Background

Mortgage lenders keep the loans they originate in the primary market or  sell them in the secondary, or resale, markets. In turn, purchasers of  mortgage loans in the secondary markets either hold the loans in their own  portfolios or, most often, pool together a group of loans to back MBS that  are sold to investors or held in the originator’s portfolio. Secondary loan  markets benefit lenders, borrowers, and investors in a number of ways.  First, they allow lenders to manage their liquidity needs, reduce interest  rate risk, and generate funds for additional lending. Second, they increase  the amount of credit available to borrowers and help lower interest rates by  fostering competition among lenders. Finally, they allow investors to  further diversify their risks and to sell their interests on active secondary  markets to other willing investors.
Ginnie Mae was created in 1968 through an amendment to the National  Housing Act. Organizationally, Ginnie Mae operates as a unit of HUD, and  its administrative, staffing, and budgetary decisions are coordinated with  HUD’s. Ginnie Mae defines its mission as expanding affordable housing in  America by linking capital markets to the nation’s housing markets, largely  by serving as the dominant secondary market vehicle for government-  backed loan programs. 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.
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.
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). Ginnie  Mae’s Multiclass Securities Program, introduced in 1994, includes, among  other things, Real Estate Mortgage Investment Conduits (REMIC) and  Ginnie Mae Platinum Securities.  REMICs are designed to tailor the  prepayment and interest rate risks associated with MBS to investors with  varying investment goals. These products direct principal and interest  payments from underlying MBS to classes, or tranches, with different  principal balances, interest rates, and other characteristics. Ginnie Mae  Platinum Securities allow investors to aggregate MBS with relatively small  remaining principal balances and similar characteristics into new, more  liquid securities.
Investors in Ginnie Mae MBS face prepayment risk—that is, the possibility  that borrowers will pay off their mortgages early, reducing the amount of  interest earned. However, investors do not face credit risk—the possibility  of loss from unpaid mortgages—because the underlying mortgages backing  the pools are federally insured or guaranteed and Ginnie Mae guarantees  timely payment of principal and interest. FHA’s single-family loan program  and PIH’s loan guarantee programs insure nearly 100 percent of the loan  amount. VA guarantees the lender against losses, subject to a cap equal to  25 percent to 50 percent of the loan amount based on the size of the loan;  RHS guarantees up to 90 percent of the loan value. Issuers are responsible  for delinquent loans in pools. When a Ginnie Mae issuer defaults in making  timely payments of principal and interest to investors, Ginnie Mae makes  the payments and takes over the issuer’s entire portfolio of government-  backed loans that stand behind the securities that Ginnie Mae has  guaranteed.
Ginnie Mae charges issuers a guarantee fee for providing its guarantee of  timely payment. The fee varies depending on the product and is six basis  points for securities backed by single-family loans, which represent the  majority of Ginnie Mae MBS. 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.

	Ginnie Mae Securities Finance Most Government-Backed Housing Loans, but Represent a Declining Share of the Total MBS Market

Ginnie Mae securities finance the great majority of FHA and VA loans,  suggesting that the agency is fulfilling its basic mission, and faces relatively  little competition in the market for government-backed mortgage loans.  However, Ginnie Mae’s share of the total MBS market has declined over the  last 20 years, both in terms of new issuances and volume outstanding,  largely because FHA and VA loan origination has not kept pace with growth  in the overall mortgage market and because securitization of conventional  mortgages has become far more prevalent.

		Ginnie Mae Guarantees Securities for the Bulk of FHA and VA Single-Family Loans

Historically, the vast majority of government-backed housing loans have  been pooled to back MBS for which Ginnie Mae guarantees the timely  payment—a trend that continues today. Ginnie Mae issued its first MBS in  1970, and since that time it has guaranteed a cumulative total of more than  $2 trillion of MBS. According to Ginnie Mae, its securities historically have  represented roughly 90 percent of the market for FHA and VA loans. For  example, between fiscal years 1998 and 2004 Ginnie Mae securities  financed between about 84 percent and 96 percent of FHA-insured  single-family loans (see fig. 2). In fiscal year 2004, Ginnie Mae issued a total  of $149.1 billion in MBS. These MBS financed 91 percent of all eligible loans  insured or guaranteed by FHA and VA. Ginnie Mae securities also have  financed about half of RHS-guaranteed single-family loans since 1999 and  financed roughly 40 percent of PIH-backed loans in fiscal year 2004.
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.

