number of issuers defaulting has varied from two to
five in recent years, the number of loans involved increased during
this period. In 2009, Ginnie Mae defaulted a large issuer--Taylor,
Bean & Whitaker Mortgage Corporation--and took over the portfolio for
approximately $26.2 billion in mortgages.[Footnote 64] In general, the
actual cost of a defaulted portfolio for Ginnie Mae cannot be
determined until insurance or guarantee claims are processed and the
number of fraudulent or delinquent mortgages determined. As of June
2011, Ginnie Mae's disbursed $7.4 billion as a result of the 21
defaults.[Footnote 65] However, according to its 2010 financial
statements after considering forecasted receipts from claims and
recoveries, Ginnie Mae estimated that its defaulted issuer portfolio
at that time of about $4.5 billion would result in net costs of
approximately $53 million.
Figure 13: Information on Ginnie Mae Issuer Defaults, Fiscal Years
2005-2010:
[Refer to PDF for image: horizontal bar graph]
Fiscal year: 2005;
Number of defaulted issuers: 3;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 788;
Number of pools: 122;
Balance at default: $107.2 million.
Fiscal year: 2006;
Number of defaulted issuers: 2;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 8;
Number of pools: 6;
Balance at default: $1.6 million.
Fiscal year: 2007;
Number of defaulted issuers: 5;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 6,158;
Number of pools: 1,615;
Balance at default: $506.7 million.
Fiscal year: 2008;
Number of defaulted issuers: 4;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 2,485;
Number of pools: 314;
Balance at default: $292.8 million.
Fiscal year: 2009;
Number of defaulted issuers: 2;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 184,105;
Number of pools: 5,515;
Balance at default: $26.219 billion.
Fiscal year: 2010;
Number of defaulted issuers: 5;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 9,170;
Number of pools: 671;
Balance at default: $1.638 billion.
Total:
Number of defaulted issuers: 21;
Assets backing Ginnie Mae-guaranteed MBS:
Number of loans: 202,714;
Number of pools: 8,253;
Balance at default: $28.765 billion.
Source: GAO analysis of Ginnie Mae data.
Note: In August 2009, Ginnie Mae defaulted the Taylor, Bean & Whitaker
Mortgage Corporation for failing to provide audited financial
information in a timely manner and violating Ginnie Mae's program
requirements for issuers.
[End of figure]
Re-estimated Subsidy Costs Resulted in Lower Net Revenue Estimate:
For budgetary purposes, Ginnie Mae annually estimates the expected
subsidy costs to the federal government of its guarantee activity.
Ginnie Mae's subsidy cost estimates to date have indicated that the
program would generate net revenues, meaning that the fees Ginnie Mae
collects were expected to exceed its losses on a present value basis.
[Footnote 66] These estimates take into account forecasted fees and
expected losses in the event of an issuer default. Once an issuer
defaults, Ginnie Mae would take over the issuer's portfolio as its own
loan portfolio. As a result, the initial subsidy cost estimates take
into account potential losses on the guaranteed portfolio as well as
potential losses on its loan portfolio from the defaulted issuers.
Agencies typically update or re-estimate the subsidy cost estimates
annually to reflect actual program performance and changes in expected
future performance.
Ginnie Mae performed a re-estimate for the first time at the end of
2010 and officials told us that they plan on performing annual re-
estimates going forward. The 2010 re-estimate lowered expected net
revenues by $720 million from the previous estimate.[Footnote 67]
Ginnie Mae officials explained that they performed the re-estimate of
their portfolio in 2010 because for the first time the agency and OMB
had developed a methodology upon which both parties could agree.
Ginnie Mae officials noted that they faced challenges in developing a
re-estimate methodology. Officials explained the nature of their
business posed a challenge because Ginnie Mae does not have a yearly
cohort of loans like other federal guarantee programs.[Footnote 68]
Ginnie Mae officials also stated the re-estimate was performed due to
the default of the Taylor, Bean & Whitaker Mortgage Corporation in
2009.
Ginnie Mae's Model Does Not Implement Certain Practices Identified in
Federal Guidance for Cost Estimation of Credit Programs:
Although Ginnie Mae has made some changes to the model it uses to
forecast cash flows for the program, it has not implemented certain
practices identified in Federal Accounting Standards Advisory Board
(FASAB) guidance.[Footnote 69] While Ginnie Mae, as a government
corporation, follows private sector accounting standards rather than
FASAB accounting standards, we believe FASAB guidance on preparing
cost estimates for federal credit programs represent sound internal
control practices for evaluating Ginnie Mae's model. Ginnie Mae uses a
statistical model to forecast cash flows, including guarantee fee
income and costs related to issuer defaults, to develop a credit
subsidy cost for the federal budget and to calculate a reserve for
loss for its financial statements.[Footnote 70] Ginnie Mae's model
uses historical trends on the default and prepayment characteristics
of loans in its guaranteed MBS and estimates of future events, such as
issuer defaults, to forecast 30 years of costs and revenues to the
program.
Ginnie Mae officials explained they recognized improvements could be
made to their model. In 2009, Ginnie Mae hired a contractor to
redesign its model over a 2-year period. Ginnie Mae hired additional
staff to assist with the development of the model in March 2011. The
contractor completed the new version of Ginnie Mae's revised model in
August 2011.[Footnote 71] Examples of changes made to the model since
2009 include the following:
* Changing the data used in the model from FHA loan-level data to
Ginnie Mae data, which includes data on other loans in Ginnie Mae-
guaranteed MBS, such as PIH, VA, and RHS loans.
* Incorporating econometric methods similar to those used in FHA's
model.[Footnote 72]
* Changing the types of scenarios used for stress testing.[Footnote
73] Previously, Ginnie Mae relied on vendor-provided scenarios rather
than using customized scenarios tailored to Ginnie Mae.
Ginnie Mae staff recently obtained FHA's estimates of borrower default
and prepayment and are intending to use these for future credit
subsidy estimates, credit subsidy re-estimates, and financial
statements.[Footnote 74]
However, the current model still does not implement certain practices
identified in FASAB guidance and risk-budgeting guidance. According to
FASAB guidance, managers of federal credit programs should develop
cost estimate models that include the following characteristics:
* Estimates should be based on the best available data of the
performance of the loans or loan guarantees, including data from
related federal agencies. Furthermore, agency documentation supporting
the estimates should include evidence of consultation with relevant
agencies.
* Estimates also should include a sensitivity analysis to identify
which cash flow assumptions have the greatest impact on the
performance of the model. In addition, according to academic risk-
budgeting guidance, it is important that stress testing, which is a
form of sensitivity analysis, use realistic scenarios to provide
accurate indications of the effect of variability in economic and
market factors.[Footnote 75]
* Estimates can rely on informed opinion (i.e., management
assumptions), but these assumptions only should be used in lieu of
available data and on an interim basis. Moreover, agency documentation
supporting the assumptions should demonstrate how the assumptions were
determined.
Ginnie Mae's Estimates May Not Have Been Based on the Best Available
Data:
Although FASAB suggests that estimates be based on the best available
data, Ginnie Mae did not fully evaluate the benefits and costs of
using data to develop borrower default and prepayment estimates from
relevant agencies, including FHA. More specifically, it did not
consider or assess the benefits of using FHA's default and prepayment
model, rather than spending resources on developing its own model.
According to Ginnie Mae officials, they took steps intended to improve
the revised model by using their own loan-level data as a basis for
developing estimates of borrower default and prepayment. However,
Ginnie Mae did not perform or document any analyses to determine what
other data from FHA--or VA, RHS, and PIH--could improve its model or
help assess its cost-effectiveness. Ginnie Mae officials explained
that they used their own loan-level data in the revised model because
they could incorporate data on mortgages from all of the guaranteeing
agencies, without obtaining data from each of the agencies that insure
or guarantee mortgages in Ginnie Mae-guaranteed MBS. However, since
approximately 80 percent of loans pooled into Ginnie Mae-guaranteed
MBS are FHA-insured mortgages, there may be some benefits of
incorporating elements of FHA's data or model. These benefits include
its cost-effectiveness and the potential for more detailed loan-level
data than Ginnie Mae collects on FHA mortgages. Similarly, there may
be benefits to incorporating VA data on loans it guarantees, which
represented 16 percent of loans pooled in Ginnie Mae-guaranteed MBS in
2010.
