Housing Finance: Ginnie Mae Is Meeting Its Mission but Faces
Challenges in a Changing Marketplace (31-OCT-05, GAO-06-9).
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, 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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-9
ACCNO: A40677
TITLE: Housing Finance: Ginnie Mae Is Meeting Its Mission but
Faces Challenges in a Changing Marketplace
DATE: 10/31/2005
SUBJECT: Data integrity
Government guaranteed loans
Homeowners loans
Internal controls
Lending institutions
Mortgage loans
Mortgage programs
Mortgage-backed securities
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GAO-06-9
* 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
* Contents
* Background
* Results in Brief
* Ginnie Mae Securities Finance Most Government-Backed Housing
Loans, but Represent a Declining Share of the Total MBS Market
* Ginnie Mae Guarantees Securities for the Bulk of FHA and VA
Single-Family Loans
* Ginnie Mae Faces Relatively Little Competition in the
Secondary Market for Government-Backed Loans
* Ginnie Mae's Share of the Total MBS Market Has Declined
* Changes in Ginnie Mae's Share and Volume Could Have Implications
for Borrowers, the Liquidity of Its Securities, and Federal
Revenue
* Ginnie Mae's Benefits to Borrowers of Government-Backed
Loans May Not Be Dependent on Its Market Share
* Changes in Ginnie Mae's Volume Could Potentially Affect the
Liquidity of Its Securities
* Changes in Ginnie Mae's Outstanding Volume Could Affect Its
Contribution to Reducing the Federal Budget Deficit
* Ginnie Mae Faces a Changing Marketplace and Management Challenges
* Ginnie Mae's Activities Have Responded to a Changing Market
Environment
* Ginnie Mae Is in the Process of Expanding Disclosure on Loan
Information to Help Investors Better Predict Prepayment
* Caps on Ginnie Mae's Commitment Authority Have Created
Potential Constraints
* Ginnie Mae Has Taken Steps to Improve Its Data Integrity,
but Improvements Are Not Yet Complete
* Adequate Contract Management and Oversight Is Essential for
Ginnie Mae
* Observations
* Agency Comments
* Objectives, Scope and Methodology
* Comments from the Department of Housing and Urban Development
* GAO Contact and Staff Acknowledgments
United States Government Accountability Office
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
a
GAO-06-9
Highlights of GAO-06-9, a report to the Chairman, Subcommittee on Housing
and Community Opportunity, Committee on Financial Services, House of
Representatives
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.
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 [email protected].
October 2005
HOUSING FINANCE
Ginnie Mae Is Meeting Its Mission but Faces Challenges in a Changing
Marketplace
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 Percentage Dollars in trillions
50 3.0
2.5
40
2.0
30
1.5 20
1.0 10
.5 0 0
Source: GAO analysis of data from the 2005 Mortgage Market Statistical Annual,
Volume II: The Secondary Market.
Contents
Letter 1
Background 2
Results in Brief 6
Ginnie Mae Securities Finance Most Government-Backed Housing Loans, but
Represent a Declining Share of the Total MBS Market 8
Changes in Ginnie Mae's Share and Volume Could Have Implications for
Borrowers, the Liquidity of Its Securities, and Federal Revenue 17
Ginnie Mae Faces a Changing Marketplace and Management Challenges 22
Observations 35
Agency Comments 37
Appendixes
:Objectives, Scope and Methodology 38
:Comments from the Department of Housing and Urban Development 40
:GAO Contact and Staff Acknowledgments 41
: Ginnie Mae's Revenues and Expenses, Fiscal Years 1998-2004
Table
Figure 1: Ginnie Mae Securitization Process 4
Figures
:FHA-Insured Single-Family Loans Guaranteed by Ginnie Mae Securities,
Fiscal Years 1998-2004 9
:Composition of Ginnie Mae's Newly Issued MBS, 2004 10
:MBS Market Volume and Ginnie Mae's Market Share, Fiscal Years 1985-2004
15
:Ginnie Mae MBS: Outstanding Balances and Income 22
:Ginnie Mae's Commitment Authority Used, Fiscal Years 1997-2004 31
Contents
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
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separately.
A
United States Government Accountability Office Washington, D.C. 20548
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.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
1This report refers to Ginnie Mae as an "agency" because it is a
government corporation housed within HUD. See 5 U.S.C. S: 105.
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.
Mortgage lenders keep the loans they originate in the primary market or
Background
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.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
governmentbacked loan programs.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.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.
2Housing and Urban Development Act of 1968, Pub. L. No. 90-448; see 12
U.S.C. S:S: 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.