		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.
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. In general, they have had  limited or no involvement in Ginnie Mae’s market. Moreover, for a variety  of reasons, they do not appear to have plans to encroach on Ginnie Mae’s  market to any substantial degree, as the following examples illustrate:  The Federal Home Loan Banks (FHLBank) have mortgage programs  under which they purchase pools of conventional and federally insured  or guaranteed mortgage loans from member banks. First authorized in  1998, the programs go by the names of the Mortgage Partnership  Finance® program and the Mortgage Purchase Program. The programs  were attractive to lenders in part because lenders could use them to sell  their mortgages without paying guarantee fees. In 2000, FHLBanks took  over a significant amount of Ginnie Mae’s market share and purchased  $12.7 billion in FHA and VA loans, representing about 11 percent of the  combined market for those loans. However, the Federal Housing  Finance Board, which oversees the FHLBanks, became concerned  because the program was intended to focus on conventional rather than  FHA loans. The board took measures to encourage the FHLBanks to  limit their purchase of FHA loans to no more than one-third of their  mortgage purchase program portfolio. After 2000, FHLBanks greatly  reduced their purchases of FHA loans. From 2001 to 2003, they  purchased loans representing about 4 percent to 5 percent of the FHA  market, which then declined further to about 2 percent in 2004.
In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA  originations. 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.
Freddie Mac has purchased less than 1 percent of the market of FHA  and VA loans each year since 1990.  Freddie Mac officials said that its  competition with Ginnie Mae is largely indirect, by encouraging  conventional lending to the most creditworthy low- and moderate-  income borrowers who might otherwise receive a mortgage through  FHA or VA. Freddie Mac officials also said they do not compete with  Ginnie Mae in the secondary market directly because it is hard to  compete with Ginnie Mae’s government guarantee. In addition, as with  Fannie Mae, government-backed loans do not count toward Freddie  Mac’s required affordable housing goals. Freddie Mac does purchase  some mortgage revenue bonds that are collateralized by FHA and VA  loans and directly purchases some FHA and VA loans that Ginnie Mae  does not securitize.
State and local government entities, including housing finance agencies,  issue mortgage revenue bonds to raise funds in the capital markets for  mortgage lending. Because these bonds are tax exempt, investors are  willing to accept a lower interest rate for them. This interest savings is  passed on through lenders to lower-income families in the form of loans  with interest rates below the market average. These bonds often finance  government-backed mortgages. As of 2003, 71 percent of the mortgages  that revenue bonds financed were insured or guaranteed by a federal  program—58 percent by FHA, 10 percent by RHS, and 3 percent by VA.   The overall volume of mortgage revenue bonds issued was $10.7 billion  in 2003.
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. According to RHS officials, private  label issuers do currently securitize the majority of Section 538  multifamily loans guaranteed by RHS, but these loans account for less  than 1 percent of Ginnie Mae’s portfolio.
Most of the competition for Ginnie Mae’s market share does not come  directly—that is, secondary market participants are not seeking to  purchase or securitize significant numbers of government-backed loans.  Rather, lenders compete with Ginnie Mae indirectly by seeking greater  market share at the origination level by making conventional loans to  borrowers who might otherwise use FHA and VA loan programs. Fannie  Mae and Freddie Mac have an incentive to serve this market because  lower-income borrowers who might otherwise turn to a government-  backed loan program can help them meet their housing goals established  by HUD. In addition, subprime mortgage originations have grown dramatically in recent years, as many lenders market to less creditworthy  borrowers who in the past may have received a government-backed loan.

		Ginnie Mae’s Share of the Total MBS Market Has Declined

Although Ginnie Mae continues to finance the bulk of government-backed  loans, its share of the overall MBS market has declined substantially over  the past 20 years. As shown in figure 4, Ginnie Mae securities represented  42 percent of all new MBS issued in 1985, but only 7 percent in 2004. 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.
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. Conventional mortgage  originations rose from an estimated $243 billion in 1985 to an estimated  $2.8 trillion in 2004. In contrast, originations of FHA and VA loans rose from  $42 billion to $129 billion during that period. In addition, the rate of  securitization of conventional mortgages has risen rapidly over the last 20  years; by the end of 2004, almost half of outstanding mortgage debt was  financed through securitization, according to the Bond Market Association.
Ginnie Mae’s market share of outstanding MBS has also declined  significantly over the last 20 years, falling from 54 percent in 1985 to 10  percent in 2004.  Since 2000, Ginnie Mae’s volume of MBS outstanding has  fallen from $612 billion to $453 billion in 2004, a drop of approximately 26  percent. The primary factor contributing to this decline has been the  increase in borrowers who have refinanced out of FHA and VA loan  programs into conventional loans. Falling interest rates and rising home  prices have led to a boom in refinancing over the last 10 years, particularly  from 1997 to 1999 and 2001 to 2004. At the peak of the refinancing boom in  2003, refinancings represented about 65 percent of mortgage originations.  As some borrowers with mortgages insured by FHA and guaranteed by VA  have built up equity in their homes, they have been able to refinance out of  these programs into conventional loans that may offer more favorable and  flexible terms and interest rates. This trend may have been facilitated to  some extent by the increased availability of loans to borrowers who are  less creditworthy. This has allowed some borrowers who would not  otherwise have been able to borrow in the conventional market to do so  rather than using FHA-insured and VA-guaranteed mortgage programs. The  decline in the outstanding volume of FHA and VA loans has led to a  corresponding decline in the outstanding volume of Ginnie Mae securities,  which are mostly composed of those loans.
To a lesser extent, lender repurchases of delinquent FHA-insured and  VA-guaranteed loans in Ginnie Mae pools have also contributed to the  decline in Ginnie Mae’s volume of outstanding MBS. Ginnie Mae’s policy  prior to 2003 allowed lenders and servicers to repurchase loans that were  in their Ginnie Mae pools if the borrower missed just one payment that  remained unpaid for 4 consecutive months. According to Ginnie Mae, these  loans often had a low risk of default; the loan may have had only one  missed payment followed by resumption of loan servicing by the borrower.  However, lenders were able to profit by repurchasing these loans for the  remaining balance because, during an era of falling interest rates, the  market value of the loans was more than the remaining balance. Data  obtained from Ginnie Mae officials show that these repurchases of  delinquent loans reached a peak in 2002, when they totaled $22 billion, and  that they contributed to the decline in Ginnie Mae’s outstanding volume. To  address this problem, Ginnie Mae announced a revision to its loan  repurchase policy in November 2002. Under the new policy, for pools  issued on or after January 1, 2003, servicers can repurchase delinquent  loans only when no payment has been made for 3 consecutive months.  Ginnie Mae officials as well as issuers we talked with said that these new  policies appear to have curtailed repurchase activity.

