GAO

United States Government Accountability Office

Report to Congressional Requesters

November 2011 GINNIE MAE

Risk Management and 

Cost Modeling Require 

Continuing Attention

GAO-12-49
 United States Government Accountability Office 

Highlights of GAO-12-49, a report to 

congressional requesters 

November 2011 

GINNIE MAE 

Risk Management and Cost Modeling Require 

Continuing Attention 

Why GAO Did This Study 

The Government National Mortgage 

Association (Ginnie Mae) has 

increased its role in the secondary 

mortgage market significantly. Ginnie 

Mae is a wholly owned government 

corporation in the Department of 

Housing and Urban Development 

(HUD). It guarantees the timely 

payment of principal and interest of 

mortgage-backed securities (MBS) 

backed by pools of federally insured or 

guaranteed mortgage loans, such as 

Federal Housing Administration (FHA) 

loans. GAO was asked to (1) describe 

how Ginnie Mae’s volume of MBS and 

market share have changed, 

(2) assess the risks Ginnie Mae faces 

and how it manages these risks, and 

(3) determine what effect recent 

changes in Ginnie Mae’s market share 

and volume may have on financial 

exposure to the federal government, 

including mission. To address these 

objectives, GAO analyzed data on 

volume and market share and 

assessed their reliability. GAO also 

reviewed guidance and Ginnie Mae’s 

credit subsidy calculations and 

estimation model, and interviewed 

agency officials and others. 

What GAO Recommends 

Ginnie Mae should enhance the model 

it uses to forecast cash flows for the 

program by (1) assessing potential 

data sources, (2) conducting sensitivity 

analyses, and (3) assessing and 

documenting its modeling approaches 

and reasons for using management 

assumptions, among others. In written 

comments, Ginnie Mae agreed with 

GAO’s recommendation to conduct 

sensitivity analyses, but neither agreed 

nor disagreed with the other 

recommendations. 

What GAO Found 

From 2007 to 2010, the volume of Ginnie Mae-guaranteed MBS and its share of 

the secondary mortgage market increased substantially. Ginnie Mae-guaranteed 

MBS outstanding grew from $412 billion to more than $1 trillion, and market 

share grew from 5 percent to more than 25 percent. As the demand for FHA and 

other federally insured or guaranteed mortgages grew during this time, financial 

institutions increased their issuance of Ginnie Mae-guaranteed MBS to finance 

these federally insured or guaranteed loans. 

Ginnie Mae has taken steps to better manage operational and counterparty risks, 

and has several initiatives planned or underway. The agency may face 

operational risk—the risk of loss resulting from inadequate or failed internal 

processes, people, or from external events—and counterparty risk—the risk that 

issuers fail to provide investors with monthly principal and interest payments. 

GAO and others, including HUD’s Inspector General, have identified limited staff, 

substantial reliance on contractors, and the need for modernized information 

systems as operational risks that Ginnie Mae may face. For example, although 

Ginnie Mae’s market share and volume of MBS have increased in recent years, 

its staffing levels were relatively constant and actual staff levels trailed authorized 

levels. In addition, between 2005 and 2010, the agency increasingly relied on 

contractors. Ginnie Mae has identified gaps in resources and conducted risk 

assessments on its contracts but has not yet fully implemented changes based 

on these analyses. To manage its counterparty risk, Ginnie Mae has processes 

in place to oversee MBS issuers that include approval, monitoring, and 

enforcement. In response to changing market conditions and increased market 

share, Ginnie Mae revised its approval and monitoring procedures. Ginnie Mae 

also has several planned initiatives to enhance its risk-management processes 

for issuers, including its tracking and reporting systems, but these plans have not 

been fully implemented. It will be important for Ginnie Mae to complete these 

initiatives as soon as practicable to enhance its operations. 

The growth in outstanding Ginnie Mae-guaranteed MBS resulted in an increased 

financial exposure for the federal government as Ginnie Mae fulfills its mission of 

expanding affordable housing by linking capital markets to the nation’s housing 

markets. Nonetheless, Ginnie Mae’s revenues have exceeded its costs and it 

has accumulated a capital reserve of about $14.6 billion. However, GAO found 

that in developing inputs and procedures for the model used to forecast costs 

and revenues, the agency did not consider certain practices identified in Federal 

Accounting Standards Advisory Board (FASAB) guidance for preparing cost 

estimates of federal credit programs. Ginnie Mae has not developed estimates 

based on the best available data, performed sensitivity analyses to determine 

which assumptions have the greatest impact on the model, or documented why it 

used management assumptions rather than available data. By not fully 

implementing certain practices identified in FASAB guidance that GAO believes 

represent sound internal controls for models, Ginnie Mae’s model may not use 

critical data which could affect the agency’s ability to provide well-informed 

budgetary cost estimates and financial statements. This may limit Ginnie Mae’s 

ability to accurately report to the Congress the extent to which its programs 

represent a financial exposure to the government. 

