Housing Finance
Ginnie Mae Is Meeting Its Mission but Faces Challenges in a Changing Marketplace Gao ID: GAO-06-9 October 31, 2005The Government National Mortgage Association, commonly known as Ginnie Mae, is a wholly owned government corporation that guarantees mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans. The agency supports federal housing programs by facilitating the securitization of loans backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Rural Housing Service, and the Office of Public and Indian Housing within the Department of Housing and Urban Development (HUD). Concerned that Ginnie Mae's share of the overall MBS market has declined significantly, Congress asked us to address (1) the state of Ginnie Mae's market share and guarantee volume, (2) the potential implications of changes in its share and volume, and (3) the challenges Ginnie Mae faces and steps it is taking and could take to address these challenges.
Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing loans. Ginnie Mae MBS financed more than 90 percent of new FHA-insured and VA-guaranteed loans in fiscal year 2004, and the agency appears to face relatively little competition in this market. Ginnie Mae's total volume has declined in recent years, however, and its share of the overall MBS market has fallen from 42 percent of new securities in 1985 to 7 percent in 2004. This drop is largely the result of the decline in the market share of the FHA and VA loan programs and the concurrent rise in the securitization of non-government-backed mortgages. Further declines in Ginnie Mae's volume could potentially have implications for borrowers, the liquidity of its securities, and federal revenues. For example, Ginnie Mae's securities could become less liquid, although it is unclear at what levels of volume this would occur. In addition, Ginnie Mae's program revenues could decline if its volume decreased. In fiscal year 2004, program revenues exceeded expenses by $295 million, which helped reduce the federal budget deficit. Ginnie Mae faces a number of challenges in responding to changes in the marketplace, meeting stakeholders' needs, and managing its operations, and the agency has been taking steps to address these challenges. For example, it has expanded its product mix to reach more borrowers and has begun disclosing more information on loans underlying its securities to help investors better predict risk. GAO and others have identified opportunities for improvement in Ginnie Mae's data integrity and internal controls. The agency has begun addressing these issues, but it contracts out most of its operations, so ensuring that it has sufficient staff capabilities to plan, monitor, and manage its contracts is essential.
GAO-06-9, Housing Finance: Ginnie Mae Is Meeting Its Mission but Faces Challenges in a Changing Marketplace
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Report to the Chairman, Subcommittee on Housing and Community
Opportunity, Committee on Financial Services, House of Representatives:
October 2005:
HOUSING FINANCE:
Ginnie Mae Is Meeting Its Mission but Faces Challenges in a Changing
Marketplace:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-9]:
GAO Highlights:
Highlights of GAO-06-9, a report to the Chairman, Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
House of Representatives
Why GAO Did This Study:
The Government National Mortgage Association, commonly known as Ginnie
Mae, is a wholly owned government corporation that guarantees mortgage-
backed securities (MBS) backed by pools of federally insured or
guaranteed mortgage loans. The agency supports federal housing programs
by facilitating the securitization of loans backed by the Federal
Housing Administration (FHA), Department of Veterans Affairs (VA),
Rural Housing Service, and the Office of Public and Indian Housing
within the Department of Housing and Urban Development (HUD). Concerned
that Ginnie Mae‘s share of the overall MBS market has declined
significantly, you asked us to address (1) the state of Ginnie Mae‘s
market share and guarantee volume, (2) the potential implications of
changes in its share and volume, and (3) the challenges Ginnie Mae
faces and steps it is taking and could take to address these
challenges.
What GAO Found:
Despite its declining share of the overall MBS market, Ginnie Mae
continues to serve its key public policy goal of providing a strong
secondary market outlet for federally insured and guaranteed housing
loans. Ginnie Mae MBS financed more than 90 percent of new FHA-insured
and VA-guaranteed loans in fiscal year 2004, and the agency appears to
face relatively little competition in this market. Ginnie Mae‘s total
volume has declined in recent years, however, and its share of the
overall MBS market has fallen from 42 percent of new securities in 1985
to 7 percent in 2004. This drop is largely the result of the decline in
the market share of the FHA and VA loan programs and the concurrent
rise in the securitization of non-government-backed mortgages.
Further declines in Ginnie Mae‘s volume could potentially have
implications for borrowers, the liquidity of its securities, and
federal revenues. For example, Ginnie Mae‘s securities could become
less liquid, although it is unclear at what levels of volume this would
occur. In addition, Ginnie Mae‘s program revenues could decline if its
volume decreased. In fiscal year 2004, program revenues exceeded
expenses by $295 million, which helped reduce the federal budget
deficit.
Ginnie Mae faces a number of challenges in responding to changes in the
marketplace, meeting stakeholders‘ needs, and managing its operations,
and the agency has been taking steps to address these challenges. For
example, it has expanded its product mix to reach more borrowers and
has begun disclosing more information on loans underlying its
securities to help investors better predict risk. GAO and others have
identified opportunities for improvement in Ginnie Mae‘s data integrity
and internal controls. The agency has begun addressing these issues,
but it contracts out most of its operations, so ensuring that it has
sufficient staff capabilities to plan, monitor, and manage its
contracts is essential.
Share and Volume of Ginnie Mae and Total Market for Mortgage-Backed
Securities:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO is making no recommendations. Ginnie Mae agreed with this report‘s
conclusions.
www.gao.gov/cgi-bin/getrpt?GAO-06-9.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov
[End of section]
Contents:
Letter:
Background:
Results in Brief:
Ginnie Mae Securities Finance Most Government-Backed Housing Loans, but
Represent a Declining Share of the Total MBS Market:
Changes in Ginnie Mae's Share and Volume Could Have Implications for
Borrowers, the Liquidity of Its Securities, and Federal Revenue:
Ginnie Mae Faces a Changing Marketplace and Management Challenges:
Observations:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Appendix II: Comments from the Department of Housing and Urban
Development:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Ginnie Mae's Revenues and Expenses, Fiscal Years 1998-2004:
Figures Figures:
Figure 1: Ginnie Mae Securitization Process:
Figure 2: FHA-Insured Single-Family Loans Guaranteed by Ginnie Mae
Securities, Fiscal Years 1998-2004:
Figure 3: Composition of Ginnie Mae's Newly Issued MBS, 2004:
Figure 4: MBS Market Volume and Ginnie Mae's Market Share, Fiscal Years
1985-2004:
Figure 5: Ginnie Mae MBS: Outstanding Balances and Income:
Figure 6: Ginnie Mae's Commitment Authority Used, Fiscal Years 1997-
2004:
Abbreviations:
ARM: adjustable rate mortgage:
Fannie Mae: Federal National Mortgage Association:
FHA: Federal Housing Administration:
FHLBank: Federal Home Loan Bank:
Freddie Mac: Federal Home Loan Mortgage Corporation:
Ginnie Mae: Government National Mortgage Association:
HUD: Department of Housing and Urban Development:
MBS: mortgage-backed security:
OIG: Office of Inspector General:
PIH: Office of Public and Indian Housing:
REMIC: Real Estate Mortgage Investment Conduit:
RHS: Rural Housing Service:
VA: Department of Veterans Affairs:
Letter:
October 31, 2005:
The Honorable Robert W. Ney:
Chairman:
Subcommittee on Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
Dear Mr. Chairman:
The Government National Mortgage Association, commonly known as Ginnie
Mae, plays an important role in supporting federal housing initiatives
by increasing liquidity in the secondary mortgage market. A wholly
owned government corporation, Ginnie Mae guarantees the timely payment
of principal and interest on securities issued by private institutions
and backed by pools of federally insured or guaranteed mortgage loans.
Securities guaranteed by Ginnie Mae finance the vast majority of loans
backed by the Federal Housing Administration (FHA) and the Department
of Veterans Affairs (VA), as well as loans backed by the Rural Housing
Service (RHS) and the Office of Public and Indian Housing (PIH) within
the Department of Housing and Urban Development (HUD).
Ginnie Mae plays a significant role in the secondary market and to some
extent competes directly with private sector entities. However, as a
government agency housed within HUD, it has less flexibility than a
private sector company in the way it operates.[Footnote 1] Partly
because of that lack of flexibility, Ginnie Mae faces a number of
challenges in responding to changes in the marketplace and in managing
its operations efficiently and effectively. In particular, Ginnie Mae
must determine if and how it should respond to its steadily declining
share of the overall market for mortgage-backed securities (MBS).
Concerned about this decline in Ginnie Mae's market prominence, you
asked us to address (1) the state of Ginnie Mae's market share and
guarantee volume, (2) the potential implications of changes in Ginnie
Mae's market share and guarantee volume, and (3) the challenges Ginnie
Mae faces in fulfilling its mission and the steps that have been or
could be taken to address these challenges.
To address our objectives, we analyzed data provided by Ginnie Mae and
industry sources on Ginnie Mae's guarantee volume and market share,
interviewed agency representatives, and reviewed agency documents. We
also interviewed representatives of HUD's FHA and PIH programs, and its
Office of the Inspector General (OIG), VA, RHS, and the Federal Housing
Finance Board and reviewed documents from these entities. In addition,
we spoke with and gathered relevant documents from a variety of Ginnie
Mae stakeholders and secondary market participants, including issuers
of Ginnie Mae securities, institutional investors, investment banks,
the Federal National Mortgage Association (Fannie Mae), the Federal
Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan
Banks of Chicago and Seattle, and trade associations such as the Bond
Market Association. Further, we conducted a literature search and
reviewed Ginnie Mae's legislative history and relevant laws,
regulations, and guidance, as well as reports by HUD's OIG. We
conducted our work in Washington, D.C., and Boston from October 2004
through September 2005 in accordance with generally accepted government
auditing standards. Appendix I provides additional details on our scope
and methodology.
Background:
Mortgage lenders keep the loans they originate in the primary market or
sell them in the secondary, or resale, markets. In turn, purchasers of
mortgage loans in the secondary markets either hold the loans in their
own portfolios or, most often, pool together a group of loans to back
MBS that are sold to investors or held in the originator's portfolio.
Secondary loan markets benefit lenders, borrowers, and investors in a
number of ways. First, they allow lenders to manage their liquidity
needs, reduce interest rate risk, and generate funds for additional
lending. Second, they increase the amount of credit available to
borrowers and help lower interest rates by fostering competition among
lenders. Finally, they allow investors to further diversify their risks
and to sell their interests on active secondary markets to other
willing investors.