	Changes in Ginnie Mae’s Share and Volume Could Have Implications for Borrowers, the Liquidity of Its Securities, and Federal Revenue

Ginnie Mae’s share of the government-backed mortgage market has been  fairly constant. If other secondary market players substantially increased  their market share of government-backed mortgages, borrowers would be  unlikely to see higher interest rates or tighter credit immediately, because  such players would need to offer products that were competitive with  Ginnie Mae’s. However, a decline in the proportion of high-quality  mortgages included in Ginnie Mae’s MBS could lower their overall credit  quality, potentially raising the cost of servicing the underlying mortgages  and thus interest rates paid by borrowers. In addition, any decline in the  volume of Ginnie Mae’s MBS could potentially reduce their liquidity,  although it is unclear whether reduced liquidity is likely to be a significant  concern in the foreseeable future. Finally, declines in Ginnie Mae’s  outstanding volume would reduce its fee revenue from its MBS programs.  Because Ginnie Mae’s program income exceeds its expenses, a drop in  income could affect its contribution to reducing the federal budget deficit.

		Ginnie Mae’s Benefits to Borrowers of Government-Backed Loans May Not Be Dependent on Its Market Share

As noted earlier, Ginnie Mae has consistently guaranteed MBS for the great  majority of FHA and VA loans, but its share of the total MBS market has  declined significantly since 1985.  Borrowers of government-backed loan  programs have benefited from the Ginnie Mae guarantee because it helps  make such loans more accessible and keep borrowers’ interest rates down.  New issuance of Ginnie Mae MBS has remained fairly constant, generally  ranging from $150 billion to $200 billion annually from 1998 to 2004. Ginnie  Mae’s share of the MBS market for government-backed loans would likely  decline only if other secondary market players such as the Federal Home  Loan Banks, Fannie Mae, Freddie Mac, state and local government entities,  and private label issuers chose to become more active in the securitization  of these loans. In such a scenario, interest rates would probably not rise or  credit tighten for borrowers because such players would need to offer  products that were competitive with Ginnie Mae’s, thus benefiting  borrowers to a similar degree. As noted earlier, however, such a scenario is  unlikely in the near future, as other secondary market participants  generally appear to have chosen not to directly compete with Ginnie Mae  because of the government guarantee.
As we have seen, Ginnie Mae’s outstanding volume of MBS has declined in  recent years because the outstanding volume of FHA and VA loans has  fallen as growing numbers of borrowers refinance in the conventional  market. However, those FHA and VA borrowers who are able to take  advantage of refinancing options are generally the most creditworthy of the  programs’ borrowers. The result has been a decline in the overall credit  quality of FHA and VA loans in recent years indicated by increased default  and foreclosure rates in government mortgage insurance and guarantee  programs. As a result, the loan quality underlying Ginnie Mae’s securities  has declined. Thus far, investors have not been directly affected by this  development because of the government guarantee.
However, the cost of servicing the government-backed loans in Ginnie  Mae’s pools could rise in such a scenario, since managing delinquencies  and the foreclosure process is the most costly component of servicing.  According to Ginnie Mae, the servicing fees issuers are allowed to charge  are sufficient to cover any significant increase in servicing costs resulting  from declines in credit quality. However, increased servicing costs could  result in smaller profits for Ginnie Mae issuers, potentially reducing  lenders’ willingness to make government-backed loans and increasing  borrowers’ interest rates. In addition, any increase in prepayment rates due  to borrower defaults could reduce the price investors are willing to pay for  Ginnie Mae MBS, which could also act to raise interest rates for borrowers.

		Changes in Ginnie Mae’s Volume Could Potentially Affect the Liquidity of Its Securities

A market is said to be liquid if the instruments it trades can be bought by  investors or sold in the markets quickly and easily with little impact on  market prices. Liquid assets have relatively lower yields and higher prices  than illiquid assets. 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. The officials said that if volume continued to  decline, liquidity could become a significant concern in the future, although  it is unknown at what levels of volume this would occur.

		Changes in Ginnie Mae’s Outstanding Volume Could Affect Its Contribution to Reducing the Federal Budget Deficit

Revenues from Ginnie Mae’s MBS guarantee programs exceed the cost of  operating them. Since fiscal year 1985, the agency has not had to borrow  from the U.S. government to finance its operations and its excess funds go  into a receipt account held as capital reserves. As shown in table 1, in fiscal  year 2004 Ginnie Mae had total revenues of $815.5 million and expenses of  $77.8 million. The excess of its revenues over expenses, net of interest  income, is invested in U.S. government securities and reduces the amount  that the Treasury must borrow from the public to finance government  programs—that is, it reduces the deficit. In fiscal year 2004, this amount  was $295 million.
Most of Ginnie Mae’s revenue comes from MBS program income, which  totaled $372.8 million in fiscal year 2004. Ginnie Mae charges issuers a  guarantee fee that is based on the aggregate principal balance of an issuer’s  outstanding MBS, and collects commitment fees for the authority to pool  mortgages into Ginnie Mae MBS.
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.  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.

	Ginnie Mae Faces a Changing Marketplace and Management Challenges

Ginnie Mae faces challenges in a number of areas. First, it must respond to  changes in the marketplace and meet the needs of its stakeholders. To meet  this challenge, the agency has expanded its product offerings and taken  other initiatives to maintain its viability. Second, Ginnie Mae must  adequately disclose loan information that MBS investors need to assess  prepayment risk. The agency has recently improved this disclosure, though  these improvements are not yet complete. Third, Ginnie Mae must work  within the limits of its commitment authority. In 1999, it instituted  procedures to ration its commitment authority when the agency faced the  possibility of reaching the limit of its authority by year’s end. To help  prevent the problem from recurring, Congress changed Ginnie Mae’s  commitment authority cycle from 1 year to 2 years and could consider  further steps. Fourth, inconsistencies and inaccuracies exist in some  aspects of Ginnie Mae’s data systems, although measures to improve these  systems are under way. Finally, given Ginnie Mae’s small staff and reliance  on contractors, the agency faces the challenge of ensuring that its capacity  to plan, manage, and oversee contractors is adequate.