More specifically, FHA's models include certain data elements that
Ginnie Mae's model does not, such as identifying which loans are FHA
streamlined refinancing products and reverse mortgages.[Footnote 76]
An FHA official with whom we spoke explained that these types of
mortgages have different borrower default and prepayment
characteristics. In addition, the official explained that including
information identifying these types of mortgages would improve the
predictive quality of any model of default and prepayment. For
example, according to 2009 FHA data, borrowers who refinanced their
mortgage under the streamlined refinance program had higher early
payment delinquency rates than those with other refinanced mortgages.
Our review of Ginnie Mae's August 2011 revised model showed that it
did not identify reverse or streamlined-refinanced mortgages.
However, since our review of the model, Ginnie Mae officials said they
have received data from FHA on estimates of borrower default and
prepayment and are intending to use this information for preparing
future credit subsidy estimates, credit subsidy re-estimates, and
financial statements. FHA's estimates of borrower default and
prepayment does include data on streamlined-refinance mortgages.
Ginnie Mae officials have not yet incorporated data on reverse
mortgages, which are modeled separately by FHA, or explored and
documented VA estimates of defaults and prepayments in their model.
According to Ginnie Mae officials, they are using FHA data to
approximate the experience expected of VA loans rather than using VA
data directly (by adjusting these data for expected differences for
prepayment and default experience). However, the analysis underlying
these adjustments have not been documented.
Ginnie Mae's Sensitivity Analysis Does Not Include Factors That Could
Affect the Accuracy of Its Model:
According to FASAB, sensitivity analysis should be performed to
improve the accuracy of a model. A stress test provides an analysis of
the sensitivity of a model's forecasted cash flows in response to
extreme changes in economic conditions. According to academic risk
budgeting guidance, using realistic stress test scenarios is important
to accurately indicate the effect of variability in economic and
market factors. More specifically, stress test scenarios should
consider the impact of movements of individual market factors and
interrelationships or correlations among these factors.
Although Ginnie Mae recently has developed more customized stress test
scenarios in its revised model, some of these scenarios may not be
realistic because they do not reflect the interrelationships between
economic and capital markets factors. For example, Ginnie Mae's
revised model includes customized scenarios that focus on mortgage
rate movements. More specifically, mortgage rates in one scenario were
lowered by 300 basis points, or 3 percent, but no other economic
variables, such as housing prices and unemployment rates, were
changed. Ginnie Mae's revised model stated that this scenario
consistently produced the lowest cumulative defaults across its FHA
and VA portfolio. However, as we previously reported, an economic
scenario involving a mortgage rate decrease, which included rising
unemployment and falling house prices, could produce more realistic
model results.[Footnote 77] This is an example of a scenario that
could create a different--yet plausible--scenario for defaults under
various economically stressful conditions. If the scenarios Ginnie Mae
used were unrealistic, it could affect the accuracy of its model.
Ginnie Mae Relies on Management Assumptions Instead of Data to
Forecast Issuer Defaults and Mortgage Buyout Rates:
Ginnie Mae relies on management assumptions rather than data to
forecast issuer defaults and mortgage buyout rates.[Footnote 78] For
example, Ginnie Mae's management assumptions for the costs of future
issuer defaults were $300 million in 2011 and $25 million annually
from 2012 to 2015. Ginnie Mae officials were not able to provide
documentation on the basis for these assumptions and have explained
they have had difficulty forecasting the risk that an issuer would
default because defaults are dependent on both economic and
noneconomic factors. However, Ginnie Mae officials acknowledged that
issuers that have a higher concentration of federally insured or
guaranteed mortgages in their portfolio may face a greater risk of
default if these mortgages default at high rates, and they could not
continue making the required advances to investors. In addition,
Ginnie Mae's model does not incorporate data on the mortgage buyout
rate but includes a management assumption that issuers will buy out
all mortgages after default. The mortgage buyout rate affects Ginnie
Mae's cash flows because mortgage buyouts reduce the guarantee fee
revenue on the MBS backed by the loans. However, Ginnie Mae officials
told us changes in interest rates may influence an issuer's decision
to buy a defaulted mortgage out of an MBS pool. More specifically,
officials explained that if an issuer's borrowing rate (cost of
capital) is higher than the interest rate on a delinquent mortgage,
the issuer is less likely to buy the mortgage out of the pool and will
choose to continue making advances to investors. When the issuer's
borrowing rate is lower than the interest rate on a delinquent
mortgage, the issuer is more likely to buy the mortgage out of the
pool at an earlier opportunity. Officials said they plan to include
quantitative estimates on issuer defaults and interest rates in
determining mortgage buyout rates in future iterations of the model,
but the agency does not have a timeline for incorporating these data
and the analysis into the model.
Because Ginnie Mae's revised model does not fully implement certain
practices identified in FASAB guidance, the model may lack critical
data needed to produce a reliable credit subsidy rate and reserve for
loss amount, which could affect Ginnie Mae's ability to provide more
informed budgetary cost estimates and financial statements. Ginnie Mae
also may be forgoing opportunities to further enhance its model in the
most cost-effective way possible by not regularly consulting with
other agencies and evaluating their data. In addition, economic
scenarios used to conduct stress tests on its revised model may not be
sufficiency realistic, which may impact the accuracy of the model.
Further, Ginnie Mae's reliance on management assumptions rather than
quantitative estimates for issuer defaults and mortgage buyout rates
also may impact the accuracy of the model and a lack of documentation
on how these assumptions were developed limits the transparency of the
model. Ultimately, because of these limitations on its model, Ginnie
Mae could be limited in its ability to accurately portray the extent
to which Ginnie Mae's programs represent a financial exposure to the
government.
Conclusions:
During the recent financial crisis and in response to continuing
stresses in housing markets, Ginnie Mae has assumed an increasingly
prominent position in the secondary mortgage market. However, risks
have accompanied its growth. The agency has faced an increased
reliance on contractors to perform many critical functions, while at
the same time coping with relatively flat staffing levels and outdated
information technology. Although Ginnie Mae has conducted risk
assessments on its contracts and enhanced some processes, technology,
and staffing, or planned to do so, a number of recommendations from
these assessments and initiatives remain in planning or under
development--warranting vigorous and continued commitment and follow
through from senior management.
In recent years, Ginnie Mae also received a salient demonstration of
counterparty risk when it defaulted a major issuer and had to assume
and service a $26 billion loan portfolio. This and other issuer
defaults and issuance volume surpassing a trillion dollars highlight
the need for comprehensive risk mitigation and monitoring. As with
operational risks, the agency has several planned initiatives to
enhance its management of counterparty risk, which have yet to be
fully implemented. These actions are critical to Ginnie Mae's efforts
to enhance its operations and we encourage the agency to complete
their implementation as soon as practicable.