Ginnie Mae was created in 1968 through an amendment to the National
Housing Act.[Footnote 2] Organizationally, Ginnie Mae operates as a
unit of HUD, and its administrative, staffing, and budgetary decisions
are coordinated with HUD's. Ginnie Mae defines its mission as expanding
affordable housing in America by linking capital markets to the
nation's housing markets, largely by serving as the dominant secondary
market vehicle for government-backed loan programs.[Footnote 3] These
programs, which insure or guarantee mortgage loans that are originated
in the private sector, are administered by a variety of federal
agencies, including FHA, VA, RHS, and PIH. The government backing
provided by these programs expands opportunities for homeownership to
borrowers who may have difficulty obtaining a conventional
mortgage.[Footnote 4]
Ginnie Mae does not buy or sell loans or issue mortgage-backed
securities. Rather, it provides guarantees backed by the full faith and
credit of the U.S. government that investors will receive timely
payments of principal and interest on securities supported by pools of
government-backed loans, regardless of whether the borrower makes the
underlying mortgage payment or the issuer makes timely payments on the
MBS. Figure 1 shows the process of Ginnie Mae securitization. All
mortgages in the Ginnie Mae pool must be insured or guaranteed by a
government agency and have eligible interest rates and maturities.
Figure 1: Ginnie Mae Securitization Process:
[See PDF for image]
Notes: This chart represents the process for basic Ginnie Mae I and
Ginnie Mae II MBS. These securities may serve as collateral for other
products, such as Ginnie Mae Real Estate Mortgage Investment Conduits
and Platinum Securities.
[A] An issuer is a company or government entity offering securities for
sale to investors.
[B] A broker-dealer is an individual or firm in the business of buying
and selling securities.
[End of figure]
Ginnie Mae has several different products. Ginnie Mae's original MBS
program, Ginnie Mae I, requires that all pools contain similar types of
mortgages (e.g., single family) 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 more heterogeneous loans. For
example, the underlying mortgages in a pool can have varying interest
rates and a pool can be created using adjustable rate mortgages
(ARM).[Footnote 5] Ginnie Mae's Multiclass Securities Program,
introduced in 1994, includes, among other things, Real Estate Mortgage
Investment Conduits (REMIC) and Ginnie Mae Platinum Securities. REMICs
are designed to 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, interest
rates, and other characteristics. Ginnie Mae Platinum Securities allow
investors to aggregate MBS with relatively small remaining principal
balances and similar characteristics into new, more liquid securities.
Investors in Ginnie Mae MBS face prepayment risk--that is, the
possibility that borrowers will pay off their mortgages early, reducing
the amount of interest earned. However, investors do not face credit
risk--the possibility of loss from unpaid mortgages--because the
underlying mortgages backing the pools are federally insured or
guaranteed and Ginnie Mae guarantees timely payment of principal and
interest. FHA's single-family loan program and PIH's loan guarantee
programs insure nearly 100 percent of the loan amount. VA guarantees
the lender against losses, subject to a cap equal to 25 percent to 50
percent of the loan amount based on the size of the loan; RHS
guarantees up to 90 percent of the loan value. Issuers are responsible
for delinquent loans in pools. When a Ginnie Mae issuer defaults in
making timely payments of principal and interest to investors, Ginnie
Mae makes the payments and takes over the issuer's entire portfolio of
government-backed loans that stand behind the securities that Ginnie
Mae has guaranteed.
Ginnie Mae charges issuers a guarantee fee for providing its guarantee
of timely payment. The fee varies depending on the product and is six
basis points for securities backed by single-family loans, which
represent the majority of Ginnie Mae MBS.[Footnote 6] Issuers also pay
a commitment fee that gives them the authority to pool mortgages into
Ginnie Mae MBS. Issuers of Ginnie Mae securities may also collect a fee
to cover the cost of servicing the underlying mortgages (generally 44
basis points for Ginnie Mae I products and 19 to 69 basis points for
the Ginnie Mae II). Ginnie Mae does not receive appropriations or
borrow money to finance its credit operations. The agency's revenues
exceed its expenses, which reduces the federal budget deficit.
Results in Brief:
The vast majority of loans in FHA's mortgage insurance program and VA's
loan guarantee program have historically been pooled into MBS
guaranteed by Ginnie Mae. In fiscal year 2004, Ginnie Mae guaranteed
$149.1 billion in MBS, which financed more than 90 percent of new loans
issued by FHA's and VA's loan programs. Because the agency's MBS are
backed solely by loans supported by FHA, VA, PIH, and RHS programs, its
MBS volume is largely a function of the volume of these loan programs.
Ginnie Mae appears to face relatively little competition in the market
for securitizing government-backed housing loans. Other major
participants in the secondary market for mortgages--such as Fannie Mae,
Freddie Mac, the Federal Home Loan Banks, and state and local
government agencies--have purchased or securitized a relatively small
number of government-backed loans in recent years and do not appear to
have plans for significant expansion into this market. Ginnie Mae's
share of the overall MBS market has declined significantly since the
1980s, dropping from about 42 percent of newly issued securities in
1985 to about 7 percent in 2004. This decline is largely due to two
factors: a decline in the number of loans FHA and VA have originated,
which has not kept pace with growth in the total market, and the rapid
rise in the securitization of conventional mortgages during this
period.
Changes in Ginnie Mae's volume of new and existing securities could
affect borrowers, the liquidity of the Ginnie Mae securities
themselves, and government revenues. Competition from other secondary
market players that reduced Ginnie Mae's share of the government-backed
loan market would not necessarily harm borrowers because these new
players would need to offer products that were competitive with Ginnie
Mae's. But a decline in the share of high-quality mortgages included in
Ginnie Mae's MBS would lower the securities' credit quality and may
increase the default rate of the underlying mortgages, possibly
increasing servicing costs and interest rates for new borrowers of
government-backed loans. In addition, significant declines in the
volume of Ginnie Mae securities could also reduce their liquidity,
although it is unclear how low Ginnie Mae's volume would have to be
before reduced liquidity became a significant concern. Finally, because
Ginnie Mae's program income is based on the principal balance of its
securities portfolio, declines in Ginnie Mae's outstanding volume could
decrease federal revenues. Ginnie Mae's revenues exceed its expenses--
by $295 million, net of interest income, in fiscal year 2004--helping
to reduce the federal budget deficit.
Ginnie Mae faces a number of challenges in fulfilling its mission of
supporting borrowers of government-backed loan programs, and we found
that the agency generally has been taking steps likely to help address
these challenges:
* Ginnie Mae has responded to a changing mortgage market by improving
the efficiency and flexibility of some products and expanding its scope
to provide securitization for new types of loans. For example, Ginnie
Mae worked with FHA to develop and ensure securitization of new FHA
hybrid ARM products, which, as of 2004, have provided FHA borrowers
with additional options previously available only in the conventional
markets. In 2005, Ginnie Mae began guaranteeing securities that finance
RHS multifamily loans, providing a new secondary market outlet for this
program. However, the Veterans Benefits Improvement Act of 2004 did not
address provisions that have limited investors' interest in securities
containing certain VA hybrid ARM products. Similarly, certain FHA
hybrid ARM products contained terms that, until modified, were
unattractive to investors and thus to lenders. Ginnie Mae and VA
officials say that capital market participants may not have been
sufficiently consulted during the legislative process to ensure that
provisions of the FHA and VA hybrid ARM programs were consistent with
Ginnie Mae and conventional secondary market requirements.
* The securities industry has raised concerns for several years that
Ginnie Mae does not disclose sufficient information on items such as
loan terms and borrower characteristics for the loans in its pools,
hindering the ability to predict prepayment rates for Ginnie Mae
securities. Ginnie Mae's ongoing MBS Disclosure Initiative, which began
in January 2004, is providing investors with substantial additional and
more frequent information on its securities' loan pools.
* In 1999, Ginnie Mae was in danger of exhausting the limit of its
congressionally authorized commitment authority that was available for
1 year and thus was not able to fully meet commitments it had made to
capital market participants. To address this problem, since 2002,
Congress has made Ginnie Mae's commitment authority available for 2
years. Other options to address this problem include increasing Ginnie
Mae's commitment authority limits or requiring earlier notification to
Congress on the amount of commitment authority the agency has used.
In addition to responding to the marketplace, Ginnie Mae faces
challenges in managing its internal operations in an efficient and cost-
effective manner and in ensuring that appropriate internal controls are
in place. Following losses due to fraud in 2002, reviews by HUD's OIG
of Ginnie Mae's internal controls, as well as our review, identified
inconsistencies and inaccuracies in Ginnie Mae's data systems. For
example, the agency was initially unable to provide us with accurate
data on the composition of the loans backing its portfolio. The agency
recently completed a business process improvement plan and has other
initiatives under way--but not yet fully implemented--designed to
improve its data integrity and streamline its operations. Ginnie Mae
operates with a small staff of about 66 people and contracts out most
of its operations. A 2004 resource management study by HUD found Ginnie
Mae had sufficient staff resources to perform contract administration
functions. But given its reliance on contractors, Ginnie Mae should
continue to focus on ensuring that these staff have sufficient
training, qualifications, and capabilities to ensure that its contracts
are planned, monitored, and executed appropriately.
HUD reviewed a draft of this report and concurred with our findings.
Ginnie Mae Securities Finance Most Government-Backed Housing Loans, but
Represent a Declining Share of the Total MBS Market:
Ginnie Mae securities finance the great majority of FHA and VA loans,
suggesting that the agency is fulfilling its basic mission, and faces
relatively little competition in the market for government-backed
mortgage loans. However, Ginnie Mae's share of the total MBS market has
declined over the last 20 years, both in terms of new issuances and
volume outstanding, largely because FHA and VA loan origination has not
kept pace with growth in the overall mortgage market and because
securitization of conventional mortgages has become far more prevalent.
Ginnie Mae Guarantees Securities for the Bulk of FHA and VA Single-
Family Loans:
Historically, the vast majority of government-backed housing loans have
been pooled to back MBS for which Ginnie Mae guarantees the timely
payment--a trend that continues today. Ginnie Mae issued its first MBS
in 1970, and since that time it has guaranteed a cumulative total of
more than $2 trillion of MBS. According to Ginnie Mae, its securities
historically have represented roughly 90 percent of the market for FHA
and VA loans. For example, between fiscal years 1998 and 2004 Ginnie
Mae securities financed between about 84 percent and 96 percent of FHA-
insured single-family loans (see fig. 2). In fiscal year 2004, Ginnie
Mae issued a total of $149.1 billion in MBS. These MBS financed 91
percent of all eligible loans insured or guaranteed by FHA and VA.
Ginnie Mae securities also have financed about half of RHS-guaranteed
single-family loans since 1999 and financed roughly 40 percent of PIH-
backed loans in fiscal year 2004.
Figure 2: FHA-Insured Single-Family Loans Guaranteed by Ginnie Mae
Securities, Fiscal Years 1998-2004:
[See PDF for image]
Note: Ginnie Mae's MBS issuance and the FHA loan endorsement do not
occur simultaneously, resulting in a lag between the year an FHA loan
is endorsed and the year that Ginnie Mae is recorded as guaranteeing
its securitization. To improve the accuracy of the data, Ginnie Mae
recently matched most of the FHA loans with the Ginnie Mae MBS in which
they were pooled from 1998 until the present. Data for Ginnie Mae's
share of VA originations is not presented here because Ginnie Mae is
still in the process of completing the matching process for its VA
portfolio.