		Ginnie Mae’s Activities Have Responded to a Changing Market Environment

Ginnie Mae has faced and continues to face the challenge of fulfilling its  mission of supporting government-backed loan programs in a changing  market environment. Among the significant market changes over the last  20 years have been the growing availability of private mortgage insurance  and subprime loans, rapid development of the conventional secondary  mortgage market, alterations in the volume and characteristics of  government-backed loan programs, and the proliferation of new mortgage  loan products, such as hybrid ARMs. Ginnie Mae recently completed or has  under way several initiatives that are likely to help respond to the needs of  its stakeholders in a changing marketplace, although additional efforts may  be needed in some areas. Among the steps Ginnie Mae has taken are the  following:  As part of its Business Improvement Initiative, in October 2004 Ginnie  Mae began a formal process of soliciting recommendations from  business partners and other stakeholders to improve its MBS and  Multiclass Securities programs. In March 2005, the agency publicly  released the suggestions it had received, including, among others,  changing technological processes and developing new securitization  products. Ginnie Mae officials say they are currently in the process of  evaluating the suggestions.
Ginnie Mae played a role in developing FHA’s hybrid ARM products.
Ginnie Mae and FHA officials say that they worked together to  encourage Congress to permit FHA to insure hybrid ARMs, in large part  because the agency wanted to remain competitive with conventional  markets, in which such products had become increasingly popular.  Ginnie Mae developed a securitization program, as Ginnie Mae II  securities, for these products, and in 2004 FHA began offering 3-, 5-, 7-,  and 10-year hybrid ARM products in addition to its standard 1-year ARM.
In February 2005, Ginnie Mae began guaranteeing securities backed by  RHS multifamily loans, which support affordable multifamily housing in  rural areas. RHS officials told us that this created the first consistent  secondary market for these loans and that Ginnie Mae’s involvement  would increase access to these loans and would lower borrower costs  by increasing lenders’ liquidity. The officials also noted that Ginnie Mae  had actively supported RHS by ensuring that the multifamily loan  program could be securitized as Ginnie Mae I securities.
The Ginnie Mae II Program was created to provide issuers and investors  with more flexibility in pooling different kinds of loans—such as  adjustable rate mortgages—into Ginnie Mae securities. By their nature,  Ginnie Mae II securities are less homogeneous than Ginnie Mae I  securities. As a result, they are considered less predictable and investors  demand a higher yield from these securities. In 2003, the Ginnie Mae II  product was restructured to make it more competitive. Among other  changes, the agency narrowed the spread on the note rates that could be  included in the pools, so that the loans backing the securities would be  more homogenous.  In addition, the range of servicing fees that issuers  could charge was widened to provide more flexibility. As a result, Ginnie  Mae says there is now a smaller gap in pricing between Ginnie Mae I and  Ginnie Mae II securities. But one broker-dealer we spoke with  complained that to ensure sufficient loan volume for a Ginnie Mae II  pool, issuers sometimes must include mortgages that would otherwise  qualify for a Ginnie Mae I.
In July 2004, Ginnie Mae expanded its Targeted Lending Initiative, which  was created to provide financial incentives for lenders to increase loan  volumes and raise homeownership levels in underserved areas. Under  the program, which began in 1996, Ginnie Mae reduced its guarantee fee  by up to 50 percent for approved issuers that originate or purchase  eligible loans in designated communities and place them in Ginnie Mae  pools. The expansion brought additional areas into the program,  including “colonias” along the Southwest border region and additional  Renewal Communities and Urban Enterprise Zones designated by  HUD. 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.
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. While this restriction may benefit  borrowers by limiting interest rate increases, Ginnie Mae and VA officials  said that a 1 percentage point annual cap was inadequate to attract interest  from investors who purchased such products. Further, the terms of VA’s  hybrid ARM products are no longer the same as the corresponding hybrid  ARMs offered by FHA, bifurcating the market and making securities  containing these types of loans less liquid. According to Ginnie Mae, this  lack of liquidity results in higher interest rates for veterans and  nonveterans alike. VA officials said that the capital markets and Ginnie Mae  may not have been sufficiently consulted on this adjustment during the  legislative process to ensure that provisions in the VA hybrid ARM program  were consistent with the requirements of Ginnie Mae and conventional  secondary markets.
A similar situation occurred with respect to an FHA single-family insured  ARM product. The fiscal year 2002 VA/HUD appropriations bill limited  annual interest rate adjustments on FHA’s hybrid ARMs to 1 percentage  point if the initial interest rate term was fixed for 5 years or less and  imposed a lifetime cap of 5 percentage points. These caps were intended  to assist FHA borrowers, but lenders and capital market participants  expressed concern that Ginnie Mae securities backed by these ARMs  would be unattractive to investors—and thus lenders—since equivalent  products in the conventional market typically included annual caps of 2  percent and lifetime caps of 6 percent. In response, an amendment to the  authorizing legislation, enacted in December 2003, made the annual cap  applicable only to loans having a fixed term for the first three or fewer  years—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. Ginnie Mae officials noted that  these problems could have been avoided had Congress initially consulted  more closely with capital market participants.