Finally, although Ginnie Mae revenues exceeded costs thus far
(including the costs of defaults) and the agency has a positive
capital reserve, it has had to lower net revenue projections in a
recent re-estimate of program costs. A combination of factors,
including changed economic conditions, increased Ginnie Mae market
share and volume, and the results of the re-estimate suggest that now
is an opportune time for the agency to reexamine its data sources and
methodologies, and identify opportunities to improve inputs and
analyses for the statistical model it uses to forecast cash flows to
and from the program. Ginnie Mae has acknowledged that it could
improve the model and has said they will use FHA's estimates of
borrower default and prepayment for preparing future credit subsidy
estimates, credit subsidy re-estimates, and financial statements. For
example, Ginnie Mae officials explained they are using FHA data to
approximate the experience expected of VA loans rather than using VA
data directly. However, the analysis underlying these adjustments have
not been documented. Therefore, without fully documenting, it is not
possible to assess the rigor of this analysis. Given that VA was 16
percent of Ginnie Mae's portfolio in 2010, evaluating and documenting
the accuracy of its assumptions going forward and assessing whether
its assumptions are sufficiently accurate for VA loans or if it should
use data directly from VA is important. We identified several areas in
which the agency could better implement certain practices identified
in federal guidance for estimating program costs, including using the
best available data, conducting sensitivity analyses, and assessing
and documenting reasons for using management assumptions (judgment)
rather than data. By consulting other agencies, assessing different
modeling inputs and approaches, and leveraging other agencies'
datasets, Ginnie Mae could provide more informed budgetary cost
estimates and financial statements. In addition, Ginnie Mae could
realize opportunities to further enhance its model in a cost-effective
way. Further, by developing quantitative estimates for issuer defaults
and mortgage buyout rates, Ginnie Mae could better predict potential
impacts on the costs and revenues of its programs. With more informed
budgetary cost estimates and financial statements, Congress could more
confidently use this information to understand the extent to which
Ginnie Mae's credit programs represent a financial exposure to the
government.
Recommendations for Executive Action:
To help ensure that Ginnie Mae is developing the most accurate model
for estimating costs and revenues, we recommend that the Secretary of
Housing and Urban Development direct Ginnie Mae to take steps to
ensure its model more closely follows certain practices identified in
Federal Accounting Standards Advisory Board guidance for estimating
subsidy costs of credit programs. More specifically, Ginnie Mae should
take the following four actions:
1. Assess and document that it is using the best available data in its
model and most appropriate modeling approach. For example, Ginnie Mae
should determine if other agencies' datasets (such as FHA, VA, RHS, or
PIH) provide for more detail that could lead to better predictability.
Ginnie Mae should also determine whether using other models for
prepayment and defaults are sufficient for accurately estimating
future guarantee fee revenue.
2. Conduct and document sensitivity analyses to determine which cash
flow assumptions have the greatest impact on the model.
3. Document how management assumptions are determined, such as those
for issuer defaults and mortgage buyout rates.
4. Assess the extent to which management assumptions, such as those
for issuer defaults and mortgage buyout rates, can be replaced with
quantitative estimates.
Agency Comments and Our Evaluation:
We provided copies of this draft report to HUD, VA, USDA, OMB, and the
Federal Housing Finance Agency for their review and comment. Ginnie
Mae (HUD) provided written comments that have been reprinted in
appendix III. Ginnie Mae, OMB, VA, and the Federal Housing Finance
Agency provided technical comments, which we incorporated as
appropriate. USDA did not have any comments. The President of Ginnie
Mae wrote that Ginnie Mae is working towards implementing our
recommendation for conducting sensitivity analyses relating to issuer
risk and behavior, but neither agreed nor disagreed with our other
specific recommendations that are also intended to better ensure that
Ginnie Mae is developing the most accurate model for estimating costs
and revenues. Rather, Ginnie Mae noted that limited funding and
resources constrained its ability to develop its model to forecast
cash flows for the program consistent with our recommendations.
However, as we also note, Ginnie Mae devoted significant resources to
designing its models, but did not fully implement certain practices
identified in FASAB guidance when redesigning its model. More
specifically, Ginnie Mae hired a contractor in 2009 to redesign its
model over a 2-year period, which cost approximately $1.8 million. The
expected additional cost for the subsequent 3-year period of the
contract is $193,000.
Ginnie Mae agreed with a number of our findings. In particular, the
President of Ginnie Mae noted that he agreed with the report's
analysis that limited staff, substantial reliance on contractors, and
the need for modernized information systems are operational risks that
Ginnie Mae can face. In addition, Ginnie Mae agreed with our
observation about the importance of completing ongoing and planned
initiatives for enhancing its risk-management processes, as soon as
practicable, to improve operations. Finally, while Ginnie Mae agreed
that its model could be further enhanced by incorporating some general
FASAB guidance, the President of Ginnie Mae stated some aspects of the
guidance did not provide a relevant framework for the nature of Ginnie
Mae's business. We recognize these differences, and as discussed in
the report, our analysis focuses on particular aspects of FASAB
guidance that are specific to developing cost estimate models and we
believe the guidance that we cite provides a relevant framework for
Ginnie Mae.
Ginnie Mae also discussed a number of other issues that were beyond
the scope of this review. For example, Ginnie Mae stated that its
negative credit subsidy calculation is overstated because OMB
currently does not allow Ginnie Mae to reduce the negative subsidy to
reflect administrative costs. Additionally, Ginnie Mae noted that FCRA-
type accounting presented a challenge because the agency could not use
funds generated from previous fiscal years' negative subsidy payments
to cover the cost of defaulted issuers. For this study, we did not
assess the accounting that Ginnie Mae is required to perform. To
achieve the objectives of this report, we reviewed Ginnie Mae's
financial statements and their subsidy estimate and re-estimate to
understand how Ginnie Mae's portfolio may affect financial exposure to
the federal government and how well Ginnie Mae has been managing this
exposure.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution of this report
until 30 days from the report date. At that time, we will send copies
of this report to the Secretary of Housing and Urban Development,
appropriate congressional committees, and other interested parties. In
addition, this report will be available at no charge on the GAO
website at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Mathew Scirč at sciremj@gao.gov or (202) 512-8678. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IV.
Signed by:
Mathew J. Scirč:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To describe changes in the Government National Mortgage Association's
(Ginnie Mae) market share and volume, we collected and analyzed data
from Ginnie Mae and Inside Mortgage Finance, a firm that collects data
on the primary and secondary mortgage markets. The data from Ginnie
Mae covered fiscal years 2005-2010 and part of fiscal year 2011
(October 2010 through June 2011).[Footnote 79] We analyzed information
on the number and types of institutions that issue Ginnie Mae-
guaranteed mortgage-backed securities (MBS) and the share of
outstanding MBS by type of issuers. We included information on the
amount of federally insured and guaranteed mortgages pooled into new
Ginnie Mae-guaranteed MBS; the amount of new guaranteed MBS backed by
reverse mortgages, multifamily loans; and the volume of Ginnie Mae
structured products. The data from Inside Mortgage Finance covered
calendar years 2005-2010. We analyzed information on the volume of MBS
issuance by Ginnie Mae issuers, private-label issuers, and government-
sponsored enterprises, and cumulative outstanding guaranteed MBS. We
assessed the reliability of the data provided by Ginnie Mae by
reviewing documentation on the systems that produced the data,
performing electronic testing, and conducting interviews with relevant
officials at Ginnie Mae and its contractors. To assess the reliability
of the data provided by Inside Mortgage Finance, we interviewed an
official at the firm and reviewed documentation that describes how
market information is collected. We determined that the data were
sufficiently reliable for the purposes of this report. We also
reviewed Ginnie Mae's 2009 and 2010 reports to Congress.
To describe the reasons for changes in Ginnie Mae's market share and
volume, we interviewed officials from the Department of Housing and
Urban Development (HUD)--more specifically, from Ginnie Mae, the
Federal Housing Administration (FHA), Office of the Inspector General,
Public and Indian Housing; the Department of Agriculture's Rural
Housing Service; the Department of Veterans Affairs; Fannie Mae and
Freddie Mac (government-sponsored enterprises); the Federal Housing
Finance Agency and the Mortgage Bankers Association.
To assess the types of risks Ginnie Mae faces and how it manages these
risks, we conducted a literature review of risks that may be prevalent
in the MBS market for Ginnie Mae and government-sponsored enterprises.