[End of figure]
In 2004, newly issued Ginnie Mae securities financed $83.8 billion in
FHA-insured loans, $31.4 billion in VA-guaranteed loans, and $1.6
billion in loans guaranteed by RHS and PIH. As shown in figure 3, FHA
and VA loans represented 72 percent and 27 percent, respectively, of
Ginnie Mae's portfolio of new issuances that year, with RHS and PIH
representing about 1 percent. About 92 percent of the loans backing
Ginnie Mae MBS were single-family loans; the remainder were multifamily
loans. Because Ginnie Mae's charter keeps it focused on a discrete
portion of the MBS market--specifically, that of loans made under FHA,
VA, RHS, and PIH programs--the volume of Ginnie Mae's new MBS issuance
is linked directly to the origination volume of these programs. Changes
in Ginnie Mae's market volume over the years are thus largely a
reflection of changes in the volume of FHA and VA loans, which
represent 99 percent of Ginnie Mae's portfolio.
Figure 3: Composition of Ginnie Mae's Newly Issued MBS, 2004:
[See PDF for image]
[End of figure]
Ginnie Mae Faces Relatively Little Competition in the Secondary Market
for Government-Backed Loans:
Although Ginnie Mae securities finance the great majority of the
government-backed loans it is authorized to support, it does face
potential competition from other secondary market entities. Federally
insured and guaranteed loans can be expected to appeal to conventional
securitizers because these loans carry little to no credit risk.
However, Ginnie Mae has consistently captured 90 percent or more of the
market for FHA and VA loans. Market participants told us that Ginnie
Mae captured most of the market because of the difficulty of competing
with the government guarantee of timely payment. This guarantee helps
Ginnie Mae securities command a higher price and, correspondingly,
offer a lower yield than other MBS of government-backed loans.[Footnote
7]
We spoke with a number of secondary market participants that have or
could become active in the market for government-backed loans,
including the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state
and local government agencies, and private label issuers.[Footnote 8]
In general, they have had limited or no involvement in Ginnie Mae's
market. Moreover, for a variety of reasons, they do not appear to have
plans to encroach on Ginnie Mae's market to any substantial degree, as
the following examples illustrate:
* The Federal Home Loan Banks (FHLBank) have mortgage programs under
which they purchase pools of conventional and federally insured or
guaranteed mortgage loans from member banks.[Footnote 9] First
authorized in 1998, the programs go by the names of the Mortgage
Partnership FinanceŽ program and the Mortgage Purchase
Program.[Footnote 10] The programs were attractive to lenders in part
because lenders could use them to sell their mortgages without paying
guarantee fees. In 2000, FHLBanks took over a significant amount of
Ginnie Mae's market share and purchased $12.7 billion in FHA and VA
loans, representing about 11 percent of the combined market for those
loans. However, the Federal Housing Finance Board, which oversees the
FHLBanks, became concerned because the program was intended to focus on
conventional rather than FHA loans. The board took measures to
encourage the FHLBanks to limit their purchase of FHA loans to no more
than one-third of their mortgage purchase program portfolio. After
2000, FHLBanks greatly reduced their purchases of FHA loans. From 2001
to 2003, they purchased loans representing about 4 percent to 5 percent
of the FHA market, which then declined further to about 2 percent in
2004.
* In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA
originations.[Footnote 11] Its share of FHA and VA originations has
varied over time, ranging from 1 percent to 6 percent between 1990 and
2004, or just 0.3 percent to 3 percent of Fannie Mae's total purchase
activity. According to Fannie Mae officials, these purchases of
government loans consist largely of repurchases of delinquent loans. A
Fannie Mae official told us the company did not systematically purchase
FHA loans and in its normal course of business did not consider itself
a competitor with Ginnie Mae. Fannie Mae does not receive credit from
HUD toward its affordable housing goals by purchasing government-backed
loans.[Footnote 12]
* Freddie Mac has purchased less than 1 percent of the market of FHA
and VA loans each year since 1990. Freddie Mac officials said that its
competition with Ginnie Mae is largely indirect, by encouraging
conventional lending to the most creditworthy low-and moderate-income
borrowers who might otherwise receive a mortgage through FHA or VA.
Freddie Mac officials also said they do not compete with Ginnie Mae in
the secondary market directly because it is hard to compete with Ginnie
Mae's government guarantee. In addition, as with Fannie Mae, government-
backed loans do not count toward Freddie Mac's required affordable
housing goals. Freddie Mac does purchase some mortgage revenue bonds
that are collateralized by FHA and VA loans and directly purchases some
FHA and VA loans that Ginnie Mae does not securitize.
* State and local government entities, including housing finance
agencies, issue mortgage revenue bonds to raise funds in the capital
markets for mortgage lending. Because these bonds are tax exempt,
investors are willing to accept a lower interest rate for them. This
interest savings is passed on through lenders to lower-income families
in the form of loans with interest rates below the market average.
These bonds often finance government-backed mortgages. As of 2003, 71
percent of the mortgages that revenue bonds financed were insured or
guaranteed by a federal program--58 percent by FHA, 10 percent by RHS,
and 3 percent by VA. The overall volume of mortgage revenue bonds
issued was $10.7 billion in 2003.[Footnote 13]
* Private label issuers purchased an estimated 3 percent of FHA and VA
loans in 2004. These issuers account for an increasingly large share of
the overall MBS market, but most of their market consists of loans not
offered by FHA and VA programs, such as jumbo nonconforming loans and
home equity lines of credit.[Footnote 14] According to RHS officials,
private label issuers do currently securitize the majority of Section
538 multifamily loans guaranteed by RHS, but these loans account for
less than 1 percent of Ginnie Mae's portfolio.
Most of the competition for Ginnie Mae's market share does not come
directly--that is, secondary market participants are not seeking to
purchase or securitize significant numbers of government-backed loans.
Rather, lenders compete with Ginnie Mae indirectly by seeking greater
market share at the origination level by making conventional loans to
borrowers who might otherwise use FHA and VA loan programs. Fannie Mae
and Freddie Mac have an incentive to serve this market because lower-
income borrowers who might otherwise turn to a government-backed loan
program can help them meet their housing goals established by HUD. In
addition, subprime mortgage originations have grown dramatically in
recent years, as many lenders market to less creditworthy borrowers who
in the past may have received a government- backed loan.[Footnote 15]
Ginnie Mae's Share of the Total MBS Market Has Declined:
Although Ginnie Mae continues to finance the bulk of government-backed
loans, its share of the overall MBS market has declined substantially
over the past 20 years. As shown in figure 4, Ginnie Mae securities
represented 42 percent of all new MBS issued in 1985, but only 7
percent in 2004.[Footnote 16] This drop in market share of new issuance
is due not to a significant decline in Ginnie Mae's MBS issuance, but
rather to rapid growth in the rest of the market--Fannie Mae, Freddie
Mac, and private label issuers, which we refer to as the "conventional"
market for MBS. In 1985, Ginnie Mae MBS issuance was $46 billion, while
the conventional market issued $64 billion. By 2004, Ginnie Mae
issuance had grown to $127 billion, but issuance of conventional MBS
had grown to $1.8 trillion. MBS issuance has risen among all segments
of the conventional market. The rise in private label MBS issuance has
been particularly steep in the last few years, rising from $136 billion
in 2000 to $864 billion in 2004.
Figure 4: MBS Market Volume and Ginnie Mae's Market Share, Fiscal Years
1985-2004:
[See PDF for image]
Note: Total market includes Ginnie Mae, Fannie Mae, Freddie Mac, and
private label issuers.
[End of figure]
Two factors have spurred the growth of the conventional MBS market: the
increasing number of conventional mortgage originations and the growing
proportion of these mortgages that are securitized. Mortgage lending in
the conventional market has grown much more rapidly over the last 20
years than lending through FHA and VA programs.[Footnote 17]
Conventional mortgage originations rose from an estimated $243 billion
in 1985 to an estimated $2.8 trillion in 2004. In contrast,
originations of FHA and VA loans rose from $42 billion to $129 billion
during that period. In addition, the rate of securitization of
conventional mortgages has risen rapidly over the last 20 years; by the
end of 2004, almost half of outstanding mortgage debt was financed
through securitization, according to the Bond Market Association.
Ginnie Mae's market share of outstanding MBS has also declined
significantly over the last 20 years, falling from 54 percent in 1985
to 10 percent in 2004. Since 2000, Ginnie Mae's volume of MBS
outstanding has fallen from $612 billion to $453 billion in 2004, a
drop of approximately 26 percent. The primary factor contributing to
this decline has been the increase in borrowers who have refinanced out
of FHA and VA loan programs into conventional loans. Falling interest
rates and rising home prices have led to a boom in refinancing over the
last 10 years, particularly from 1997 to 1999 and 2001 to 2004. At the
peak of the refinancing boom in 2003, refinancings represented about 65
percent of mortgage originations. As some borrowers with mortgages
insured by FHA and guaranteed by VA have built up equity in their
homes, they have been able to refinance out of these programs into
conventional loans that may offer more favorable and flexible terms and
interest rates. This trend may have been facilitated to some extent by
the increased availability of loans to borrowers who are less
creditworthy. This has allowed some borrowers who would not otherwise
have been able to borrow in the conventional market to do so rather
than using FHA-insured and VA-guaranteed mortgage programs. The decline
in the outstanding volume of FHA and VA loans has led to a
corresponding decline in the outstanding volume of Ginnie Mae
securities, which are mostly composed of those loans.
To a lesser extent, lender repurchases of delinquent FHA-insured and VA-
guaranteed loans in Ginnie Mae pools have also contributed to the
decline in Ginnie Mae's volume of outstanding MBS. Ginnie Mae's policy
prior to 2003 allowed lenders and servicers to repurchase loans that
were in their Ginnie Mae pools if the borrower missed just one payment
that remained unpaid for 4 consecutive months. According to Ginnie Mae,
these loans often had a low risk of default; the loan may have had only
one missed payment followed by resumption of loan servicing by the
borrower. However, lenders were able to profit by repurchasing these
loans for the remaining balance because, during an era of falling
interest rates, the market value of the loans was more than the
remaining balance. Data obtained from Ginnie Mae officials show that
these repurchases of delinquent loans reached a peak in 2002, when they
totaled $22 billion, and that they contributed to the decline in Ginnie
Mae's outstanding volume. To address this problem, Ginnie Mae announced
a revision to its loan repurchase policy in November 2002. Under the
new policy, for pools issued on or after January 1, 2003, servicers can
repurchase delinquent loans only when no payment has been made for 3
consecutive months.[Footnote 18] Ginnie Mae officials as well as
issuers we talked with said that these new policies appear to have
curtailed repurchase activity.