		Ginnie Mae Is in the Process of Expanding Disclosure on Loan Information to Help Investors Better Predict Prepayment

Investors in Ginnie Mae securities do not face credit risk, since the  mortgages underlying these securities are federally insured or guaranteed  and because Ginnie Mae guarantees timely payment of principal and  interest. However, MBS investors do face prepayment risk, because they  are purchasing cash flows that can stop when borrowers pay their loans in  full early. Mortgage loans are prepaid for several reasons, most commonly  when the house is refinanced, sold, or destroyed, or when the borrower  goes into foreclosure. Prepayment rates tend to increase in periods of  declining interest rates, when borrowers have the opportunity to lower  their interest payments by refinancing. 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.
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.  Since 1990, Ginnie Mae’s prepayment rates have been slower than those of  their conventional equivalents in the initial 18 months to 2 years after loan  origination. But after this initial period, as the loans seasoned, Ginnie Mae’s  prepayment rates have generally risen compared with conventional MBS.  Ginnie Mae securities backed by seasoned loans are currently prepaying at  a much faster rate than did similar securities during the 1990s.
Three factors in particular seem to have influenced the increase in Ginnie  Mae’s rate of prepayment—refinancings, delinquencies, and repurchases.  As explained earlier, expanded access to credit, rising home prices, and  falling interest rates have allowed more FHA and VA borrowers to  refinance into conventional loans. 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. 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.
In the past, the securities industry has also expressed concerns that  developing models to predict prepayment of Ginnie Mae MBS has been  particularly difficult because Ginnie Mae has not always provided the same  degree of detail on its loans as conventional securitizers. In written  comments to Ginnie Mae, the Bond Market Association—a trade  association representing securities dealers—said that while Ginnie Mae  had begun providing more information than ever before about the  mortgages backing its securities, there was still “significant room for  improvement.” One broker-dealer noted to us that information was  particularly lacking on hybrid ARM products in Ginnie Mae pools. A second  broker-dealer said that additional information on geography and occupancy  rates for multifamily loans would help better estimate the risk of  delinquency—and thus prepayment—of securities backing those loans.  Market participants also noted that having information on borrower credit  scores would be useful.
To address concerns about its disclosures, in January 2004 Ginnie Mae  began its MBS Disclosure Initiative, which was designed to provide  investors with additional information that would allow them to better  forecast prepayment rates. Prior to the initiative, Ginnie Mae’s disclosures  on the loans underlying its securities included such things as the weighted  average age of the loan, the number of loans in the pool, the unpaid  principal balance, and the average original loan size. With the initiative, the  agency began providing expanded disclosures—at issuance—of loan data  that it was already collecting and began disclosing new data items about  FHA and VA single-family loan pools, including original loan-to-value ratios,  loan purpose, property type, average original loan size, and year of  origination. In addition, in September 2004 Ginnie Mae began updating its  MBS disclosures every month instead of quarterly. Ginnie Mae said that in  December 2005 it would begin disclosing additional details on the reasons  for prepayments of the loans backing Ginnie Mae MBS, including the  number of loans that were paid off in full by borrowers, repurchased by  issuers because of delinquency, and liquidated due to foreclosure. Ginnie  Mae officials told us that the recent changes made disclosures on Ginnie  Mae securities comparable with those for Fannie Mae’s and Freddie Mac’s.

		Caps on Ginnie Mae’s Commitment Authority Have Created Potential Constraints

In developing its annual budget, Ginnie Mae officials told us they must  estimate the amount of the agency’s commitment authority—the limit on  the total dollar volume of securities that the agency can guarantee. The  Office of Management and Budget reviews Ginnie Mae’s commitment  authority estimates before they are finalized and included in the President’s  budget request to Congress. Ginnie Mae estimates the amount of the  commitment authority it will need for future years based on the actual  authority used by the federal guarantee programs it served in the previous  year. The agency also considers commitment authority allocations it  actually made to issuers in the previous year and includes them as part of  the estimate, adding an additional percentage to that estimate to cover  unanticipated events in the marketplace. The Secretary of HUD is required  by statute to notify Congress when Ginnie Mae has utilized 75 percent of its  commitment authority and when HUD estimates that the agency will  exhaust this authority before the end of a fiscal year. If Ginnie Mae  exhausts the limit placed on its commitment authority, it must suspend  issuance of new MBS until Congress provides additional authority. Under  these circumstances, an issuer may either have its request returned or  leave it with Ginnie Mae to be processed on a first-come, first-served basis  after additional commitment authority is restored.
In 1999, fearing it would reach the limit before the end of the year, Ginnie  Mae instituted procedures to ration its commitment authority. It  temporarily limited the approval of commitment requests to the amount  estimated to cover issuer needs for no more than a 60-day period.  According to industry participants we spoke with, this step was disruptive  to lenders and issuers and caused concern that Ginnie Mae would not have  the authority it needed to honor commitments it had already made. One  trade association told us that that this situation had resulted in some loss of  credibility for Ginnie Mae.
According to Ginnie Mae, the agency had not adequately estimated the  demand for its guarantee in 1999, in part because of unexpectedly high  levels of new construction and mortgage refinancing activity that year.  Since that time, the agency has taken steps to help ensure that it is no  longer in danger of reaching the limit of its commitment authority. Since  2002, the commitment authority Ginnie Mae has received as part of HUD’s  annual appropriations is available for 2 years. Congress annually provides  commitment authority but the authority is available for two years. This  means Ginnie Mae can use “carryover” authority from the prior year to  make current year commitments. According to agency officials, this change  from a 1- to a 2-year cycle has given Ginnie Mae more flexibility in planning  how to use its commitment authority and should reduce the need to ration  it again in the future. In addition, the actual commitment authority  available to Ginnie Mae at any given time may be above the additional  amount authorized annually, because since fiscal year 2002, the agency has  carried over unused authority from the prior year. Thus, as shown in figure  6, although Ginnie Mae’s new commitment authority limit has been $200  billion each year since fiscal year 1999, the actual authority available for  Ginnie Mae to use has been higher beginning in 2002. In fact, in fiscal year  2003, Ginnie Mae was able to meet program demands. Having the ability to  rely on unused authority carried over from prior years has meant that the  agency has not had to ration or suspend issuer commitments since 1999.  Thus, if Ginnie Mae exceeds its annual commitment limit, for a particular  year, it has the authority to do so but only to the extent of its carryover  authority. However, given uncertainty of demand in the marketplace,  carryover authority still may not be enough.
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. Some of the options discussed in that report  could be applicable to Ginnie Mae. For example, Congress could establish a  higher limit on Ginnie Mae’s commitment authority, although such a step  could increase the government’s exposure to risk. Congress could also  require Ginnie Mae to provide more frequent updates on the amount of  commitment authority it has used. This would involve little additional  administrative burden and would provide additional and timelier  information for determining whether to provide supplemental commitment  authority before the end of a fiscal year. Because both of these options  could have various implications, their specific impacts would depend on  how the changes were structured and implemented.