We also interviewed officials from Ginnie Mae, Fannie Mae, and Freddie
Mac to determine what risk these agencies face and how they are
managed. From this review and discussion, we identified counterparty
and operational risk as the key risks facing Ginnie Mae.[Footnote 80]
For both of these risks, we reviewed and identified principles in our
internal control and management tool relevant to managing these risks.
[Footnote 81] We also identified human capital principles in our prior
work on the topic. We compared these principles to the steps that
Ginnie Mae took to manage its risk. For operational risk, we focused
on risks present in the agency's management of human capital,
contracting, and technology. We assessed Ginnie Mae's staffing and
organizational realignment plans to determine if Ginnie Mae developed
strategies to address gaps in staffing needs and evaluated its
organizational structure and made changes based on changing
conditions. We collected information on the number of full-time
equivalent positions requested, authorized, and actual in 2005-2010
and part of 2011 (October 2010 through June 2011). We assessed the
reliability of the information provided by reviewing documentation
that HUD's budget office and Ginnie Mae's administrative officer
maintain and conducting interviews with relevant officials. We
determined that the data were sufficiently reliable for the purposes
of this report. We reviewed HUD's 2004 Resource Estimation and
Allocation Process study. We also reviewed proposed 2012 budget
documents produced by the Office of Management and Budget.
To assess how Ginnie Mae managed risks associated with contracting, we
reviewed Ginnie Mae's guidance and other HUD and federal contracting
standards. We obtained and analyzed Federal Procurement Data System-
Next Generation data to determine the amount of Ginnie Mae contract
dollars awarded from 2005 to 2010.[Footnote 82] We assessed the
reliability of the data by reviewing documentation on the systems that
produced the data, conducting interviews with relevant officials at
Ginnie Mae and HUD's Office of the Chief of Procurement, and reviewing
the internal controls on the data. We also reviewed the number of
active contracts and orders during that time period. We reviewed a
nonprobability sample of 14 contracts selected either because the
activities involved represented a core business function or Ginnie Mae
identified the activities as key business functions that could result
in operational risk if problems occurred with the contract.[Footnote
83] In addition, we examined a nonprobability sample of 33 third-party
Contract Assessment Reviews conducted between 2005 and 2010.[Footnote
84] We also interviewed 7 contractors from our nonprobability sample
of 14 contracts to gain an understanding of the work performed and how
they were monitored. The interviews included four contractors that
received some of the largest obligation amounts from 2005-2010 and
three third-party contractors who conducted reviews on the majority of
these contracts. We interviewed Government Technical Representatives
for five contracts to understand their role and how they monitored
contracts. We also reviewed risk assessments conducted by Ginnie Mae
and its review contractor in December 2010 and June 2011 and
determined if these studies followed our principles (from our internal
control and management tool) for agencies to consider risks associated
with major suppliers and contracts. We reviewed the 2011 performance
plans for senior management that contained directives to assess
contracts. In addition, we met with HUD Inspector General officials
and reviewed Ginnie Mae financial statements from 2006 to 2010,
management letters from 2008 to 2010, and program audits on the MBS
program and information technology. To assess how Ginnie Mae managed
risks associated with its information technology, we reviewed Ginnie
Mae's information technology improvement initiative and discussed the
initiative and additional plans with Ginnie Mae officials.
For counterparty risk, we assessed Ginnie Mae's MBS policies and
guidance, including processes for issuer approval, monitoring, and
enforcement. We interviewed Ginnie Mae officials and contractors about
how issuers are approved and monitored and the changes made to these
processes in recent years. We collected and reviewed data from Ginnie
Mae from 2005 to 2010 and part of 2011 (October 2010 through June
2011) and described the number of new issuer applications, approvals,
reviews, and findings. We assessed the reliability of these data and
determined they were reliable for our purposes. In addition, we met
with HUD Inspector General officials and reviewed 2008 and 2009
program audits on the MBS program. We also reviewed A-123 internal
control reviews performed by a third-party contractor from 2006 to
2011 to determine the types of findings and recommendations on Ginnie
Mae's approval, monitoring, and enforcement processes. We reviewed
Ginnie Mae's risk committee minutes from 2008 to 2010 to determine the
role of the committee and how risks were monitored. We reviewed
documentation on a nonprobability sample of 10 issuers to understand
the types of monitoring Ginnie Mae and its contractors conducted. To
select the issuers, we used a certainty sample to select the three
largest issuers based on overall portfolio size and also one newly
approved issuer approved after Ginnie Mae made changes to its process.
The other six issuers were selected at random and included three that
were on Ginnie Mae's watch list and three that were not. We also
selected 5 of the 10 issuers to interview based on size, institution
type, and results from monitoring reviews. Two of the issuers selected
also were investors and sponsors of structured products. We also
looked at examples of monthly and quarterly reports prepared by Ginnie
Mae's contractor that report such information as issuer performance
thresholds. We reviewed documentation on risk-management ideas,
planned initiatives, and risk assessments performed by the agency's
contractor. We also reviewed the performance plans of senior
management in the office of the Chief Risk Officer and the Office of
Mortgage-Backed Securities to determine what goals were in place for
the year.
To determine how recent changes in Ginnie Mae's market share and
volume might affect financial exposure to the federal government and
the agency's ability to meet its mission, we interviewed officials
from Ginnie Mae and its contractor that conducts modeling, the Office
of Management and Budget, and FHA. We reviewed Ginnie Mae's guidance
and financial statements. We obtained and analyzed data on the
potential risks of changes in Ginnie Mae's market share and volume on
its mission. More specifically, we analyzed data on FHA and Department
of Veterans Affairs loan securitization rates from Inside Mortgage
Finance for calendar years 2005-2010.[Footnote 85] To gain an
understanding of how Ginnie Mae's program might produce financial
exposure to the federal government, we obtained data from Ginnie Mae
on issuer defaults, including the number of pools, loans, and
remaining balance of the assets needed to be serviced from 2005 to
2010 and part of 2011 (October 2010 through June 2011). We also
obtained data as of June 30, 2011, on the associated costs Ginnie Mae
incurred due to issuer defaults. We analyzed Ginnie Mae's revenue and
expense data to identify the extent to which its guarantee fee
revenues covered its costs from 2005 through 2010 and part of 2011
(October 2010 through June 2011). We assessed the reliability of the
data provided by Inside Mortgage Finance and Ginnie Mae by means such
as interviewing relevant officials and reviewing documentation on the
systems that produced the data. We determined that the data were
sufficiently reliable for the purposes of this report.
In addition, to determine how Ginnie Mae forecasts costs and revenues,
we reviewed the Federal Credit Reform Act of 1990 and budget documents
produced by the Office of Management and Budget. We also reviewed
Ginnie Mae's statutes and documentation related to the development of
the annual subsidy estimate, including the credit subsidy re-estimate
for 2010 and Ginnie Mae's model used to forecast cash flows.
Furthermore, we reviewed Federal Accounting Standards Advisory Board
guidance for cost estimation of federal credit programs, academic
research on risk budgeting, and FHA's 2010 actuarial review. We
compared this information with Ginnie Mae's revised model.
We conducted this performance audit from September 2010 to November
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Ginnie Mae's Planned and Proposed Changes to Address
Operational and Counterparty Risk:
As mentioned previously, Ginnie Mae has several planned and proposed
initiatives to address operational and counterparty risk. Table 3
provides a listing of these plans.
Table 3: Planned and Proposed Changes to Address Operational and
Counterparty Risk, as of September 30, 2011:
Operational risk:
Type of risk and related activity: Staffing levels;
Planned or proposed change: Phase One--staff 25 priority positions
across the agency;
Expected completion date: Upon approval of Ginnie Mae requested 2012
budget.
Type of risk and related activity: Organizational structure;
Planned or proposed change: Complete reorganization;
Expected completion date: Upon approval of Congress and HUD union.