Changes in Ginnie Mae's Share and Volume Could Have Implications for
Borrowers, the Liquidity of Its Securities, and Federal Revenue:
Ginnie Mae's share of the government-backed mortgage market has been
fairly constant. If other secondary market players substantially
increased their market share of government-backed mortgages, borrowers
would be unlikely to see higher interest rates or tighter credit
immediately, because such players would need to offer products that
were competitive with Ginnie Mae's. However, a decline in the
proportion of high-quality mortgages included in Ginnie Mae's MBS could
lower their overall credit quality, potentially raising the cost of
servicing the underlying mortgages and thus interest rates paid by
borrowers. In addition, any decline in the volume of Ginnie Mae's MBS
could potentially reduce their liquidity, although it is unclear
whether reduced liquidity is likely to be a significant concern in the
foreseeable future. Finally, declines in Ginnie Mae's outstanding
volume would reduce its fee revenue from its MBS programs. Because
Ginnie Mae's program income exceeds its expenses, a drop in income
could affect its contribution to reducing the federal budget deficit.
Ginnie Mae's Benefits to Borrowers of Government-Backed Loans May Not
Be Dependent on Its Market Share:
As noted earlier, Ginnie Mae has consistently guaranteed MBS for the
great majority of FHA and VA loans, but its share of the total MBS
market has declined significantly since 1985. Borrowers of government-
backed loan programs have benefited from the Ginnie Mae guarantee
because it helps make such loans more accessible and keep borrowers'
interest rates down. New issuance of Ginnie Mae MBS has remained fairly
constant, generally ranging from $150 billion to $200 billion annually
from 1998 to 2004. Ginnie Mae's share of the MBS market for government-
backed loans would likely decline only if other secondary market
players such as the Federal Home Loan Banks, Fannie Mae, Freddie Mac,
state and local government entities, and private label issuers chose to
become more active in the securitization of these loans. In such a
scenario, interest rates would probably not rise or credit tighten for
borrowers because such players would need to offer products that were
competitive with Ginnie Mae's, thus benefiting borrowers to a similar
degree. As noted earlier, however, such a scenario is unlikely in the
near future, as other secondary market participants generally appear to
have chosen not to directly compete with Ginnie Mae because of the
government guarantee.
As we have seen, Ginnie Mae's outstanding volume of MBS has declined in
recent years because the outstanding volume of FHA and VA loans has
fallen as growing numbers of borrowers refinance in the conventional
market. However, those FHA and VA borrowers who are able to take
advantage of refinancing options are generally the most creditworthy of
the programs' borrowers. The result has been a decline in the overall
credit quality of FHA and VA loans in recent years indicated by
increased default and foreclosure rates in government mortgage
insurance and guarantee programs. As a result, the loan quality
underlying Ginnie Mae's securities has declined. Thus far, investors
have not been directly affected by this development because of the
government guarantee.
However, the cost of servicing the government-backed loans in Ginnie
Mae's pools could rise in such a scenario, since managing delinquencies
and the foreclosure process is the most costly component of servicing.
According to Ginnie Mae, the servicing fees issuers are allowed to
charge are sufficient to cover any significant increase in servicing
costs resulting from declines in credit quality. However, increased
servicing costs could result in smaller profits for Ginnie Mae issuers,
potentially reducing lenders' willingness to make government-backed
loans and increasing borrowers' interest rates. In addition, any
increase in prepayment rates due to borrower defaults could reduce the
price investors are willing to pay for Ginnie Mae MBS, which could also
act to raise interest rates for borrowers.
Changes in Ginnie Mae's Volume Could Potentially Affect the Liquidity
of Its Securities:
A market is said to be liquid if the instruments it trades can be
bought by investors or sold in the markets quickly and easily with
little impact on market prices. Liquid assets have relatively lower
yields and higher prices than illiquid assets.[Footnote 19] One key
factor affecting the liquidity of MBS is the size of the market in
which they are traded--all other things being equal, larger markets are
generally more liquid than smaller markets. In addition, standardized
pools--that is, pools of mortgages with similar interest rates and
terms--are generally more liquid than pools of mixed mortgage products,
which cannot be traded as readily because they are more difficult to
value and thus riskier. For this reason, Ginnie Mae I securities are
more liquid than Ginnie Mae II securities (whose pools consist of loans
with more variability).
Market participants we spoke with provided mixed opinions about the
current liquidity of Ginnie Mae securities. Some dealers said that
Ginnie Mae securities were quite liquid and traded easily, while others
noted that they were less liquid than other MBS, such as those issued
by Fannie Mae and Freddie Mac. One institutional investor told us that
Ginnie Mae securities that are traded in smaller volumes--such as those
backed by hybrid ARMs--could face liquidity issues. Another noted that
the liquidity of Ginnie Mae securities could be a concern for very
large trades, such as those of more than $1 billion.
Any reduced liquidity resulting from a continued decline in Ginnie
Mae's market share could have some effect on the costs to borrowers of
government-backed loans. However, it is not clear how significant the
decline would have to be before liquidity became a significant concern
that materially affected the pricing of Ginnie Mae securities and thus
interest rates for borrowers of government-backed loans. Ginnie Mae
officials told us that their securities had at least adequate
liquidity. They noted, for example, that the bid-ask spread on Ginnie
Mae securities was comparable with the spread for Fannie Mae
securities, one indication that liquidity is not currently an
issue.[Footnote 20] The officials said that if volume continued to
decline, liquidity could become a significant concern in the future,
although it is unknown at what levels of volume this would occur.
Changes in Ginnie Mae's Outstanding Volume Could Affect Its
Contribution to Reducing the Federal Budget Deficit:
Revenues from Ginnie Mae's MBS guarantee programs exceed the cost of
operating them. Since fiscal year 1985, the agency has not had to
borrow from the U.S. government to finance its operations and its
excess funds go into a receipt account held as capital reserves. As
shown in table 1, in fiscal year 2004 Ginnie Mae had total revenues of
$815.5 million and expenses of $77.8 million. The excess of its
revenues over expenses, net of interest income, is invested in U.S.
government securities and reduces the amount that the Treasury must
borrow from the public to finance government programs--that is, it
reduces the deficit.[Footnote 21] In fiscal year 2004, this amount was
$295 million.
Table 1: Ginnie Mae's Revenues and Expenses, Fiscal Years 1998-2004:
Dollars in millions.
Ginnie Mae's Revenues and Expenses:
Interest income;
Fiscal Year: 1998: $362.7;
Fiscal Year: 1999: $380.3;
Fiscal Year: 2000: $415.8;
Fiscal Year: 2001: $430.3;
Fiscal Year: 2002: $398.9;
Fiscal Year: 2003: $389.3;
Fiscal Year: 2004: $442.7.
MBS program income;
Fiscal Year: 1998: $392.3;
Fiscal Year: 1999: $405.0;
Fiscal Year: 2000: $408.2;
Fiscal Year: 2001: $438.7;
Fiscal Year: 2002: $446.0;
Fiscal Year: 2003: $406.1;
Fiscal Year: 2004: $372.8.
Other income;
Fiscal Year: 1998: $12.4;
Fiscal Year: 1999: $13.3;
Fiscal Year: 2000: $8.0;
Fiscal Year: 2001: $9.5;
Fiscal Year: 2002: $6.2;
Fiscal Year: 2003: $4.2;
Fiscal Year: 2004: -- .
Total revenues;
Fiscal Year: 1998: $767.4;
Fiscal Year: 1999: $798.6;
Fiscal Year: 2000: $832.0;
Fiscal Year: 2001: $878.5;
Fiscal Year: 2002: $851.1;
Fiscal Year: 2003: $799.6;
Fiscal Year: 2004: $815.5.
Total expenses;
Fiscal Year: 1998: $45.6;
Fiscal Year: 1999: $51.8;
Fiscal Year: 2000: $47.2;
Fiscal Year: 2001: $49.4;
Fiscal Year: 2002: $56.8;
Fiscal Year: 2003: 68.1;
Fiscal Year: 2004: 77.8.
Excess of revenues over expenses;
Fiscal Year: 1998: $674.7;
Fiscal Year: 1999: $746.8;
Fiscal Year: 2000: $762.8;
Fiscal Year: 2001: $805.3;
Fiscal Year: 2002: $794.3;
Fiscal Year: 2003: $731.5;
Fiscal Year: 2004: $737.7.
Excess of revenues over expenses, net of interest income;
Fiscal Year: 1998: $312.0;
Fiscal Year: 1999: $366.5;
Fiscal Year: 2000: $347.0;
Fiscal Year: 2001: $375.0;
Fiscal Year: 2002: $395.4;
Fiscal Year: 2003: $342.2;
Fiscal Year: 2004: $295.0.
Source: Ginnie Mae.
[End of table]
Most of Ginnie Mae's revenue comes from MBS program income, which
totaled $372.8 million in fiscal year 2004. Ginnie Mae charges issuers
a guarantee fee that is based on the aggregate principal balance of an
issuer's outstanding MBS, and collects commitment fees for the
authority to pool mortgages into Ginnie Mae MBS.[Footnote 22]
Ginnie Mae's program income allows it to cover the expenses it incurs
in carrying out its programs and initiatives, including the cost of
hiring contractors, paying staff salaries and benefits, printing, and
performing other administrative functions. Ginnie Mae also incurs
credit-related expenses--for example, it must maintain reserves against
losses and issuer defaults in order to ensure a ready source of funds
to meet its guarantee of timely payment. At the end of fiscal year
2004, Ginnie Mae had reserves of about $10.4 billion.
Ginnie Mae's fee income is based on the principal balance of its
securities portfolio, so the agency's revenues largely depend on the
volume of its outstanding securities. As we have seen, Ginnie Mae's
share of the MBS market has declined in the last 20 years. In fiscal
years 2000 through 2004, Ginnie Mae's principal balance outstanding
also declined, falling from $603.4 billion to $453.4 billion and
reducing program income from $408.2 million to $372.8 million (see fig.
5). As a result, during that period, the agency's excess of revenues
over expenses (net of interest), which reduces the federal budget
deficit, declined from $347 million to $295 million.[Footnote 23]
Ginnie Mae's program income continues to exceed its expenses and,
according to Ginnie Mae officials, is likely to do so for the
foreseeable future. However, if its outstanding volume continued to
decline, program income and excess revenues, which reduce the federal
budget deficit, could also be expected to continue falling.
Figure 5: Ginnie Mae MBS: Outstanding Balances and Income:
[See PDF for image]
[End of figure]
Ginnie Mae Faces a Changing Marketplace and Management Challenges:
Ginnie Mae faces challenges in a number of areas. First, it must
respond to changes in the marketplace and meet the needs of its
stakeholders. To meet this challenge, the agency has expanded its
product offerings and taken other initiatives to maintain its
viability. Second, Ginnie Mae must adequately disclose loan information
that MBS investors need to assess prepayment risk. The agency has
recently improved this disclosure, though these improvements are not
yet complete. Third, Ginnie Mae must work within the limits of its
commitment authority. In 1999, it instituted procedures to ration its
commitment authority when the agency faced the possibility of reaching
the limit of its authority by year's end. To help prevent the problem
from recurring, Congress changed Ginnie Mae's commitment authority
cycle from 1 year to 2 years and could consider further steps. Fourth,
inconsistencies and inaccuracies exist in some aspects of Ginnie Mae's
data systems, although measures to improve these systems are under way.