		Ginnie Mae Has Taken Steps to Improve Its Data Integrity, but Improvements Are Not Yet Complete

In November 2002, officials of First Beneficial Mortgage Corporation, one  of Ginnie Mae’s approved issuers, were convicted of engaging in fraudulent  pooling practices. According to information from HUD’s Office of the  Inspector General (OIG) the company used forged documents to pool loans  that were collateralized with nonexistent properties and that were not  insured or guaranteed by a federal agency, as required of Ginnie Mae  securities. 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. Most notably, the OIG found that  Ginnie Mae, its issuers, and the agencies it serves did not all use a single  common and unique case number as the primary management control for  identifying and tracking loans in the MBS pools. Instead, each entity  assigned its own tracking number, making comparisons of loan data  difficult and hindering efforts to ensure that the loans in Ginnie Mae’s pools  were federally insured or guaranteed. The OIG’s report also found that  Ginnie Mae did not have adequate controls in place to ensure the reliability  of its data—for example, it could not ensure the accuracy of its data entry  procedures, had not sufficiently verified all loans to ensure they were  federally insured or guaranteed, and did not make sure that all issuers were  in fact eligible to issue Ginnie Mae securities. As a result, Ginnie Mae  potentially could not identify ineligible loans in its pools.
Ginnie Mae has taken several measures to address many of the internal  control and data weaknesses identified in the HUD OIG’s reports. For  example, the agency has developed and implemented policies, controls,  and training designed to make data entry more accurate and is working to  better integrate its multiple data systems. Further, 99 percent of Ginnie  Mae’s portfolio is made up of loans backed by FHA and VA, and the agency  now matches the loans in its data systems against those in FHA’s and VA’s  databases. However, Ginnie Mae, FHA, and VA still do not use the same  case numbers, which would eliminate the need for time-consuming  matching. Ginnie Mae officials told us that they are analyzing aligning case  numbers as part of an ongoing Business Process Improvement Initiative.  However, such a change would be difficult because it would require  systems changes for both Ginnie Mae and its issuers.
OIG officials told us that Ginnie Mae had largely addressed the deficiencies  they had observed in the loan data and that that the OIG was generally  satisfied with the agency’s efforts to address internal control weaknesses.  However, we identified additional data integrity issues during our review.  For example, Ginnie Mae was initially unable to provide us with a  breakdown of loans in its portfolio—that is, percentages of FHA, VA, RHS,  and PIH loans. This basic data could not be provided, the agency said,  because a programming error had resulted in the underreporting of FHA  loans and the overreporting of VA loans. Ginnie Mae officials  acknowledged that their data systems should be improved and that they do  not have easy access to as much of their information as they should.

		Adequate Contract Management and Oversight Is Essential for Ginnie Mae

Ginnie Mae operates with a small staff—in fiscal year 2004, the agency had  about 66 employees—and contracts out most of its transactional and  support work. Ginnie Mae has stated that this centralized management  model is designed to allow a relatively small group of agency employees to  manage a large number of outsourced projects, improving the quality,  timeliness, and consistency of their work. In fiscal year 2004,  approximately 81 percent of Ginnie Mae’s activities were contracted out,  including key operations such as accounting and technical support, Ginnie  Mae servicing of defaulted loans, internal control reviews, preparation of  assessment rating tools, issuer compliance reviews, and information  systems management.
Concerns about Ginnie Mae’s oversight of its contractors have existed for  several years. Our 1993 review of Ginnie Mae’s staffing found that the  agency was not adequately monitoring its contractors’ activities. 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. 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. At that time, Ginnie Mae had its  own contracting officer; however, as of January 1999, Ginnie Mae began  using HUD’s contracting officer and its staff to award contracts.
Internal control issues continue to be a potential concern at Ginnie Mae, as  evidenced by losses due to fraud in the First Beneficial case, the HUD OIG’s  2003 report, and our own findings of problems with some aspects of the  agency’s management information systems. Because Ginnie Mae has a  small staff and contracts out most of its operations, appropriate contract  management and oversight are inherently key components in improving the  agency’s data systems and internal controls. Unlike the time of the 1997  OIG report, Ginnie Mae’s contracting staff are now supplemented by  assistance from HUD’s contracting staff. In addition, the agency has  initiatives under way to improve its information technology infrastructure  and to streamline its business processes, some of which involve contract  management. For example, Ginnie Mae officials told us that in 2002 the  agency created the Procurement Management Division to more stringently  oversee existing contracting and procurement procedures and to provide  additional training for staff in contract planning and development. In  addition, Ginnie Mae officials say they have built incentives into their  performance rating system to increase staff accountability for contract  planning and oversight and to provide incentives designed to foster  effective contract planning and monitoring.
Ginnie Mae’s staff of about 66 are responsible for performing inherently  governmental functions and for overseeing the contractors that perform  most of the agency’s operations. Based on a 2004 HUD resource  management study that found that Ginnie Mae had sufficient staff to  perform contract administration functions, Ginnie Mae officials told us  they believe that their staffing levels are adequate. But given its reliance  on contractors, Ginnie Mae should continue to focus on ensuring that staff  have the training, qualifications, and capabilities they need to ensure that  contracts are planned, monitored, and executed appropriately.