Type of risk and related activity: Contracting;
Planned or proposed change: Use additional staff resources to
supplement third-party contract assessment reviews;
Expected completion date: On hold due to budget uncertainties.
Type of risk and related activity: Contracting;
Planned or proposed change: Implement recommendations from three risk
assessments done on contracting;
Expected completion date: During 2012.
Type of risk and related activity: Information systems;
Planned or proposed change: Complete draft information technology
strategy document;
Expected completion date: Ongoing.
Counterparty risk:
Type of risk and related activity: Approval process;
Planned or proposed change: Decrease issuer approval time;
Expected completion date: Yet to be determined.
Type of risk and related activity: Approval process;
Planned or proposed change: Expand number and types of issuers;
Expected completion date: Yet to be determined.
Type of risk and related activity: Monitoring issuers;
Planned or proposed change: Update guidance;
Expected completion date: 2012.
Type of risk and related activity: Issuer reviews;
Planned or proposed change: Create scoring system for issuer findings
and work with Chief Risk Office to develop schedules;
Expected completion date: Yet to be determined.
Type of risk and related activity: Issuer reviews;
Planned or proposed change: Develop database to track the resolution
and timing of issuer findings;
Expected completion date: June 2012.
Type of risk and related activity: Issuer reviews;
Planned or proposed change: Update guidance used to conduct issuer
reviews;
Expected completion date: June 2012.
Type of risk and related activity: Risk management;
Planned or proposed change: Develop counterparty risk-management
system, including issuer scorecard;
Expected completion date: March 2012.
Source: GAO analysis of Ginnie Mae information.
[End of table]
[End of section]
Appendix III: Comments from Ginnie Mae:
U.S. Department of Housing and Urban Development:
President, Government National Mortgage Association:
Washington, DC D410-9000:
November 1, 2011:
Mr. Mathew J. Scirč:
Director, Financial Markets and Community Investments:
Government Accountability Office:
441 G Street, NW, Room 2440B:
Washington, DC 20548:
Dear Mr. Scirč:
Thank you for the opportunity to review and comment on GAO's draft
report, entitled Ginnie Mae Risk Management and Cost Modeling Require
Continuing Attention.
We appreciate GAO's acknowledgment that Ginnie Mae has taken steps to
better manage operational and counterparty risk, and has incorporated
some principles consistent with GAO's internal control and management
tool. We agree with the report's analysis that limited staff,
substantial reliance on contractors, and the need for modernized
information systems are operational risks that Ginnie Mae may face,
and appreciate GAO's acknowledgment of the initiatives that Ginnie Mae
has undertaken in order to address these challenges, such as
developing strategies to address staffing gaps, realigning our
organizational structure, conducting risk assessments on its
contracting, and starting to improve outdated information systems.
Additionally, we appreciate GAO's acknowledgment that Ginnie Mae has
revised its approval and monitoring procedures in response to changing
market conditions and increased market share to better manage our
counterparty risk. We agree with GAO's observation with respect to the
importance of completing our ongoing and planned initiatives for
enhancing our risk-management processes, as soon as practicable, to
improve our operations.
As your report points out, Ginnie Mae's share and guaranteed mortgage
backed securities (MBS) increased substantially from 2007 to 2010. At
the end of FY201 1, Ginnie Mae's share of the MBS market was 28
percent and Ginnie Mae's MBS volume grew to more than $1.2 trillion.
Although Ginnie Mae's market share and volume of MBS have increased in
recent years, Ginnie Mac's staff levels have been relatively constant
during this time period despite requests for increased staffing
authority. We believe that the additional flexibility provided in the
President's 2012 budget request will enable Ginnie Mae to strengthen
risk management and oversight, move in-house some functions performed
by contractors, and provide flexibility for future needs.
We appreciate GAO's acknowledgment that Ginnie Mae has made
improvements to the forecasting model and would note that limited
funding and resources have precluded implementation of some of the
econometric enhancements suggested in your report. We agree that the
model could be further enhanced to incorporate some of the general
guidance of Federal Accounting Standards Advisory Board (FASAB) to
assure that there is appropriate matching of expenses and revenues in
the same fiscal year for programs where fees are received before any
demand is made on the government guarantee; however, the unique nature
of the Ginnie Mae guarantee needs to be reflected in the model. Ginnie
Mae is unique in that it does not make loan level guarantees. Thus,
certain aspects of the FASAB guidance surrounding cohort accounting,
loans, and loan guarantees are impossible for us to perform and would
not reflect the intent of the FASAB guidance. We recognize that GAO
believes that the FASAB guidance represents sound internal control
practices for evaluating Ginnie Mae's model. However, because of the
unique nature of our business, some aspects of FASAB guidance do not
provide a relevant framework.
Ginnie Mae is working towards implementing GAO's recommendations for
conducting additional sensitivity analyses and "what-if' scenarios
relating to issuer risk and behavior across different interest-rate
and economic environments. However, we would note that more staff is
needed to carry out these quantitative economic analyses and liaise
with the various agencies' finance offices to provide timely inter-
agency data for Ginnie Mae's financial models.
Your report points out that for budgetary purposes, Ginnie Mae
annually estimates the expected subsidy costs to the federal
government of our guarantee activity and historically,
Ginnie Mae has estimated that our guarantee program would have a
negative credit subsidy rate, resulting in budgetary receipts for the
federal government. We would like to note that the negative credit
subsidy calculation is overstated because currently OMB does not allow
Ginnie Mae to reduce the negative subsidy to reflect administrative
costs, which is inconsistent with Congress' intent ” that Ginnie Mae's
administrative costs be paid from its fee income. Another challenge
that Ginnie Mae faces when required to perform Federal Credit Reform
Act (FCRA) type accounting is our inability to use the cash generated
by previous fiscal years' negative subsidy payments to cover the costs
of defaulted issuers. When we default an issuer and have to take over
their servicing obligations, we may need access to large amounts of
working capital. Our reserves would be the logical source for such
funds. We welcome the opportunity to discuss this situation further
with GAO and others interested in the unique challenges Ginnie Mae
faces with FCRA policy implementation.
At Ginnie Mae, we believe in doing business right and are committed to
being an open and transparent organization. We enjoyed working with
GAO and appreciate the time spent by GAO staff to understand our
business and operations.
Again, thank you for the opportunity to comment on the draft report.
Sincerely,
Signed by:
Theodore W. Tozer:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mathew Scirč, (202) 512-8678 or sciremj@gao.gov:
Staff Acknowledgments:
In addition to the contact named, Andy Pauline (Assistant Director),
Serena Atim Agoro-Menyang, Jennifer Alpha, Marcia Carlsen, Kathryn
Edelman, Carol Henn, Julia Kennon, John McGrail, Luann Moy, Marc
Molino, Nadine Garrick Raidbard, Paul G. Revesz, Barbara Roesmann, and
Heneng Yu made key contributions to this report.
[End of section]
Footnotes:
[1] Unless otherwise stated, the years shown in this report are fiscal
years. "More than $1 trillion" refers to the remaining principal
balance on federally insured or guaranteed mortgages. The secondary
market is where the originators of mortgage loans sell them to
investors and the loans are packaged into securities.
[2] In August 2009, Ginnie Mae defaulted Taylor, Bean & Whitaker
Mortgage Corporation for failing to provide audited financial
information in a timely manner and violating Ginnie Mae's program
requirements for issuers. Ginnie Mae's MBS guide specifies 11 events
that might result in an issuer being defaulted. For example, an issuer
can be defaulted for failing to remit principal and interest payments
to investors, actual or impending insolvency, submitting a false
report, or failing to submit a report. In addition, Ginnie Mae can
default an issuer if its status as an FHA lender is not maintained.