Finally, given Ginnie Mae's small staff and reliance on contractors,
the agency faces the challenge of ensuring that its capacity to plan,
manage, and oversee contractors is adequate.
Ginnie Mae's Activities Have Responded to a Changing Market
Environment:
Ginnie Mae has faced and continues to face the challenge of fulfilling
its mission of supporting government-backed loan programs in a changing
market environment. Among the significant market changes over the last
20 years have been the growing availability of private mortgage
insurance and subprime loans, rapid development of the conventional
secondary mortgage market, alterations in the volume and
characteristics of government-backed loan programs, and the
proliferation of new mortgage loan products, such as hybrid ARMs.
Ginnie Mae recently completed or has under way several initiatives that
are likely to help respond to the needs of its stakeholders in a
changing marketplace, although additional efforts may be needed in some
areas. Among the steps Ginnie Mae has taken are the following:
* As part of its Business Improvement Initiative, in October 2004
Ginnie Mae began a formal process of soliciting recommendations from
business partners and other stakeholders to improve its MBS and
Multiclass Securities programs. In March 2005, the agency publicly
released the suggestions it had received, including, among others,
changing technological processes and developing new securitization
products. Ginnie Mae officials say they are currently in the process of
evaluating the suggestions.
* Ginnie Mae played a role in developing FHA's hybrid ARM
products.[Footnote 24] Ginnie Mae and FHA officials say that they
worked together to encourage Congress to permit FHA to insure hybrid
ARMs, in large part because the agency wanted to remain competitive
with conventional markets, in which such products had become
increasingly popular. Ginnie Mae developed a securitization program, as
Ginnie Mae II securities, for these products, and in 2004 FHA began
offering 3-, 5-, 7-, and 10-year hybrid ARM products in addition to its
standard 1-year ARM.
* In February 2005, Ginnie Mae began guaranteeing securities backed by
RHS multifamily loans, which support affordable multifamily housing in
rural areas.[Footnote 25] RHS officials told us that this created the
first consistent secondary market for these loans and that Ginnie Mae's
involvement would increase access to these loans and would lower
borrower costs by increasing lenders' liquidity. The officials also
noted that Ginnie Mae had actively supported RHS by ensuring that the
multifamily loan program could be securitized as Ginnie Mae I
securities.
* The Ginnie Mae II Program was created to provide issuers and
investors with more flexibility in pooling different kinds of loans--
such as adjustable rate mortgages--into Ginnie Mae securities. By their
nature, Ginnie Mae II securities are less homogeneous than Ginnie Mae I
securities. As a result, they are considered less predictable and
investors demand a higher yield from these securities. In 2003, the
Ginnie Mae II product was restructured to make it more competitive.
Among other changes, the agency narrowed the spread on the note rates
that could be included in the pools, so that the loans backing the
securities would be more homogenous.[Footnote 26] In addition, the
range of servicing fees that issuers could charge was widened to
provide more flexibility. As a result, Ginnie Mae says there is now a
smaller gap in pricing between Ginnie Mae I and Ginnie Mae II
securities. But one broker-dealer we spoke with complained that to
ensure sufficient loan volume for a Ginnie Mae II pool, issuers
sometimes must include mortgages that would otherwise qualify for a
Ginnie Mae I.
* In July 2004, Ginnie Mae expanded its Targeted Lending Initiative,
which was created to provide financial incentives for lenders to
increase loan volumes and raise homeownership levels in underserved
areas. Under the program, which began in 1996, Ginnie Mae reduced its
guarantee fee by up to 50 percent for approved issuers that originate
or purchase eligible loans in designated communities and place them in
Ginnie Mae pools. The expansion brought additional areas into the
program, including "colonias" along the Southwest border region and
additional Renewal Communities and Urban Enterprise Zones designated by
HUD.[Footnote 27] In September 2005, Ginnie Mae announced it was
temporarily expanding the Targeted Lending Initiative further to
include counties in the states of Alabama, Louisiana, and Mississippi
that were declared federal disaster areas as a result of Hurricane
Katrina.[Footnote 28]
Ginnie Mae still faces certain barriers to financing government-backed
loan programs. For example, VA and Ginnie Mae officials have expressed
concern that recently enacted changes in the law authorizing certain
hybrid ARM products in VA's loan guarantee program did not address a
limitation that has made these products difficult to securitize.
Although the Veterans Benefits Act of 2004 made certain modifications
to the program's provisions for adjusting interest rates for VA's 5-, 7-
, and 10-year hybrid ARM products, the act continued a restriction on
annual rate adjustments (those made after the initial rate adjustment)
to a maximum increase or decrease of 1 percentage point.[Footnote 29]
While this restriction may benefit borrowers by limiting interest rate
increases, Ginnie Mae and VA officials said that a 1 percentage point
annual cap was inadequate to attract interest from investors who
purchased such products. Further, the terms of VA's hybrid ARM products
are no longer the same as the corresponding hybrid ARMs offered by FHA,
bifurcating the market and making securities containing these types of
loans less liquid. According to Ginnie Mae, this lack of liquidity
results in higher interest rates for veterans and nonveterans alike. VA
officials said that the capital markets and Ginnie Mae may not have
been sufficiently consulted on this adjustment during the legislative
process to ensure that provisions in the VA hybrid ARM program were
consistent with the requirements of Ginnie Mae and conventional
secondary markets.
A similar situation occurred with respect to an FHA single-family
insured ARM product. The fiscal year 2002 VA/HUD appropriations bill
limited annual interest rate adjustments on FHA's hybrid ARMs to 1
percentage point if the initial interest rate term was fixed for 5
years or less and imposed a lifetime cap of 5 percentage
points.[Footnote 30] These caps were intended to assist FHA borrowers,
but lenders and capital market participants expressed concern that
Ginnie Mae securities backed by these ARMs would be unattractive to
investors--and thus lenders--since equivalent products in the
conventional market typically included annual caps of 2 percent and
lifetime caps of 6 percent. In response, an amendment to the
authorizing legislation, enacted in December 2003, made the annual cap
applicable only to loans having a fixed term for the first three or
fewer years[Footnote 31]--a change that FHA said was needed to meet the
needs of home buyers, lenders, and the secondary mortgage market.
Following the 2003 amendment, FHA issued an interim final rule in March
2005 that raised the cap on adjustments to annual interest rates for 5-
year ARMs from 1 to 2 percentage points and raised the lifetime cap on
interest rate adjustments for those loans to 6 percentage
points.[Footnote 32] Ginnie Mae officials noted that these problems
could have been avoided had Congress initially consulted more closely
with capital market participants.
Ginnie Mae Is in the Process of Expanding Disclosure on Loan
Information to Help Investors Better Predict Prepayment:
Investors in Ginnie Mae securities do not face credit risk, since the
mortgages underlying these securities are federally insured or
guaranteed and because Ginnie Mae guarantees timely payment of
principal and interest. However, MBS investors do face prepayment risk,
because they are purchasing cash flows that can stop when borrowers pay
their loans in full early. Mortgage loans are prepaid for several
reasons, most commonly when the house is refinanced, sold, or
destroyed, or when the borrower goes into foreclosure. Prepayment rates
tend to increase in periods of declining interest rates, when borrowers
have the opportunity to lower their interest payments by
refinancing.[Footnote 33] When mortgages are prepaid, voluntarily or
involuntarily, investors receive their principal, but not further
interest payments. In an environment of declining interest rates,
prepayments may force investors to reinvest prematurely at a lower
interest rate and to incur transaction costs.[Footnote 34]
Historically, the rate of prepayment for Ginnie Mae securities has been
lower than for other MBS because borrowers of government-backed
mortgages are generally first-time or low-to moderate-income home
buyers who are less likely to be able to incur the cost of refinancing
or relocating. According to research by securities trading firms,
between 1980 and 1990 Ginnie Mae securities consistently prepaid at
lower rates than their conventional counterparts. However, since that
time, prepayment rates for conventional MBS have changed relative to
those for Ginnie Mae MBS.[Footnote 35] Since 1990, Ginnie Mae's
prepayment rates have been slower than those of their conventional
equivalents in the initial 18 months to 2 years after loan origination.
But after this initial period, as the loans seasoned, Ginnie Mae's
prepayment rates have generally risen compared with conventional MBS.
Ginnie Mae securities backed by seasoned loans are currently prepaying
at a much faster rate than did similar securities during the 1990s.
Three factors in particular seem to have influenced the increase in
Ginnie Mae's rate of prepayment--refinancings, delinquencies, and
repurchases. As explained earlier, expanded access to credit, rising
home prices, and falling interest rates have allowed more FHA and VA
borrowers to refinance into conventional loans.[Footnote 36] With the
added equity built up in their homes, borrowers have been able to
reduce their monthly costs by refinancing without paying the federal
programs' insurance premiums. In addition, delinquency and default
rates for FHA and VA loans--which have traditionally been higher than
those for conventional loans--have been steadily increasing in recent
years.[Footnote 37] The delinquency rate on all FHA mortgages increased
from 6.7 percent in 1990 to 12.2 percent in 2004. By contrast, the
delinquency rate for conventional mortgages has remained relatively
stable and stood at 1.6 percent in 2003. Finally, as noted earlier,
before July 2003 Ginnie Mae's policy allowed loan servicers to
repurchase loans from Ginnie Mae's pools if a borrower missed only one
payment and left it unpaid for 4 months. These repurchases, which
peaked in 2002, caused a temporary acceleration in the prepayment rates
of Ginnie Mae's MBS.
Market participants we met with expressed concerns about the
accelerated rate of prepayment on Ginnie Mae securities in recent
years. Institutional investors often employ complex models--which rely
in part on detailed information about the underlying loan pools--to
forecast prepayment rates and help price MBS. Investors we spoke with
noted that predicting prepayment risk on Ginnie Mae securities had
become increasingly difficult because of rapid shifts in the
marketplace, such as the expansion in the availability of conventional
credit and increases in FHA and VA delinquencies, and uncertainty about
future developments.[Footnote 38]
In the past, the securities industry has also expressed concerns that
developing models to predict prepayment of Ginnie Mae MBS has been
particularly difficult because Ginnie Mae has not always provided the
same degree of detail on its loans as conventional securitizers. In
written comments to Ginnie Mae, the Bond Market Association--a trade
association representing securities dealers--said that while Ginnie Mae
had begun providing more information than ever before about the
mortgages backing its securities, there was still "significant room for
improvement." One broker-dealer noted to us that information was
particularly lacking on hybrid ARM products in Ginnie Mae pools. A
second broker-dealer said that additional information on geography and
occupancy rates for multifamily loans would help better estimate the
risk of delinquency--and thus prepayment--of securities backing those
loans. Market participants also noted that having information on
borrower credit scores would be useful.