3For 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.
4Mortgages without explicit government backing are called conventional
mortgages.
Figure 1: Ginnie Mae Securitization Process
Source: GAO.
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.
aAn issuer is a company or government entity offering securities for sale
to investors.
bA broker-dealer is an individual or firm in the business of buying and
selling securities.
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).5
Ginnie Mae's Multiclass Securities Program, introduced in 1994, includes,
among
5An 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.
Page 4 GAO-06-9 Ginnie Mae
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 governmentbacked 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.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.
6A 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.
Page 5 GAO-06-9 Ginnie Mae
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:
o 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.
o 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.
o 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 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 Securities Finance Most Government-Backed Housing Loans, but
Represent a Declining Share of the Total MBS Market
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 Percentage
1998 1999 2000 2001 2002 2003 2004
Source: GAO analysis of Ginnie Mae data.
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.
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 Type of loan
Type of housing
1%
RHS/PIH
Multifamily
VA
FHA Single family
Source: GAO analysis of Ginnie Mae data.
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.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.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:
o 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.9 First authorized in 1998,
the programs go by the names of the Mortgage Partnership Finance(R)
program and the Mortgage Purchase Program.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
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.
9The 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).
10Mortgage Partnership Finance is a registered trademark of the Federal
Home Loan Bank of Chicago.
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.
o In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA
originations.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.12
o 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.
o 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
11Fannie 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.
12The 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 S:S:
1331-1334; see 12 U.S.C. S:S: 4561-4565 (2000 & Supp. 2004).
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 2003.13
o 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.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 governmentbacked loan program can
help them meet their housing goals established by HUD. In addition,
subprime mortgage originations have grown
13Measuring 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.
14A 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.
Ginnie Mae's Share of the Total MBS Market Has Declined
dramatically in recent years, as many lenders market to less creditworthy
borrowers who in the past may have received a government-backed loan.15
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 2004.16
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.
15The 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.
16For 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.
Figure 4: MBS Market Volume and Ginnie Mae's Market Share, Fiscal Years
1985-2004 Percentage Dollars in trillions
50 3.0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
2001 2002 2003 2004
Ginnie Mae MBS issuance
Total market MBS issuance
Ginnie Mae share of total MBS issuance
Source: GAO analysis of data from the 2005 Mortgage Market Statistical
Annual, Volume II: The Secondary Market.
Note: Total market includes Ginnie Mae, Fannie Mae, Freddie Mac, and
private label issuers.
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.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
17Market 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.
Page 15 GAO-06-9 Ginnie Mae
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
Changes in Ginnie Mae's Share and Volume Could Have Implications for
Borrowers, the Liquidity of Its Securities, and Federal Revenue
issued on or after January 1, 2003, servicers can repurchase delinquent
loans only when no payment has been made for 3 consecutive months.18
Ginnie Mae officials as well as issuers we talked with said that these new
policies appear to have curtailed repurchase activity.
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,
18Under 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.
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.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.20 The officials said that if
volume continued to
19The 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.
20Bid-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.
Page 19 GAO-06-9 Ginnie Mae
Changes in Ginnie Mae's Outstanding Volume Could Affect Its Contribution
to Reducing the Federal Budget Deficit
decline, liquidity could become a significant concern in the future,
although it is unknown at what levels of volume this would occur.
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.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
Fiscal Year
Ginnie Mae revenues and
expenses 1998 1999 2000 2001 2002 2003 2004
Interest income $362.7 $380.3 $415.8 $430.3 $398.9 $389.3 $442.7
MBS program income 392.3 405.0 408.2 438.7 446.0 406.1 372.8
Other income 12.4 13.3 8.0 9.5 6.2 4.2 -
Total revenues 767.4 798.6 832.0 878.5 851.1 799.6 815.5
Total expenses 45.6 51.8 47.2 49.4 56.8 68.1 77.8
Excess of revenues over
expenses 674.7 746.8 762.8 805.3 794.3 731.5 737.7
Excess of revenues over
expenses, net of interest 312.0 366.5 347.0 375.0 395.4 342.2 295.0
income
Source: Ginnie Mae.
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
21Ginnie 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.
Page 20 GAO-06-9 Ginnie Mae
outstanding MBS, and collects commitment fees for the authority to pool
mortgages into Ginnie Mae MBS.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.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.
22Other 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.
23The 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.