More specifically, FHA requires that all lenders must be approved by
FHA and must maintain this status in order to provide loans with FHA
insurance. In August 2009, the Taylor, Bean & Whitaker Mortgage
Corporation filed for bankruptcy, and in 2011 executives were found
guilty of fraudulently representing the firm's assets to multiple
federal agencies.
[3] Inside Mortgage Finance is a firm that collects data on the
primary and secondary mortgage markets.
[4] Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people, and systems, or from external
events. Ginnie Mae faces counterparty risk when an issuer fails or
defaults, which would require the agency to ensure that investors
receive monthly principal and interest payments and service the
underlying loans.
[5] Our review focused on existing policy and procedures to mitigate
risk of Ginnie Mae-guaranteed MBS. Therefore, we did not perform an in-
depth review of risk-management practices for Ginnie Mae's structured
products, which include Ginnie Mae MBS products that direct principal
and interest payments from underlying MBS to classes, or tranches,
with different principal balances, terms of maturity, interest rates,
and other characteristics.
[6] Ginnie Mae was created in 1968 with the passage of the Housing and
Urban Development of 1968, Pub. L. No. 90-448, see 12 U.S.C. §§ 1716-
1723i. Ginnie Mae is authorized to guarantee the timely payment for
securities of pools of federally backed mortgages. 12 U.S.C. § 1721(g).
[7] FHA's single-family and multifamily mortgage insurance programs
and PIH's Loan Guarantee for Indian Housing program guarantee 100
percent of the mortgage. VA generally guarantees 25 percent of the
mortgage amount, but can guarantee up to 50 percent of the mortgage
amount for smaller loans; and RHS guarantees up to 90 percent of the
mortgage.
[8] Issuers of Ginnie Mae-guaranteed MBS backed by single-family
mortgages pay Ginnie Mae a guarantee fee of 0.06 percent of the
remaining principal balance of their MBS. However, Ginnie Mae provides
discounts ranging from 0.01 to 0.03 percent on its guarantee for
issuers that are pooling single-family mortgages in traditionally
underserved areas of the country. Issuers of Ginnie Mae-guaranteed MBS
backed by multifamily mortgages pay a guarantee fee of 0.13 percent.
In 2010, Ginnie Mae guarantee fees were $567.8 million.
[9] The commitment fee is based on the size of commitment authority
request--$500 for the first $1.5 million and $200 for each additional
$1 million (or part thereof) in commitment authority. In 2010, Ginnie
Mae collected $83.7 million in commitment fee revenue.
[10] Prepayment occurs when a borrower pays off the mortgage before it
matures, which generally occurs because the home was sold or the
mortgage was refinanced into a new loan.
[11] The fee for three of the structured products REMICs, Platinum
Securities, and Callable Trusts--is 7.5 basis points for the first
$100 million and 2.5 basis points for amounts of more than $100
million. Callable Trusts allow investors the flexibility to redeem or
call a security prior to its maturity date under certain conditions.
In addition to these structured products, Ginnie Mae offers stripped
MBS, which allow approved financial institutions to separate and
redirect the principal and interest portions of Ginnie Mae-guaranteed
MBS. The fee for stripped MBS is 3.125 basis points. In 2010, Ginnie
Mae collected $63.4 million in fees on structured products.
[12] Interest-rate risk is the risk that an increase in interest rates
will reduce the value of a fixed-rate loan.
[13] Funding for Ginnie Mae staff is subject to annual appropriations,
but Ginnie Mae has permanent and indefinite authority to pay for
contractors from fee revenues.
[14] HUD's appropriation provides for annual caps on Ginnie Mae's
commitment authority--the limit on the dollar volume of new securities
that the agency can guarantee. Since 2002, the annual commitment
authority Ginnie Mae received has been available for 2 years. That is,
Ginnie Mae can use "carry-over" authority from the prior year to make
current year commitments. In the 2012 proposed budget, the
administration proposed a cap of $500 billion in MBS guarantees.
[15] Inside Mortgage Finance data are calendar year.
[16] The demand for FHA-insured mortgages may have increased in
February 2008 after changes were made to FHA loan limits as a result
of the Economic Stimulus Act of 2008 (from approximately $360,000 to
$730,000 in high-cost areas of the country).
[17] Ginnie Mae MBS include Ginnie Mae I and Ginnie Mae II, which
differ in terms of eligible loans, collateral, number of issuers
participating, pool sizes, servicing fee structure, and payment
schedule to investors.
[18] Multifamily loans finance the purchase, and in some cases, the
construction of apartment buildings, hospitals, nursing homes, and
assisted-living facilities. Home Equity Conversion Mortgages are FHA-
insured reverse mortgages available to persons 62 years or older that
allow the homeowner to convert equity in their home to income.
[19] The financial institutions that issue structured products are
subject to a different approval and recertification process than
issuers of MBS. In some cases, issuers of structured products also may
be issuers of MBS. Although Ginnie Mae also offers another structured
product (stripped MBS), the agency did not guarantee any in 2005-2010.
[20] GAO, Housing Finance: Ginnie Mae Is Meeting Its Mission but Faces
Challenges in a Changing Marketplace, [hyperlink,
http://www.gao.gov/products/GAO-06-9] (Washington, D.C.: Oct. 31,
2005) and Government National Mortgage Association: Greater Staffing
Flexibility Needed to Improve Management, [hyperlink,
http://www.gao.gov/products/GAO/RCED-93-100] (Washington, D.C.: June
30, 1993). HUD, Office of the Inspector General, Fiscal Year 2009
Government National Mortgage Association Financial Statement Audit
Management Letter (Washington, D.C., Nov. 3, 2009).
[21] We reported previously on Ginnie Mae's staff resources and found
that in 1991 Ginnie Mae had 69 employees and little flexibility in
determining how to use its resources due to staff ceilings imposed by
HUD and OMB. In 1991, Ginnie Mae's staff level was about the same as
it has been in recent years. In 2009, Ginnie Mae had a staff level of
about 72 full-time equivalents.
[22] HUD uses REAP in estimating, justifying, and allocating its
staffing resources. REAP is used for budget formulation and execution,
strategic planning, organizational and management analyses, and
ongoing management of staff resources. The number of FTEs are
determined by using workload data analysis and observations gathered
from staff members and management.
[23] Ginnie Mae submits requests for authorization for additional
funding to increase staffing levels to HUD.
[24] Ginnie Mae uses a contractor to conduct internal control reviews
to document, test, assess, and report on internal controls over
financial reporting, as required by OMB Circular A-123. A control
deficiency is a less serious finding that identifies an internal
control that might not be designed to prevent or detect and correct
issues.
[25] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001) and Human Capital: Key Principles for Effective Strategic
Workforce Planning, [hyperlink, http://www.gao.gov/products/GAO-04-39]
(Washington, D.C.: Dec. 11, 2003).
[26] Ginnie Mae originally was authorized 76 FTEs for 2011, but after
further discussions with HUD, it was determined that funds available
to Ginnie Mae could support 108 FTEs. However, according to Ginnie Mae
officials, the agency imposed a hiring cap (at 88 FTEs) on itself
because of budget uncertainty in 2011.
[27] Of the 25 priority positions, 23 were new, and 2 were
replacement. Currently, the Chief Risk Officer operates in the Office
of the President and Executive Vice President.
[28] Under the proposed budget, the additional FTEs will be funded
with revenue from Ginnie Mae's commitment and multiclass fees.