To address concerns about its disclosures, in January 2004 Ginnie Mae
began its MBS Disclosure Initiative, which was designed to provide
investors with additional information that would allow them to better
forecast prepayment rates. Prior to the initiative, Ginnie Mae's
disclosures on the loans underlying its securities included such things
as the weighted average age of the loan, the number of loans in the
pool, the unpaid principal balance, and the average original loan size.
With the initiative, the agency began providing expanded disclosures--
at issuance--of loan data that it was already collecting and began
disclosing new data items about FHA and VA single-family loan pools,
including original loan-to-value ratios, loan purpose, property type,
average original loan size, and year of origination. In addition, in
September 2004 Ginnie Mae began updating its MBS disclosures every
month instead of quarterly. Ginnie Mae said that in December 2005 it
would begin disclosing additional details on the reasons for
prepayments of the loans backing Ginnie Mae MBS, including the number
of loans that were paid off in full by borrowers, repurchased by
issuers because of delinquency, and liquidated due to foreclosure.
Ginnie Mae officials told us that the recent changes made disclosures
on Ginnie Mae securities comparable with those for Fannie Mae's and
Freddie Mac's.
Caps on Ginnie Mae's Commitment Authority Have Created Potential
Constraints:
In developing its annual budget, Ginnie Mae officials told us they must
estimate the amount of the agency's commitment authority--the limit on
the total dollar volume of securities that the agency can guarantee.
The Office of Management and Budget reviews Ginnie Mae's commitment
authority estimates before they are finalized and included in the
President's budget request to Congress. Ginnie Mae estimates the amount
of the commitment authority it will need for future years based on the
actual authority used by the federal guarantee programs it served in
the previous year. The agency also considers commitment authority
allocations it actually made to issuers in the previous year and
includes them as part of the estimate, adding an additional percentage
to that estimate to cover unanticipated events in the marketplace. The
Secretary of HUD is required by statute to notify Congress when Ginnie
Mae has utilized 75 percent of its commitment authority and when HUD
estimates that the agency will exhaust this authority before the end of
a fiscal year.[Footnote 39] If Ginnie Mae exhausts the limit placed on
its commitment authority, it must suspend issuance of new MBS until
Congress provides additional authority. Under these circumstances, an
issuer may either have its request returned or leave it with Ginnie Mae
to be processed on a first-come, first-served basis after additional
commitment authority is restored.
In 1999, fearing it would reach the limit before the end of the year,
Ginnie Mae instituted procedures to ration its commitment authority. It
temporarily limited the approval of commitment requests to the amount
estimated to cover issuer needs for no more than a 60-day period.
According to industry participants we spoke with, this step was
disruptive to lenders and issuers and caused concern that Ginnie Mae
would not have the authority it needed to honor commitments it had
already made. One trade association told us that that this situation
had resulted in some loss of credibility for Ginnie Mae.
According to Ginnie Mae, the agency had not adequately estimated the
demand for its guarantee in 1999, in part because of unexpectedly high
levels of new construction and mortgage refinancing activity that year.
Since that time, the agency has taken steps to help ensure that it is
no longer in danger of reaching the limit of its commitment authority.
Since 2002, the commitment authority Ginnie Mae has received as part of
HUD's annual appropriations is available for 2 years. Congress annually
provides commitment authority but the authority is available for two
years. This means Ginnie Mae can use "carryover" authority from the
prior year to make current year commitments. According to agency
officials, this change from a 1-to a 2-year cycle has given Ginnie Mae
more flexibility in planning how to use its commitment authority and
should reduce the need to ration it again in the future. In addition,
the actual commitment authority available to Ginnie Mae at any given
time may be above the additional amount authorized annually, because
since fiscal year 2002, the agency has carried over unused authority
from the prior year. Thus, as shown in figure 6, although Ginnie Mae's
new commitment authority limit has been $200 billion each year since
fiscal year 1999, the actual authority available for Ginnie Mae to use
has been higher beginning in 2002. In fact, in fiscal year 2003, Ginnie
Mae was able to meet program demands. Having the ability to rely on
unused authority carried over from prior years has meant that the
agency has not had to ration or suspend issuer commitments since 1999.
Thus, if Ginnie Mae exceeds its annual commitment limit, for a
particular year, it has the authority to do so but only to the extent
of its carryover authority. However, given uncertainty of demand in the
marketplace, carryover authority still may not be enough.
Figure 6: Ginnie Mae's Commitment Authority Used, Fiscal Years 1997-
2004:
[See PDF for image]
Note: Ginnie Mae has been able to carry over unused commitment
authority since fiscal year 2002.
[End of figure]
Federal agencies often face difficulties estimating potential demand
for loan guarantees, in part because the budget process requires them
to forecast demand nearly 2 years in advance. Our 2005 report on the
FHA and RHS loan guarantee programs discussed options that Congress
could consider to prevent suspensions of those programs related to
exhaustion of their commitment authority.[Footnote 40] Some of the
options discussed in that report could be applicable to Ginnie Mae. For
example, Congress could establish a higher limit on Ginnie Mae's
commitment authority, although such a step could increase the
government's exposure to risk. Congress could also require Ginnie Mae
to provide more frequent updates on the amount of commitment authority
it has used. This would involve little additional administrative burden
and would provide additional and timelier information for determining
whether to provide supplemental commitment authority before the end of
a fiscal year. Because both of these options could have various
implications, their specific impacts would depend on how the changes
were structured and implemented.
Ginnie Mae Has Taken Steps to Improve Its Data Integrity, but
Improvements Are Not Yet Complete:
In November 2002, officials of First Beneficial Mortgage Corporation,
one of Ginnie Mae's approved issuers, were convicted of engaging in
fraudulent pooling practices. According to information from HUD's
Office of the Inspector General (OIG) the company used forged documents
to pool loans that were collateralized with nonexistent properties and
that were not insured or guaranteed by a federal agency, as required of
Ginnie Mae securities.[Footnote 41] Ginnie Mae declared First
Beneficial in default and incurred a loss of approximately $20 million.
HUD's OIG, among others, investigated the First Beneficial case and
subsequently audited Ginnie Mae's internal controls, completing its
report in March 2003. The investigation and audit identified
inconsistencies and inaccuracies in Ginnie Mae's data systems and other
internal control weaknesses.[Footnote 42] Most notably, the OIG found
that Ginnie Mae, its issuers, and the agencies it serves did not all
use a single common and unique case number as the primary management
control for identifying and tracking loans in the MBS pools. Instead,
each entity assigned its own tracking number, making comparisons of
loan data difficult and hindering efforts to ensure that the loans in
Ginnie Mae's pools were federally insured or guaranteed. The OIG's
report also found that Ginnie Mae did not have adequate controls in
place to ensure the reliability of its data--for example, it could not
ensure the accuracy of its data entry procedures, had not sufficiently
verified all loans to ensure they were federally insured or guaranteed,
and did not make sure that all issuers were in fact eligible to issue
Ginnie Mae securities. As a result, Ginnie Mae potentially could not
identify ineligible loans in its pools.
Ginnie Mae has taken several measures to address many of the internal
control and data weaknesses identified in the HUD OIG's reports. For
example, the agency has developed and implemented policies, controls,
and training designed to make data entry more accurate and is working
to better integrate its multiple data systems. Further, 99 percent of
Ginnie Mae's portfolio is made up of loans backed by FHA and VA, and
the agency now matches the loans in its data systems against those in
FHA's and VA's databases. However, Ginnie Mae, FHA, and VA still do not
use the same case numbers, which would eliminate the need for time-
consuming matching. Ginnie Mae officials told us that they are
analyzing aligning case numbers as part of an ongoing Business Process
Improvement Initiative. However, such a change would be difficult
because it would require systems changes for both Ginnie Mae and its
issuers.
OIG officials told us that Ginnie Mae had largely addressed the
deficiencies they had observed in the loan data and that that the OIG
was generally satisfied with the agency's efforts to address internal
control weaknesses. However, we identified additional data integrity
issues during our review. For example, Ginnie Mae was initially unable
to provide us with a breakdown of loans in its portfolio--that is,
percentages of FHA, VA, RHS, and PIH loans. This basic data could not
be provided, the agency said, because a programming error had resulted
in the underreporting of FHA loans and the overreporting of VA loans.
Ginnie Mae officials acknowledged that their data systems should be
improved and that they do not have easy access to as much of their
information as they should.
Adequate Contract Management and Oversight Is Essential for Ginnie Mae:
Ginnie Mae operates with a small staff--in fiscal year 2004, the agency
had about 66 employees--and contracts out most of its transactional and
support work. Ginnie Mae has stated that this centralized management
model is designed to allow a relatively small group of agency employees
to manage a large number of outsourced projects, improving the quality,
timeliness, and consistency of their work. In fiscal year 2004,
approximately 81 percent of Ginnie Mae's activities were contracted
out, including key operations such as accounting and technical support,
Ginnie Mae servicing of defaulted loans, internal control reviews,
preparation of assessment rating tools, issuer compliance reviews, and
information systems management.
Concerns about Ginnie Mae's oversight of its contractors have existed
for several years. Our 1993 review of Ginnie Mae's staffing found that
the agency was not adequately monitoring its contractors'
activities.[Footnote 43] At that time, the largest contractor told us
the agency did not have the resources to adequately review its
contractors' work, and Ginnie Mae itself acknowledged that it did not.
Similarly, in a 1997 review of HUD's contracting activity, HUD's OIG
found that Ginnie Mae was not in compliance with contracting and
procurement procedures.[Footnote 44] The review found that in some
instances Ginnie Mae contractors were performing tasks that were
inherently governmental functions and that aspects of the bidding
process hindered competition.[Footnote 45] At that time, Ginnie Mae had
its own contracting officer; however, as of January 1999, Ginnie Mae
began using HUD's contracting officer and its staff to award contracts.
Internal control issues continue to be a potential concern at Ginnie
Mae, as evidenced by losses due to fraud in the First Beneficial case,
the HUD OIG's 2003 report, and our own findings of problems with some
aspects of the agency's management information systems. Because Ginnie
Mae has a small staff and contracts out most of its operations,
appropriate contract management and oversight are inherently key
components in improving the agency's data systems and internal
controls. Unlike the time of the 1997 OIG report, Ginnie Mae's
contracting staff are now supplemented by assistance from HUD's
contracting staff. In addition, the agency has initiatives under way to
improve its information technology infrastructure and to streamline its
business processes, some of which involve contract management. For
example, Ginnie Mae officials told us that in 2002 the agency created
the Procurement Management Division to more stringently oversee
existing contracting and procurement procedures and to provide
additional training for staff in contract planning and development. In
addition, Ginnie Mae officials say they have built incentives into
their performance rating system to increase staff accountability for
contract planning and oversight and to provide incentives designed to
foster effective contract planning and monitoring.