View GAO-12-49 or key components. 

For more information, contact Mathew J. Scirè 

at (202) 512-8678 or sciremj@gao.gov. 
Page i GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Letter 1 

Background 4

Ginnie Mae’s Market Share and MBS Volume Increased 

Substantially from 2007 to 2010 9

Ginnie Mae Has Been Taking Steps to Better Manage Risks 16

Although Ginnie Mae Continues to Fulfill Its Mission, Its Model for 

Estimating Costs and Revenues Could Be Improved 42

Conclusions 51

Recommendations for Executive Action 53

Agency Comments and Our Evaluation 54

Appendix I Scope and Methodology 56 

Appendix II Ginnie Mae’s Planned and Proposed Changes to Address 

Operational and Counterparty Risk 61 

Appendix III Comments from Ginnie Mae 62 

Appendix IV GAO Contact and Staff Acknowledgments 64

Tables 

Table 1: Number of Ginnie Mae Requested, Authorized, and Actual 

FTEs, Fiscal Years 2005–2010 18

Table 2: Description of Select Contracted Functions at Ginnie Mae 

and Total Obligated Amounts, Fiscal Years 2005–2010 25

Table 3: Planned and Proposed Changes to Address Operational 

and Counterparty Risk, as of September 30, 2011 61

Figures 

Figure 1: Securitization of Federally Insured or Guaranteed 

Mortgages into Ginnie Mae-Guaranteed MBS 5

Figure 2: Volume of MBS Issuance by Type, Calendar Years 

2000−2010 10

Contents 
Page ii GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 3: Number and Types of Institutions Issuing Ginnie MaeGuaranteed MBS, Fiscal Years 2005–2010 and Share of 

Outstanding MBS by Issuer Type, as of June 30, 2011 11

Figure 4: Ginnie Mae Guarantees of New MBS and Cumulative 

Guaranteed MBS Outstanding, Fiscal Years 2005–2010 12

Figure 5: Federally Insured and Guaranteed Mortgages Pooled into 

New Ginnie Mae-Guaranteed MBS, by Agency, Fiscal 

Years 2005–2010 13

Figure 6: Ginnie Mae Guarantees of New MBS Backed by 

Multifamily Loans and Reverse Mortgages, Fiscal Years 

2005–2010, and Types of Mortgages Backing New Ginnie 

Mae-Guaranteed MBS, Fiscal Year 2010 14

Figure 7: Volume of Ginnie Mae Structured Products Backed by 

Ginnie Mae-Guaranteed MBS, Fiscal Years 2005–2010 16

Figure 8: Ginnie Mae’s 2011 Proposal for Reorganization 22

Figure 9: Amount of Ginnie Mae Contract Dollars Obligated, Fiscal 

Year 2005−2010 23

Figure 10: Number of New Issuer Applications and Approvals, 

Fiscal Years 2005−2010 33

Figure 11: Number of Issuer Reviews and Findings, Fiscal Years 

2005–2010 39

Figure 12: Number of Notices of Intent to Default, Fiscal Years 

2005–2010 41

Figure 13: Information on Ginnie Mae Issuer Defaults, Fiscal Years 

2005–2010 44
Page iii GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Abbreviations 

CAR Contract Assessment Review 

FASAB Federal Accounting Standards Advisory Board 

FHA Federal Housing Administration 

FTE full-time equivalent 

Ginnie Mae Government National Mortgage Association 

HUD Department of Housing and Urban Development 

MBS mortgage-backed securities 

OIG Office of the Inspector General 

OMB Office of Management and Budget 

PIH Public and Indian Housing 

REAP Resource Estimation and Allocation Process 

RHS Rural Housing Service 

VA Department of Veterans Affairs 

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Page 1 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

United States Government Accountability Office

Washington, DC 20548 

November 14, 2011 

The Honorable Shelley Moore Capito 

Chairwoman 

Subcommittee on Financial Institutions 

 and Consumer Credit 

Committee on Financial Services 

House of Representatives 

The Honorable Judy Biggert 

Chairwoman 

Subcommittee on Insurance, Housing 

 and Community Opportunity 

Committee on Financial Services 

House of Representatives 

In fiscal year 2010, the Government National Mortgage Association 

(Ginnie Mae) supported more than $1 trillion in outstanding federally 

insured or guaranteed mortgages by increasing liquidity in the secondary 

mortgage market.1

 A wholly owned government corporation, Ginnie Mae 

guarantees the timely payment of principal and interest on securities 

issued by financial institutions and backed by pools of federally insured or 

guaranteed mortgage loans. Ginnie Mae defines its mission as expanding 

affordable housing by linking capital markets to the nation’s housing 

markets. Ginnie Mae relies on approved issuers to issue and service their 

mortgage-backed securities (MBS), and on agencies, such as the Federal 

Housing Administration (FHA) and the Department of Veterans Affairs 

(VA), to guarantee the underlying mortgages against borrower default. 