Previously, the appropriation for administrative costs in the HUD
budget funded personnel expenses. Ginnie Mae officials explained that
OMB set the 249 FTE level and they were not consulted on FTE numbers
to include in the budget request. Through a memorandum to the House of
Representatives and Senate Appropriations Committee staff, Ginnie Mae
revised its request on July 5, 2011, to 111 FTEs, estimated to cost
$25.4 million. Ginnie Mae explained that the agency's current office
space could hold only 111 employees but that they asked the General
Services Administration to identify additional office space, which
likely would not be available until mid-to-late 2012. Ginnie Mae also
requested flexibility to use the remaining $4.6 million to continue
hiring staff in 2012 once office space was identified. Ginnie Mae
officials determined that the $30 million would be sufficient to hire
137 FTEs not 249 FTEs.
[29] HUD, Office of the Inspector General, Audit of Government
National Mortgage Association's Financial Statements for Fiscal Years
2008 and 2007 (Washington, D.C., Nov. 7, 2008). The Office of
Enterprise Risk provides a framework for risk management by
identifying particular events or circumstances relevant to Ginnie
Mae's objectives, assessing them in terms of likelihood and magnitude
of impact, determining a response strategy, and monitoring progress.
The Chief Risk Officer helps to ensure that all key risks facing
Ginnie Mae are effectively identified, measured, and managed. The Risk
Committee provides direction and oversight for Ginnie Mae's risk-
management activities. Through the Risk Committee, the Risk Officer
seeks to ensure that Ginnie Mae has developed and continues to
maintain a robust risk framework by establishing policies and
procedures for risk management throughout the organization, monitoring
aggregate risk and compliance with risk policies, and delegating
primary responsibility for day-to-day risk management to business
units. With the creation of an independent risk office, in October
2010 Ginnie Mae dissolved its Issuer Review Board, the predecessor to
the Risk Committee.
[30] Ginnie Mae's other current offices comprise the Office of
Finance, which oversees financial management and operational controls
(for example, over investment of Ginnie Mae funds, preparation and
execution of the budget, and performance or coordination of internal
and external audits); the Office of Mortgage-Backed Securities, which
establishes policies and procedures for, and eligibility of, issuers;
the Office of Capital Markets, which coordinates creation and
marketing of existing and new securities and administers Ginnie Mae's
Multiclass Securities Program; and the Office of Management
Operations, which develops and implements policies and procedures for
human capital administration and procurement management.
[31] All contract dollars have been adjusted to constant dollars to
reflect inflation based on the price index for 2010 from the Bureau of
Economic Analysis. In addition, according to Ginnie Mae officials
obligated amounts represent a maximum level of spending on contracts
and actual amounts of spending may be lower.
[32] Orders refer to task orders, which are requests to a contractor
to perform a specific type of work under an existing contract. Task
order contracts generally are used when the precise quantities of
supplies or services that will be required during the contract period
are unknown. A task order contract permits flexibility in quantities
and delivery scheduling.
[33] We were unable to obtain an accurate account of the number of
contract staff FTEs because neither Ginnie Mae nor HUD's contracting
office tracked these data. The Consolidated Appropriations Act of
2010, requires the heads of civilian agencies, including HUD, to
annually submit to OMB an inventory of service contracts. However,
implementation of the act is in progress. In May 2011, we reported
that civilian agencies did not have the ability to collect FTE
information from contractors, or the amount invoiced. See GAO, OMB
Service Contracts Inventory Guidance and Implementation, GAO-11-538R
(Washington, D.C.: May 27, 2011). In addition, OMB plans to issue a
proposed rule that will require agencies to collect information on the
number of direct-labor hours expended on services performed by
contractors and subcontractors, among other things and expects this
information to be collected in a phased approach over the next 4 years
based on contract type and total estimated value of a contract. In
addition to collecting this information, all agencies are required to
ensure that contractor personnel are not performing inherently
governmental functions. The Office of Federal Procurement Policy
recently issued new guidance to agencies on managing the performance
of inherently governmental and critical functions. 76 Fed. Reg. 56227
(Sept. 12, 2011).
[34] We met with GTRs who oversaw five contracts and discussed how
they oversaw these contracts in accordance with HUD guidance.
[35] According to revised OMB Circular A-123, federal agencies must
perform an annual review to document, test, and assess the internal
controls in place on financial reporting.
[36] Ginnie Mae officials explained they decreased the size of the
portfolio by establishing policy and procedures based on OMB guidance
to write off loans in the servicer's defaulted portfolio.
[37] The other recommendations included two related to clarifying the
servicer's procedures and role and one on improving procedures to
prevent recurrence of specific accounting issues.
[38] [hyperlink, http://www.gao.gov/products/GAO-01-1008G].
[39] We also have been examining contracting risks associated with
professional and management support service contracts at multiple
agencies (including HUD and Ginnie Mae). We plan to issue a separate
report on these topics at a later date.
[40] Contracts identified as top contracts included those that
serviced loans in the single-family, manufactured housing, and
mulitfamily portfolio; performed administrative functions of the MBS
program, such as pool processing; and conducted issuer compliance
reviews.
[41] Ginnie Mae officials explained these risks were identified based
on views from Ginnie Mae staff and not on actual occurrences.
[42] OMB defines critical functions as those necessary for an agency
to effectively maintain control of its mission and operations.
[43] [hyperlink, http://www.gao.gov/products/GAO-01-1008G].
[44] Ginnie Mae, MBS Guide, 5500.3, Rev. 1.
[45] Issuer required risk thresholds include default, financial, and
insurance risk. Default risk is based on delinquency ratio. More
specifically, Ginnie Mae uses three indicators of delinquencies (1)
DQ3+Delinquency Ratio: Number of loans in the issuer's Ginnie Mae
portfolio that either are in the foreclosure process or 3 or more
months delinquent divided by total number of loans remaining in the
portfolio; (2) DQ2+Delinquency Ratio: Number of loans in the issuer's
Ginnie Mae portfolio that either are in the foreclosure process or 2
or more months delinquent divided by total number of loans remaining
in the portfolio; and (3) DQP Delinquency Ratio: Accumulated amount of
delinquent principal and interest payments divided by total monthly
fixed installment control due the issuer. For DQ3+Delinquency, the
ratio cannot be more than 5 percent for larger issuers or 9 percent
for smaller issuers. Larger issuers are those with more than 1,000
loans, and smaller issuers, those with less than 1,000 loans. For
DQ2+Delinquency, the ratio cannot be more than 7.5 percent for larger
issuers or 10 percent for smaller issuers. For DQP Delinquency, the
ratio cannot be more than 60 percent for larger issuers or 90 percent
for smaller issuers. Financial risk refers to net worth amounts.
Insurance risk includes loan matching, which refers to the
verification of the government insurance status of underlying
mortgages to allow for the more timely identification and follow-up of
loans lacking appropriate insurance documentation.
[46] Ginnie Mae also increased net worth and liquid asset thresholds
for multifamily issuers.
[47] Before October 2010, additional net worth was calculated as 1
percent of remaining principal balance (RPB) plus the amount of
available commitment authority between $5 million and $20 million,
plus 0.2 percent of RPB greater than $20 million. As of October 2010,
additional net worth was calculated as 0.2 percent of the issuer's RPB
plus the amount of available commitment authority. See "All
Participant Memoranda" 10-17.
[48] Indemnification agreements require the lender to repay FHA for
any losses that it incurs after a loan has gone into default and the
property has been sold.
[49] Issuer required risk thresholds exist for default risk (which
includes thresholds for borrower delinquency), financial risk (which
includes requirements for adjusted net worth, adjusted net income, and
other financial ratios), insurance risk (which includes requirements
for loan matching rates with FHA, VA, RHS, and PIH), and compliance
score (which includes the results of issuer reviews).
[50] Issuers are added to the watch list if they exceed performance
thresholds for default, financial, insurance risk, and compliance
risk. In addition, officials explained that Ginnie Mae can add issuers
to the watch list at their discretion if it is determined the issuer
poses a risk that is not captured in the performance thresholds.
[51] The Ginnie Mae desk manual on operational procedures, which
provides guidance on the commitment authority process, requires Ginnie
Mae staff to complete a checklist of required steps in the process.
[52] The Ginnie Mae contractor that provides back-office support for
the administration of the MBS program provides reports to Ginnie Mae
on a monthly or quarterly basis. Ginnie Mae officials explained the
contractor also can supply additional, custom reports at the agency's
request.