Ginnie Mae's staff of about 66 are responsible for performing
inherently governmental functions and for overseeing the contractors
that perform most of the agency's operations. Based on a 2004 HUD
resource management study that found that Ginnie Mae had sufficient
staff to perform contract administration functions, Ginnie Mae
officials told us they believe that their staffing levels are
adequate.[Footnote 46] But given its reliance on contractors, Ginnie
Mae should continue to focus on ensuring that staff have the training,
qualifications, and capabilities they need to ensure that contracts are
planned, monitored, and executed appropriately.
Observations:
Despite its declining share of the overall MBS market, Ginnie Mae
continues to serve its key public policy goal of providing a strong
secondary market outlet for federally insured and guaranteed housing
programs, helping to improve their access and affordability for low-to
moderate-income borrowers. The decline in Ginnie Mae's share of the
overall MBS market should not necessarily be a major source of concern,
since it is largely a function of the rapid growth in the conventional
MBS market. Unlike firms in the conventional market, however, Ginnie
Mae has relatively little control over the volume of its securities,
which depends on the volume of FHA and VA loan programs. Changes in the
volume and market share of government-backed housing loans are largely
the result of policies and decisions made by Congress and the agencies
themselves. Improvements to Ginnie Mae's product line benefit
government-backed loan programs by making them more liquid, but the
impact on these programs' volume is relatively marginal. A further
decline in Ginnie Mae's volume could have certain implications related
to credit quality, liquidity, and the agency's contribution to
offsetting the federal budget deficit. But just how much Ginnie Mae's
volume could decline in the near future is unclear, as is the magnitude
of any potential effects on the market or federal budget.
Ginnie Mae faces the challenge of adjusting its product mix and
policies to address changes in the marketplace while continuing to meet
the needs of both borrowers who rely on affordable housing programs and
of industry stakeholders such as issuers and investors. Ginnie Mae has
added a number of new products over the years, has made a serious
effort to solicit feedback from its business partners, and has expanded
its disclosures for investors. The agency has also expanded the types
of loans that Ginnie Mae securities can finance, and RHS and PIH
officials have commended Ginnie Mae's proactive efforts to assist their
loan programs. But some changes remain beyond its scope--for instance,
conditions in FHA and VA hybrid ARM products that have limited investor
interest. Closer consultation by lawmakers with Ginnie Mae and capital
market participants could help ensure that congressionally mandated
provisions of loan programs are consistent with Ginnie Mae and
conventional secondary market requirements.
Ginnie Mae also faces the challenge of avoiding the need to ration its
commitment authority, which can cause disruption among secondary market
participants and harm Ginnie Mae's credibility. Beginning in 2002,
Congress made the agency's commitment authority available for 2 years
rather than 1 year to provide more flexibility, but Ginnie Mae could
again bump up against its commitment level cap in the future. Other
options to address this problem include raising Ginnie Mae's commitment
authority or requiring the agency to notify Congress when it appears
the agency may reach its cap. Each of these measures could have various
implications that would need to be considered.
Like any agency, Ginnie Mae faces challenges in managing its internal
operations in an efficient and cost-effective manner, and in ensuring
that appropriate internal controls are in place. This may be especially
challenging for Ginnie Mae because it operates with a small staff of
about 66 and contracts out most of its operations. Certain weaknesses
in Ginnie Mae's data integrity, along with losses resulting from
fraudulent activity in the First Beneficial case, indicate the need for
continued improvements in data systems and internal controls. Ginnie
Mae has taken some important steps on these issues and has ongoing
initiatives, such as its Business Process Improvement Plan. However,
given certain data integrity issues we identified, the recency of the
First Beneficial case, and that Ginnie Mae's business plan was only
recently approved, it is too early to assess the results of Ginnie
Mae's recent efforts. Finally, given its reliance on contractors to
carry out most of its operations, Ginnie Mae will need to pay
particular attention to ensuring that its staff have sufficient
resources, training, and qualifications to ensure that the agency's
contracts are planned, monitored, and executed appropriately.
Agency Comments:
On behalf of HUD, Ginnie Mae provided written comments on a draft of
this report, which are reprinted in appendix II. Ginnie Mae agreed with
the report's analysis of the challenges it faces and with the report's
findings on initiatives Ginnie Mae has taken to address these
challenges. It also agreed with our observations related to the
importance of improving Ginnie Mae's data systems and maintaining
effective contract management. In addition, Ginnie Mae provided us with
technical comments, which we have incorporated where appropriate.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the report date. At that time, we will send copies to the
Secretary of Housing and Urban Development. We will also make copies
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you have any questions about this report, please contact me at (202)
512-8678 or [Hyperlink, shearw@gao.gov]. 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 III.
Sincerely yours,
William B. Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Our report objectives were to evaluate (1) the state of Ginnie Mae's
market share and guarantee volume, (2) the potential implications of
changes in Ginnie Mae's market share and guarantee volume, and (3)
challenges Ginnie Mae faces in fulfilling its mission and the steps
that have been or could be taken to address these challenges.
To assess the state of Ginnie Mae's market share and guarantee volume,
we obtained data on issued and outstanding mortgage-backed securities
(MBS) from the agency's Integrated Pool Management System and Portfolio
Analysis Display System, which obtains its source data from Ginnie
Mae's Mortgage-Backed Securities Information System. We tested the
reliability of these data by comparing them within the two data systems
and with data from the 2005 Mortgage Market Statistical Annual and the
Bond Market Association--sources used widely in the industry to analyze
MBS activity. We also compared loan data provided by Ginnie Mae with
data maintained by the Department of Veterans Affairs (VA), Rural
Housing Service (RHS), and the Office of Public and Indian Housing
(PIH) within the Department of Housing and Urban Development (HUD).
Our initial comparisons showed significant discrepancies between Ginnie
Mae's source data and that of industry sources. Because Ginnie Mae's
MBS issuance and agency loan endorsement do not occur simultaneously, a
lag exists between the date that the loan is endorsed and the date
Ginnie Mae is recorded as guaranteeing its securitization. Thus, to
provide accurate information on Ginnie Mae's market share and volume
for a given point in time, individual loans must be matched to the
Ginnie Mae MBS in which they were pooled. When we began our review, no
data for VA, RHS, or PIH loans had been matched with their pool, and
data for Federal Housing Administration (FHA) loans had been matched
only since 2001. At our request, Ginnie Mae completed the matching of
FHA data from 1998 to 2004.
Our initial comparison of the portion of Ginnie Mae's MBS portfolio
collateralized by each loan program--that is, by FHA, VA, RHS, and PIH-
-showed discrepancies as well. As previously discussed, Ginnie Mae
could provide us only with estimated percentages because a programming
error in the system resulted in the underreporting of FHA loans and the
overreporting of VA loans. Because of our request, Ginnie Mae noticed
the error and corrected it, and we were able to obtain accurate data on
the percentage of loans from each program that were used to
collateralize Ginnie Mae MBS. With the corrections Ginnie Mae made, we
found the data to be reliable for our purposes.
To address all of the objectives, we spoke with and gathered relevant
documents from secondary market participants, including five Ginnie Mae-
approved issuers and five dealers/institutional investors in Ginnie Mae
securities. Among other things, we discussed with them their
perceptions of Ginnie Mae and its products and their reasons for
investing in or issuing Ginnie Mae securities rather than other MBS
products. The issuers were judgmentally selected and represented more
than 46 percent of the MBS Ginnie Mae issued in 2003. Three of the
issuers focused on single-family FHA loans and the remaining two on
multifamily and VA loans. Dealers/institutional investors were also
judgmentally selected; among them were the largest broker-dealers of
Ginnie Mae MBS, Real Estate Mortgage Investment Conduits, and Platinum
securities. We also interviewed and obtained documentation from
representatives of secondary market participants that may compete with
Ginnie Mae, including Fannie Mae, Freddie Mac, the National Council for
State Housing Finance Agencies, and the Federal Home Loan Banks of
Chicago and Seattle. We also interviewed representatives of and
reviewed documents from Ginnie Mae, HUD's FHA and PIH programs and its
Office of the Inspector General (OIG), VA, RHS, and the Federal Housing
Finance Board. In addition, we spoke with relevant trade associations,
including the Bond Market Association, National Association of Home
Builders, Mortgage Bankers Association, and National Association of
Realtors. We conducted a literature search and reviewed Ginnie Mae's
legislative history, relevant laws, regulations, budget documents,
performance, and annual reports and guidance, and studies and reports
by HUD's OIG and others. We conducted our work in Washington, D.C., and
Boston from October 2004 through September 2005 in accordance with
generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Housing and Urban
Development:
U.S. Department Of Housing And Urban Development:
Washington, DC 20410-9000:
Government National Mortgage Association:
October 6, 2005:
Mr. William Shear:
Director, Financial Markets and Community Investment:
Government Accountability Office:
441 G Street, NW, Room 2440B:
Washington, DC 20548:
Dear Mr. Shear:
Thank you for the opportunity to review and comment on GAO's draft
report entitled Ginnie Mae is Meeting Its Mission but Faces Challenges
in a Chart in Marketplace.
We appreciate GAO's acknowledgement that Ginnie Mae is meeting its
mission, which is to expand access to affordable housing by supporting
an efficient secondary market for federally insured and guaranteed
mortgages. We agree with the report's analysis of a number of
challenges facing Ginnie Mae, and appreciate GAO's acknowledgement of
the initiatives that Ginnie Mae has undertaken in order to address
these challenges, such as developing new products and improving
disclosures to investors. We also agree with GAO's observations with
respect to the importance of improving our data systems and the need to
continue to effectively manage Ginnie Mae's critical contracts.
As your report points out, Ginnie Mae has begun a business process
improvement initiative that we believe will result in a systems
environment comparable to best practices in the industry, and we have
improved our contract oversight by creating a Procurement Management
Division to increase staff accountability for effective contract
planning and monitoring.
At Ginnie Mae, we are committed to being an open and transparent
organization. We enjoyed working with GAO on this report, because we
believe that subjecting ourselves to the analysis and criticism of an
objective third party provides an excellent opportunity for Ginnie Mae
to improve.
Thank you, again, for the opportunity to comment on the draft report.
Sincerely,
Michael J. Frenz:
Executive Vice President:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
William B. Shear, (202) 512-8678 or [Hyperlink, shearw@gao.gov]:
Staff Acknowledgments:
In addition to the contact named above, Jason Bromberg, Assistant
Director; Heather Atkins; Daniel Blair; Christine Bonham; Diane Brooks;
Emily Chalmers; William Chatlos; Carlos Diz; Austin J. Kelly; Marc
Molino; Mitchell B. Rachlis; Paul Thompson; and Franklyn Yao made key
contributions to this report.