The economic crisis and housing downturn of the past 3 years has had a 

significant effect on Ginnie Mae. As the conventional mortgage market 

tightened and the subprime market contracted, borrowers increasingly 

turned to federally insured or guaranteed mortgage loan programs, such 

as those offered by FHA and VA, to finance their homes. As a result, 

Ginnie Mae’s total outstanding MBS volume and market share increased 

 

1

Unless otherwise stated, the years shown in this report are fiscal years. “More than $1 

trillion” refers to the remaining principal balance on federally insured or guaranteed 

mortgages. The secondary market is where the originators of mortgage loans sell them to 

investors and the loans are packaged into securities. 

 
 

Page 2 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

substantially. Specifically, the volume of new Ginnie Mae-guaranteed 

MBS (backed by single-family mortgages), which comprised the majority 

of Ginnie Mae-guaranteed MBS, increased from $83.4 billion in 2005 to 

$388.9 billion in 2010. In addition, during this time frame, Ginnie Mae 

defaulted a large issuer—Taylor, Bean & Whitaker Mortgage 

Corporation—due to issues with its financial statements (such as their 

timeliness) and the withdrawal by FHA of its mortgagee status, which 

resulted in Ginnie Mae acquiring and servicing a $26 billion loan 

portfolio.2

Concerned about the rapid increase in Ginnie Mae’s share of the overall 

MBS market and potential risks Ginnie Mae faces, you asked us to 

examine Ginnie Mae’s capacity to manage this growth. The objectives of 

this report are to (1) describe how Ginnie Mae’s market share and volume 

have changed in recent years; (2) assess Ginnie Mae’s risks and how 

these risks are managed; and (3) determine what effect recent changes in 

Ginnie Mae’s market share and volume may have on financial exposure 

to the federal government, including its ability to meet its mission. 

To address these objectives, we collected and analyzed data on Ginnie 

Mae’s market share and volume. We used data from Ginnie Mae for 

2005–2011 (third quarter) and from Inside Mortgage Finance for calendar 

years 2005–2010.3

 We assessed the reliability of these data by 

performing electronic testing, reviewing existing information about the 

data and systems that produced them, and interviewing agency officials 

knowledgeable about the data. We determined that the data were 

sufficiently reliable for the purposes of this report. We also interviewed 

officials from the Department of Housing and Urban Development 

 

2

In August 2009, Ginnie Mae defaulted Taylor, Bean & Whitaker Mortgage Corporation for 

failing to provide audited financial information in a timely manner and violating Ginnie 

Mae’s program requirements for issuers. Ginnie Mae’s MBS guide specifies 11 events that 

might result in an issuer being defaulted. For example, an issuer can be defaulted for 

failing to remit principal and interest payments to investors, actual or impending 

insolvency, submitting a false report, or failing to submit a report. In addition, Ginnie Mae 

can default an issuer if its status as an FHA lender is not maintained. More specifically, 

FHA requires that all lenders must be approved by FHA and must maintain this status in 

order to provide loans with FHA insurance. In August 2009, the Taylor, Bean & Whitaker 

Mortgage Corporation filed for bankruptcy, and in 2011 executives were found guilty of 

fraudulently representing the firm’s assets to multiple federal agencies. 

3

Inside Mortgage Finance is a firm that collects data on the primary and secondary 

mortgage markets.
 

Page 3 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

(HUD)—more specifically from Ginnie Mae, FHA, Office of the Inspector 

General (OIG), and Public and Indian Housing (PIH); the Department of 

Agriculture’s Rural Housing Service (RHS); VA; Fannie Mae and Freddie 

Mac (government-sponsored enterprises); the Federal Housing Finance 

Agency; and the Mortgage Bankers Association. 

After assessing Ginnie Mae’s risks, we identified operational and 

counterparty risk as the key risks facing Ginnie Mae.4

 For operational risk, 

we focused on risks present in the agency’s management of human 

capital, contracting, and information technology. We assessed Ginnie 

Mae’s staffing and organizational realignment plans; reviewed Ginnie 

Mae’s guidance and other HUD and federal contracting standards; and 

analyzed Ginnie Mae’s list of contracts, dollar values of contracts, and 

range of services. We also reviewed a nonprobability sample of contracts 

and contract assessment reviews to gain an understanding of the types of 

functions contractors perform and how these contractors were monitored. 

The sample of contracts was selected based on the function of the 

contract or Ginnie Mae identified the activities as key business functions 

that could result in operational risk if problems occurred with the contract. 