	Observations

Despite its declining share of the overall MBS market, Ginnie Mae  continues to serve its key public policy goal of providing a strong  secondary market outlet for federally insured and guaranteed housing  programs, helping to improve their access and affordability for low- to  moderate-income borrowers. The decline in Ginnie Mae’s share of the  overall MBS market should not necessarily be a major source of concern,  since it is largely a function of the rapid growth in the conventional MBS  market. Unlike firms in the conventional market, however, Ginnie Mae has  relatively little control over the volume of its securities, which depends on  the volume of FHA and VA loan programs. Changes in the volume and  market share of government-backed housing loans are largely the result of  policies and decisions made by Congress and the agencies themselves.  Improvements to Ginnie Mae’s product line benefit government-backed  loan programs by making them more liquid, but the impact on these  programs’ volume is relatively marginal. A further decline in Ginnie Mae’s  volume could have certain implications related to credit quality, liquidity,  and the agency’s contribution to offsetting the federal budget deficit. But  just how much Ginnie Mae’s volume could decline in the near future is  unclear, as is the magnitude of any potential effects on the market or  federal budget.
Ginnie Mae faces the challenge of adjusting its product mix and policies to  address changes in the marketplace while continuing to meet the needs of  both borrowers who rely on affordable housing programs and of industry  stakeholders such as issuers and investors. Ginnie Mae has added a  number of new products over the years, has made a serious effort to solicit  feedback from its business partners, and has expanded its disclosures for  investors. The agency has also expanded the types of loans that Ginnie Mae  securities can finance, and RHS and PIH officials have commended Ginnie  Mae’s proactive efforts to assist their loan programs. But some changes  remain beyond its scope—for instance, conditions in FHA and VA hybrid  ARM products that have limited investor interest. Closer consultation by  lawmakers with Ginnie Mae and capital market participants could help  ensure that congressionally mandated provisions of loan programs are  consistent with Ginnie Mae and conventional secondary market  requirements.
Ginnie Mae also faces the challenge of avoiding the need to ration its  commitment authority, which can cause disruption among secondary  market participants and harm Ginnie Mae’s credibility. Beginning in 2002,  Congress made the agency’s commitment authority available for 2 years  rather than 1 year to provide more flexibility, but Ginnie Mae could again  bump up against its commitment level cap in the future. Other options to  address this problem include raising Ginnie Mae’s commitment authority or  requiring the agency to notify Congress when it appears the agency may  reach its cap. Each of these measures could have various implications that  would need to be considered.
Like any agency, Ginnie Mae faces challenges in managing its internal  operations in an efficient and cost-effective manner, and in ensuring that  appropriate internal controls are in place. This may be especially  challenging for Ginnie Mae because it operates with a small staff of about  66 and contracts out most of its operations. Certain weaknesses in Ginnie  Mae’s data integrity, along with losses resulting from fraudulent activity in  the First Beneficial case, indicate the need for continued improvements in  data systems and internal controls. Ginnie Mae has taken some important  steps on these issues and has ongoing initiatives, such as its Business  Process Improvement Plan. However, given certain data integrity issues we  identified, the recency of the First Beneficial case, and that Ginnie Mae’s  business plan was only recently approved, it is too early to assess the  results of Ginnie Mae’s recent efforts. Finally, given its reliance on  contractors to carry out most of its operations, Ginnie Mae will need to pay  particular attention to ensuring that its staff have sufficient resources,  training, and qualifications to ensure that the agency’s contracts are  planned, monitored, and executed appropriately.

	Agency Comments

On behalf of HUD, Ginnie Mae provided written comments on a draft of  this report, which are reprinted in appendix II. Ginnie Mae agreed with the  report’s analysis of the challenges it faces and with the report’s findings on  initiatives Ginnie Mae has taken to address these challenges. It also agreed  with our observations related to the importance of improving Ginnie Mae’s  data systems and maintaining effective contract management. In addition,  Ginnie Mae provided us with technical comments, which we have  incorporated where appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  report date. At that time, we will send copies to the Secretary of Housing  and Urban Development. We will also make copies available to others upon  request. In addition, this report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)  512-8678 or shearw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.