Page 21 GAO-06-9 Ginnie Mae
Ginnie Mae Faces a Changing Marketplace and Management Challenges
Figure 5: Ginnie Mae MBS: Outstanding Balances and Income
Principal balance outstanding Program income (dollars in billions)
(dollars in millions)
700 460
600
440
500
420
400
400
300
380
200
360
100
340
0
320 1998 1999 2000 2001 2002 2003 2004
MBS principal balance (in billions) MBS program income (in millions)
Source: GAO analysis of Ginnie Mae data.
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
Ginnie Mae's Activities Have Responded to a Changing Market Environment
on contractors, the agency faces the challenge of ensuring that its
capacity to plan, manage, and oversee contractors is adequate.
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:
o 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.
o Ginnie Mae played a role in developing FHA's hybrid ARM products.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.
24Hybrid 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 S: 206; see 12 U.S.C. S: 1715z-16, as amended.
Page 23 GAO-06-9 Ginnie Mae
o In February 2005, Ginnie Mae began guaranteeing securities backed by
RHS multifamily loans, which support affordable multifamily housing in
rural areas.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.
o 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.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.
o 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,
25In 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 S:
774.
26For 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.
including "colonias" along the Southwest border region and additional
Renewal Communities and Urban Enterprise Zones designated by HUD.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.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.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
27The 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).
28Loans 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.
29Pub. L. No. 108-454 S: 405(b); see 12 U.S.C. S: 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.
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.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 years31-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.32 Ginnie Mae officials noted that these problems could
have been avoided had Congress initially consulted more closely with
capital market participants.
30Pub. L. No. 107-73 S: 206 (2001).
31The 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 S: 301 (2003).
3270 FR 16080 (Mar. 29, 2005).
Page 26 GAO-06-9 Ginnie Mae
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.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.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.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.
33As noted earlier, some investors use REMICs to reduce prepayment risk by
investing in tranches that absorb less of a security's prepayment
variability.
34Conversely, prepayments can benefit investors during a period of rising
interest rates because investors can then redirect their cash to
investments that offer higher returns.
35This 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.
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.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.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.38
36Falling 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.
37Loans are considered in default when they are delinquent for more than
90 days.
38Economists 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.
Caps on Ginnie Mae's Commitment Authority Have Created Potential
Constraints
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.
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
Page 29 GAO-06-9 Ginnie Mae
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.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
39Pub. L. No. 99-289, 100 Stat. 412; codified at 12 U.S.C. S: 1721 Note.
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
Dollars in billions 300
250
200
150
100
50
0 1997 1998 1999 2000 2001 2002 2003 2004
Total commitment authority available Total commitment authority allocated
New commitment limit authorized
Source: GAO analysis of U.S. Department of Housing and Urban Development
Congressional Budget Justifications, 1998-2005.
Note: Ginnie Mae has been able to carry over unused commitment authority since
fiscal year 2002.
Ginnie Mae Has Taken Steps to Improve Its Data Integrity, but Improvements
Are Not Yet Complete
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.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.
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.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.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
40GAO, Housing Finance: Options to Help Prevent Suspensions of FHA and RHS
Loan Guarantee Programs, GAO-05-227 (Washington, D.C.: Mar. 15, 2005).
41See United States v. McLean, 131 Fed. Appx. 34, 2005 U.S. App. Lexis
7564 (2005).
42HUD, OIG, Government National Mortgage Association Review of Internal
Controls, Audit 2003-AT-0001 (Washington, D.C.; Mar. 5, 2003).
Page 32 GAO-06-9 Ginnie Mae
Adequate Contract Management and Oversight Is Essential for Ginnie Mae
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.
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,
Page 33 GAO-06-9 Ginnie Mae
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.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.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.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
43GAO, Government National Mortgage Association: Greater Staffing
Flexibility Needed to Improve Management, GAO/RCED-93-100 (Washington,
D.C.: June 30, 1993).
44HUD, 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.
Observations
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.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.
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.
46We did not assess HUD's resource management study or verify its
findings.
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,
Agency Comments
training, and qualifications to ensure that the agency's contracts are
planned, monitored, and executed appropriately.
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 http://www.gao.gov.
If you have any questions about this report, please contact me at (202)
512-8678 or [email protected]. 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
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.
Appendix I Objectives, Scope and Methodology
To address all of the objectives, we spoke with and gathered relevant
documents from secondary market participants, including five Ginnie
Maeapproved 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.
Appendix II
Comments from the Department of Housing and Urban Development
Appendix III
GAO Contact and Staff Acknowledgments
William B. Shear, (202) 512-8678 or [email protected]
GAO Contact
In addition to the contact named above, Jason Bromberg, Assistant
Staff
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.
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Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Relations
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