[53] The Ginnie Mae MBS guide outlines the thresholds that issuers
must maintain.
[54] We reviewed documentation of a nonprobability sample of 10
issuers to understand the types of monitoring Ginnie Mae and its
contractors conducted. To select the issuers, we used a certainty
sample to select the three largest issuers based on overall portfolio
size and also one newly approved issuer approved after Ginnie Mae
changed its process. The other six issuers were selected at random and
included three that were on Ginnie Mae's watch list and three that
were not.
[55] On-site reviews can be basic (lower-risk) or special (higher-
risk). The basic review has smaller pool and loan sample sizes. In
2008, Ginnie Mae began conducting special servicer reviews to evaluate
certain new issuer applicants and existing issuers that posed a
potential risk to Ginnie Mae. From 2008 to June 30, 2011, it has
conducted 32 such reviews on new applicants and 6 on existing issuers.
[56] More specifically, 14 of the 22 issuers that were not reviewed
did not have issuance activity until 2010 and may not be required to
be reviewed until 2013; the remaining 8 were not eligible for a review
because they no longer had a portfolio of Ginnie Mae-guaranteed MBS.
[57] A high-risk finding is classified as having an immediate impact
on investors, issuers, or Ginnie Mae, such as not having sufficient
funds to cover the principal and interest payments to investors. A
medium-risk finding is classified as having a substantial impact on
investors, issuers, or, Ginnie Mae, such as principal and interest
bank account reconciliations not being accurate. A low-risk finding is
classified as having low impact on investors, issuers, or Ginnie Mae,
such as principal and interest bank account reconciliations not being
timely.
[58] Ginnie Mae developed remote monitoring procedures of issuers
focused on monitoring the movement of funds in financial accounts
related to MBS.
[59] As mentioned previously, Ginnie Mae relies on four contractors to
service its single-family, manufactured housing, and multifamily
portfolios.
[60] Ginnie Mae received approximately $568 million in guarantee fee
income in 2010.
[61] Capital reserves refers to accumulated net earnings to withstand
potential downturns in the housing market that could cause issuer
defaults to increase. The funds with the U.S. Treasury (cash) readily
available to pay claims was $6.7 billion.
[62] Ginnie Mae has the statutory authority to keep its fee revenue in
a reserve account rather than remitting the balance to the general
fund at the end of the fiscal year.
[63] When a borrower defaults on an acquired mortgage, Ginnie Mae
seeks reimbursement from the federal agency that insured or guaranteed
the mortgage. In some instances, some mortgages that are in pools may
not be insured due to fraud or error.
[64] According to its 2010 financial statement, Ginnie Mae determined
that about $4.5 billion of the loans in the defaulted issuer
portfolio, including those from Taylor, Bean & Whitaker Mortgage
Corporation, were delinquent. Ginnie Mae used its reserve fund to buy
these mortgages from its MBS pools and now owns the loans; however, it
expects to recover the majority of these funds through foreclosure and
filing claims with FHA. That is, as owner of the loans, Ginnie Mae can
conduct foreclosure proceedings on delinquent borrowers and file
claims with FHA to recover the insured portion of the mortgage not
recovered during foreclosure proceedings.
[65] This number represents the disbursements Ginnie Mae incurred due
to issuer defaults. For 2011 (as of June 30), Ginnie Mae has defaulted
one issuer.
[66] Pursuant to the statutory provisions under which Ginnie Mae
operates, its net earnings are used to build reserves. For the
guaranteed portfolio, Ginnie Mae determines a reserve for loss, which
is established to the extent management believes issuer defaults are
probable and FHA, RHS, VA, and PIH insurance or guarantees are
insufficient to recoup Ginnie Mae expenditures. As of September 30,
2010, Ginnie Mae reported a reserve for loss of approximately $1
billion on a guaranteed portfolio of approximately $1 trillion.
[67] Since 2000, Ginnie Mae has had a negative subsidy, which has
ranged from negative 0.29 percent in 2000 to negative 0.22 percent in
2010. The 2012 budget showed an upward re-estimate of the 2010 rate to
negative 0.20 percent. Since 1998, Ginnie Mae's negative subsidies
related to MBS guaranteed through September 30, 2010, have resulted in
a positive budgetary impact of $6.59 billion. However, with the upward
re-estimate this amount was reduced to $5.87 billion.
[68] Ginnie Mae uses a single cohort to re-estimate the subsidy cost
of its portfolio, rather than re-estimating for annual cohorts based
on obligation dates.
[69] Federal Accounting Standards Advisory Board, Federal Financial
Accounting and Auditing Technical Release 6: Preparing Estimates for
Direct Loan and Loan Guarantee Subsidies under the Federal Credit
Reform Act (January 2004). The guidance is used to identify specific
practices that, if fully implemented by credit agencies, will enhance
their ability to reasonably estimate loan program costs. The guidance
was developed by an interagency group including members from OMB, the
Department of the Treasury, GAO, and various credit agencies to
provide detailed implementation guidance on how to prepare reasonable
credit subsidies. In our view, the guidance represents sound internal
control practices that also could be applied to an agency's
development of a model used to generate budget and financial statement
credit subsidy estimates.
[70] The statistical model that Ginnie Mae uses to project cash flows
is called the Policy and Financial Analysis Model.
[71] The cost of the contract to redesign its model was approximately
$1.8 million in the first 2 years and more than $193,000 in each of 3
subsequent years.
[72] FHA's model uses statistical methods--called econometrics--to
forecast borrower default and prepayment based on how economic
conditions, such as housing prices and interest rates, influence
borrower behavior.
[73] A stress test is a "what-if" scenario that is not a prediction or
expected outcome of the economy but shows the outcome of the model in
extreme economic circumstances.
[74] According to Ginnie Mae officials, their 2011 financial
statements will be provided in November 2011, and the credit subsidy
estimate and re-estimate are to be provided in February 2012 as part
of HUD's 2013 budget.
[75] D. Neil Pearson, Risk Budgeting: Portfolio Problem Solving with
Value-at-Risk (New York: John Wiley & Sons, Inc., 2002).
[76] As noted earlier, the growth in FHA-insured reverse mortgages
pooled into Ginnie Mae-guaranteed MBS has outpaced growth in other
mortgage types.
[77] See GAO, Mortgage Financing: FHA's Fund Has Grown, but Options
for Drawing on the Fund Have Uncertain Outcomes, [hyperlink,
http://www.gao.gov/products/GAO-01-460] (Washington, D.C.: Feb. 28,
2001).
[78] The rate at which issuers buy defaulted or prepaid mortgages out
of their Ginnie Mae-guaranteed MBS.
[79] Unless otherwise stated, the years shown in this report are in
fiscal years.
[80] Our engagement focused on these risks and might not address all
risks that are relevant to Ginnie Mae.
[81] [hyperlink, http://www.gao.gov/products/GAO-01-1008G].
[82] We ran the output on August 16, 2011. In addition, all contract
dollars were adjusted to constant dollars to reflect inflation based
on the 2010 price index from the Bureau of Economic Analysis at the
Department of Commerce.
[83] Due to the large volume of contractors at Ginnie Mae, we did not
conduct an in-depth analysis of the monitoring of all contractors.
[84] However, some of the contracts were not included in our review
because Ginnie Mae does not conduct third-party contract assessments
on those contracts that have not expended $1 million.
[85] The data from Inside Mortgage Finance were limited to mortgages
insured by FHA and guaranteed by VA and excluded mortgages guaranteed
by the Rural Housing Service and Public and Indian Housing. We
determined that using data on FHA and VA was sufficient to assess
Ginnie Mae's overall securitization rates because these mortgages
accounted for more than 95 percent of Ginnie Mae-guaranteed MBS issued
in 2005-2010.
[End of section]
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