Objectives, Scope and Methodology

Our report objectives were to evaluate (1) the state of Ginnie Mae’s market  share and guarantee volume, (2) the potential implications of changes in  Ginnie Mae’s market share and guarantee volume, and (3) challenges  Ginnie Mae faces in fulfilling its mission and the steps that have been or  could be taken to address these challenges.
To assess the state of Ginnie Mae’s market share and guarantee volume, we  obtained data on issued and outstanding mortgage-backed securities  (MBS) from the agency’s Integrated Pool Management System and  Portfolio Analysis Display System, which obtains its source data from  Ginnie Mae’s Mortgage-Backed Securities Information System. We tested  the reliability of these data by comparing them within the two data systems  and with data from the 2005 Mortgage Market Statistical Annual and the  Bond Market Association—sources used widely in the industry to analyze  MBS activity. We also compared loan data provided by Ginnie Mae with  data maintained by the Department of Veterans Affairs (VA), Rural Housing  Service (RHS), and the Office of Public and Indian Housing (PIH) within  the Department of Housing and Urban Development (HUD).
Our initial comparisons showed significant discrepancies between Ginnie  Mae’s source data and that of industry sources. Because Ginnie Mae’s MBS  issuance and agency loan endorsement do not occur simultaneously, a lag  exists between the date that the loan is endorsed and the date Ginnie Mae  is recorded as guaranteeing its securitization. Thus, to provide accurate  information on Ginnie Mae’s market share and volume for a given point in  time, individual loans must be matched to the Ginnie Mae MBS in which  they were pooled. When we began our review, no data for VA, RHS, or PIH  loans had been matched with their pool, and data for Federal Housing  Administration (FHA) loans had been matched only since 2001. At our  request, Ginnie Mae completed the matching of FHA data from 1998 to  2004.
Our initial comparison of the portion of Ginnie Mae’s MBS portfolio  collateralized by each loan program—that is, by FHA, VA, RHS, and PIH— showed discrepancies as well. As previously discussed, Ginnie Mae could  provide us only with estimated percentages because a programming error  in the system resulted in the underreporting of FHA loans and the  overreporting of VA loans. Because of our request, Ginnie Mae noticed the  error and corrected it, and we were able to obtain accurate data on the  percentage of loans from each program that were used to collateralize  Ginnie Mae MBS. With the corrections Ginnie Mae made, we found the data  to be reliable for our purposes.
To address all of the objectives, we spoke with and gathered relevant  documents from secondary market participants, including five Ginnie Mae- approved issuers and five dealers/institutional investors in Ginnie Mae  securities. Among other things, we discussed with them their perceptions  of Ginnie Mae and its products and their reasons for investing in or issuing  Ginnie Mae securities rather than other MBS products. The issuers were  judgmentally selected and represented more than 46 percent of the MBS  Ginnie Mae issued in 2003. Three of the issuers focused on single-family  FHA loans and the remaining two on multifamily and VA loans.  Dealers/institutional investors were also judgmentally selected; among  them were the largest broker-dealers of Ginnie Mae MBS, Real Estate  Mortgage Investment Conduits, and Platinum securities. We also  interviewed and obtained documentation from representatives of  secondary market participants that may compete with Ginnie Mae,  including Fannie Mae, Freddie Mac, the National Council for State Housing  Finance Agencies, and the Federal Home Loan Banks of Chicago and  Seattle. We also interviewed representatives of and reviewed documents  from Ginnie Mae, HUD’s FHA and PIH programs and its Office of the  Inspector General (OIG), VA, RHS, and the Federal Housing Finance Board.  In addition, we spoke with relevant trade associations, including the Bond  Market Association, National Association of Home Builders, Mortgage  Bankers Association, and National Association of Realtors. We conducted a  literature search and reviewed Ginnie Mae’s legislative history, relevant  laws, regulations, budget documents, performance, and annual reports and  guidance, and studies and reports by HUD’s OIG and others. We conducted  our work in Washington, D.C., and Boston from October 2004 through  September 2005 in accordance with generally accepted government  auditing standards.

Comments from the Department of Housing and Urban Development

GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Jason Bromberg, Assistant  Director; Heather Atkins; Daniel Blair; Christine Bonham; Diane Brooks;  Emily Chalmers; William Chatlos; Carlos Diz; Austin J. Kelly; Marc Molino;  Mitchell B. Rachlis; Paul Thompson; and Franklyn Yao made key  contributions to this report.

Summary:
Why GAO Did This Study

The Government National Mortgage Association, commonly known as Ginnie Mae, is a wholly owned government corporation that guarantees mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans. The agency supports federal housing programs by facilitating the securitization of loans backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Rural Housing Service, and the Office of Public and Indian Housing within the Department of Housing and Urban Development (HUD). Concerned that Ginnie Mae's share of the overall MBS market has declined significantly, 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.

What GAO Found

Despite its declining share of the overall MBS market, Ginnie Mae continues to serve its key public policy goal of providing a strong secondary market outlet for federally insured and guaranteed housing loans. Ginnie Mae MBS financed more than 90 percent of new FHA-insured and VA-guaranteed loans in fiscal year 2004, and the agency appears to face relatively little competition in this market. Ginnie Mae's total volume has declined in recent years, however, and its share of the overall MBS market has fallen from 42 percent of new securities in 1985 to 7 percent in 2004. This drop is largely the result of the decline in the market share of the FHA and VA loan programs and the concurrent rise in the securitization of non-government-backed mortgages. Further declines in Ginnie Mae's volume could potentially have implications for borrowers, the liquidity of its securities, and federal revenues. For example, Ginnie Mae's securities could become less liquid, although it is unclear at what levels of volume this would occur. In addition, Ginnie Mae's program revenues could decline if its volume decreased. In fiscal year 2004, program revenues exceeded expenses by $295 million, which helped reduce the federal budget deficit. Ginnie Mae faces a number of challenges in responding to changes in the marketplace, meeting stakeholders' needs, and managing its operations, and the agency has been taking steps to address these challenges. For example, it has expanded its product mix to reach more borrowers and has begun disclosing more information on loans underlying its securities to help investors better predict risk. GAO and others have identified opportunities for improvement in Ginnie Mae's data integrity and internal controls. The agency has begun addressing these issues, but it contracts out most of its operations, so ensuring that it has sufficient staff capabilities to plan, monitor, and manage its contracts is essential.