(250219):
FOOTNOTES
[1] This report refers to Ginnie Mae as an "agency" because it is a
government corporation housed within HUD. See 5 U.S.C. § 105.
[2] Housing and Urban Development Act of 1968, Pub. L. No. 90-448; see
12 U.S.C. §§ 1716-1723c. Ginnie Mae's charter allows it to conduct
three primary activities: (1) implement programs to guarantee the
timely payment for securities of pools of federally backed mortgages,
(2) conduct certain management and liquidation functions related to
mortgages in which federal agencies have a financial interest, and (3)
purchase certain federally backed mortgages. According to Ginnie Mae
officials, at present Ginnie Mae exercises only the first of these
authorities.
[3] For the purposes of this report, the term "government-backed loan"
is used to describe a mortgage loan that is either insured or
guaranteed by a program of the federal government.
[4] Mortgages without explicit government backing are called
conventional mortgages.
[5] An adjustable rate mortgage is a loan type that allows the lender
to adjust the interest rate during the term of the loan. In contrast, a
fixed rate mortgage has an interest rate that does not change during
the term of the loan.
[6] A basis point represents one 1/100th of a percentage point (0.01
percent). A guarantee fee of six basis points means that Ginnie Mae
charges issuers an annual fee of 6 cents for every $100 of guaranteed
MBS.
[7] "Price" refers to the dollar amount to be paid for a security and
"yield" to the rate of return it earns. As a security's price rises,
its yield falls because strong demand for a given security raises its
price for the seller and the return to the investor (yield) declines.
Conversely, as a security's price declines, its yield rises.
[8] "Private label issuer" is the term commonly used to describe a
securities issuer that is an entity other than a U.S. government agency
or U.S. government-sponsored enterprise. Such issuers may include
subsidiaries of investment banks or other financial institutions.
[9] The Federal Home Loan Bank System is a government-sponsored
enterprise that consists of 12 Federal Home Loan Banks, which are
cooperatively owned by member financial institutions--typically
commercial banks and thrifts (or savings and loans). The primary
mission of the FHLBank System is to promote housing and community
development, generally by making loans, also known as advances, to
member financial institutions. See GAO, Federal Home Loan Bank System:
An Overview of Changes and Current Issues Affecting the System, GAO-05-
489T (Washington, D.C.: Apr. 13, 2005).
[10] Mortgage Partnership Finance is a registered trademark of the
Federal Home Loan Bank of Chicago.
[11] Fannie Mae and Freddie Mac are government-sponsored enterprises--
congressionally chartered, private corporations that are publicly
owned--that help ensure that funds are available to home buyers by
buying mortgages from mortgage originators, such as savings and loan
associations, commercial banks, and mortgage bankers.
[12] The Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 requires Freddie Mac and Fannie Mae to meet housing goals
established by HUD for serving certain categories of borrowers,
including those who are underserved and have low or moderate incomes.
Pub. L. No. 102-550 §§ 1331-1334; see 12 U.S.C. §§ 4561-4565 (2000 &
Supp. 2004).
[13] Measuring the secondary market share of government-backed loans
that these bonds represent is difficult because the bonds are often
purchased by other secondary market entities. For example, Freddie
Mac's reported purchases of FHA loans include loans collateralizing
mortgage revenue bonds that it holds.
[14] A jumbo nonconforming loan provides financing for those borrowers
who are purchasing or refinancing properties that require larger loan
amounts than Fannie Mae and Freddie Mac will allow--$359,650 for a
single-family mortgage in 2005. Home equity lines of credit provide a
revolving line of credit based on the equity available in a home.
[15] The subprime market serves borrowers who have poor or no credit
histories or limited incomes who cannot meet the credit standards for
obtaining loans in the prime market. Many borrowers of government-
backed loan programs, which are designed to serve lower-income or
underserved populations, have those characteristics.
[16] For the purposes of this report, issuance refers to new MBS issued
in a given year and outstanding refers to the cumulative amount of
existing MBS issued in the past years and still held by investors.
[17] Market participants cite several reasons for recent declines in
FHA and VA loan volume. Among them are (1) increased competition from
private mortgage insurers and other housing finance institutions; (2)
administrative and regulatory requirements that may serve as a
disincentive to lenders to originate FHA and VA loans; (3) rising home
prices, which reduce the proportion of homes that can stay within FHA's
and VA's mortgage limits; and (4) a decline in the veteran population
that has reduced the number of potential VA borrowers.
[18] Under the new policy, repurchases of loans issued on or before
December 1, 2002, are permitted where for 4 consecutive months at least
one missed payment remains uncured (a "rolling" delinquency) or else a
consecutive 3 month delinquency warranted repurchase consideration. For
pools issued on or after January 1, 2003, loans to be repurchased must
be delinquent for 3 consecutive months. Loans with rolling
delinquencies issued in pools on or after January 1, 2003, are not
eligible for repurchase. See HUD, Ginnie Mae MBS Guide, Ginnie Mae
5500.3, Rev. 1 (Washington, D.C; July 1, 2003), ch. 18.
[19] The less risky an asset, the more investors will pay for it and
the lower the interest rate, or yield, that they will require from it.
[20] Bid-ask spreads represent the difference between the price at
which an investor can buy a bond and can sell the same bond. Bid-ask
spreads are sometimes used as an indicator of liquidity, since small
spreads can suggest active trading and efficient pricing.
[21] Ginnie Mae's interest income does not have a direct effect on its
contribution to offsetting the federal budget deficit. Interest income
that Ginnie Mae receives is, from the Treasury's point of view, offset
by the Treasury's cost of paying it.
[22] Other fees charged by Ginnie Mae include new issuer fees, handling
fees, multiclass fees, and fees for transferring servicing to Ginnie
Mae when issuers default on their securities.
[23] The amount of Ginnie Mae's excess of revenues over expenses is
also affected, of course, by changes in its expenses. Ginnie Mae's
expenses rose from $47.2 million to $77.8 million from fiscal years
2000 to 2004.
[24] Hybrid ARMs offer a fixed interest rate for a set period of time.
After this period--say, 5 years--the rate is adjusted periodically.
These products were authorized by the fiscal year 2002 VA/HUD
Appropriations bill. Pub. L. No. 107-73 § 206; see 12 U.S.C. § 1715z-
16, as amended.
[25] In January 2004, Congress amended Ginnie Mae's charter legislation
to specify that Ginnie Mae has the authority to guarantee securities
backed by loans made under the Section 538 Rural Rental Housing
Guaranteed Loan Program. Consolidated Appropriations Act, 2004, Pub. L.
No. 108-199 § 774.
[26] For example, under the old policy, a Ginnie Mae II pool could
include mortgage loans with both 5-1/2 percent and 6-1/2 percent coupon
rates (a spread of 100 basis points). Under the new policy, the spread
in a given pool can be no greater than 50 basis points.
[27] The underserved areas under the expanded Targeted Lending
Initiative include urban and rural Empowerment Zones and Enterprise
Communities (distressed communities eligible for certain tax benefits
designed to attract or retain jobs or businesses); Renewal Communities
(distressed areas in need of economic and social renewal); adjacent
eligible central city areas; areas with a majority population of Native
Americans; and "colonias" (rural communities along the U.S.-Mexico
border that lack adequate infrastructure and other basic services).
[28] Loans backing Ginnie Mae securities, where the property is located
in a designated county, are being given Targeted Lending Initiative
status, effective for securities with an issue date of October 1, 2005,
through September 1, 2009.
[29] Pub. L. No. 108-454 § 405(b); see 12 U.S.C. § 3703A(c), as
amended. In a hybrid ARM mortgage loan, the interest rate is fixed for
an initial multiyear period, and then is adjusted, based on market
rates, on an annual basis. Prior to enactment of the 2004 act, the
annual adjustment rate for VA hybrid ARM loans was limited to a maximum
increase or decrease of 1 percentage point. Under the act, the initial
adjustment rate for VA's 5-, 7-, and 10-year hybrid ARM products can be
prescribed by the VA Secretary, but annual adjustments after that are
limited to an increase or decrease of 1 percentage point.
[30] Pub. L. No. 107-73 § 206 (2001).
[31] The amendment changed the annual cap by applying the 1 percent
annual adjustment limitation only to ARMs having a fixed term for the
first 3 or fewer years. As a result, annual adjustments for FHA's 5-
year hybrid ARMs could exceed 1 percent. See Pub. L. 108-186 § 301
(2003).
[32] 70 FR 16080 (Mar. 29, 2005).
[33] As noted earlier, some investors use REMICs to reduce prepayment
risk by investing in tranches that absorb less of a security's
prepayment variability.
[34] Conversely, prepayments can benefit investors during a period of
rising interest rates because investors can then redirect their cash to
investments that offer higher returns.
[35] This rate is often expressed as the "conditional prepayment rate,"
which measures prepayments in a given year as a percentage of the
current outstanding loan balance. For example, a conditional prepayment
rate of 10 percent means that 10 percent of the pool's current loan
balance pool is likely to prepay over the next year.
[36] Falling interest rates resulted in a rapid rate of refinancings in
the entire mortgage market, and prepayment rates of both conventional
MBS and Ginnie Mae MBS rose as a result.
[37] Loans are considered in default when they are delinquent for more
than 90 days.
[38] Economists make a distinction between risk and uncertainty. Risk
refers to variation in potential outcomes to which an associated
probability can be assigned. For example, MBS investors can estimate
the probability of prepayment on underlying loans based on the
prepayment rates of similar loans in the past. Uncertainty, by
contrast, is the lack of knowledge concerning the probability
distribution of future events. When market conditions are uncertain and
contain unknown variables, predicting prepayment rates can be difficult
because the past behavior of loans may not be an accurate guide to the
future.
[39] Pub. L. No. 99-289, 100 Stat. 412; codified at 12 U.S.C. § 1721
Note.
[40] GAO, Housing Finance: Options to Help Prevent Suspensions of FHA
and RHS Loan Guarantee Programs, GAO-05-227 (Washington, D.C.: Mar. 15,
2005).
[41] See United States v. McLean, 131 Fed. Appx. 34, 2005 U.S. App.
Lexis 7564 (2005).
[42] HUD, OIG, Government National Mortgage Association Review of
Internal Controls, Audit 2003-AT-0001 (Washington, D.C; Mar. 5, 2003).
[43] GAO, Government National Mortgage Association: Greater Staffing
Flexibility Needed to Improve Management, GAO/RCED-93-100 (Washington,
D.C.: June 30, 1993).
[44] HUD, OIG, HUD Contracting, 97-PH-163-0001 (Washington, D.C; Sept.
30, 1997).
[45] "Inherently governmental functions" are intimately related to the
public interest and thus must be performed only by government
employees. Examples include such things as determining whether contract
costs are reasonable and collecting and disbursing public funds.
[46] We did not assess HUD's resource management study or verify its
findings.
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