In addition, we reviewed documentation related to Ginnie Mae’s initiative 

to improve its information technology. For counterparty risk, we assessed 

Ginnie Mae’s MBS policies and guidance, including Ginnie Mae 

processes for issuer approval, issuer monitoring, and enforcement.5

 We 

interviewed Ginnie Mae officials and contractors on how issuers are 

approved and monitored and the changes made to these processes in 

recent years. 

To determine how recent changes in Ginnie Mae’s market share and 

volume might affect financial exposure to the federal government and the 

agency’s ability to meet its mission, we reviewed Ginnie Mae’s guidance 

and financial statements and reviewed Ginnie Mae’s credit subsidy 

 

4

Operational risk is the risk of loss resulting from inadequate or failed internal processes, 

people, and systems, or from external events. Ginnie Mae faces counterparty risk when 

an issuer fails or defaults, which would require the agency to ensure that investors receive 

monthly principal and interest payments and service the underlying loans. 

5

Our review focused on existing policy and procedures to mitigate risk of Ginnie Maeguaranteed MBS. Therefore, we did not perform an in-depth review of risk-management 

practices for Ginnie Mae’s structured products, which include Ginnie Mae MBS products 

that direct principal and interest payments from underlying MBS to classes, or tranches, 

with different principal balances, terms of maturity, interest rates, and other 

characteristics. 
 

Page 4 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

calculations and policy and financial model to determine what information 

was included and if the model followed sound internal control practices for 

cost estimation of federal credit programs. We reviewed Ginnie Mae’s 

statutes, Office of Management and Budget (OMB) budget documents, 

and the Federal Credit Reform Act of 1990 (FCRA). Finally, we 

interviewed officials from Ginnie Mae and its contractor that conducts 

modeling, OMB, and FHA. For a detailed description of our scope and 

methodology, see appendix I. 

We conducted this performance audit from September 2010 to November 

2011 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Ginnie Mae operates as a unit of HUD and its administrative, staffing, and 

budgetary decisions are coordinated with HUD.6

 Ginnie Mae is organized 

into five offices and relies on contractors for many aspects of its work. 

Contracted functions include certifying new MBS, administering payments 

to investors, data collection from issuers and risk analysis, Ginnie Mae 

servicing of defaulted loans, internal control reviews, issuer compliance 

reviews, and information systems management. Ginnie Mae staff 

responsibilities include policy and management functions and oversight of 

contractors. We discuss Ginnie Mae’s organization, staffing, and budget 

in greater detail later in this report. 

Ginnie Mae guarantees the performance of MBS, which are obligations of 

the issuers that are backed by mortgages insured or guaranteed by 

federal agencies, such as FHA, PIH, VA, or RHS.7

 Ginnie Mae provides 

 

6

Ginnie Mae was created in 1968 with the passage of the Housing and Urban 

Development of 1968, Pub. L. No. 90-448, see 12 U.S.C. §§ 1716-1723i. Ginnie Mae is 

authorized to guarantee the timely payment for securities of pools of federally backed 

mortgages. 12 U.S.C. § 1721(g). 

7

FHA’s single-family and multifamily mortgage insurance programs and PIH’s Loan 

Guarantee for Indian Housing program guarantee 100 percent of the mortgage. VA 

generally guarantees 25 percent of the mortgage amount, but can guarantee up to 50 

percent of the mortgage amount for smaller loans; and RHS guarantees up to 90 percent 

of the mortgage. 

Background 
 

Page 5 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

an explicit federal guarantee (full faith and credit of the United States) on 

these MBS, but it does not issue the MBS or originate the underlying 

mortgages. Rather, it relies on approved financial institutions (issuers) to 

pool or securitize the eligible mortgages and issue Ginnie Maeguaranteed MBS. The issuers can service the MBS themselves or hire a 

third party to transmit the monthly principal and interest payments to 

investors. Ginnie Mae’s explicit guarantee can lower the cost of borrowing 

for issuers, which allows them to offer lower interest rates to mortgage 

borrowers. Issuers can obtain these mortgages by originating the loans or 

purchasing the loans from another institution. See figure 1 for an overview 

of Ginnie Mae securitization. 

Figure 1: Securitization of Federally Insured or Guaranteed Mortgages into Ginnie 

Mae-Guaranteed MBS 

Ginnie Mae’s guarantee is limited to the risk that issuers cannot make the 

required monthly principal and interest payments to investors. While other 

federal agencies already insure or guarantee the mortgages that back 
 

Page 6 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Ginnie Mae-guaranteed MBS, the private-sector issuers of these MBS are 

responsible for ensuring that investors that purchase these MBS receive 

monthly payments on time and in full, even if the borrower makes a late 

payment or defaults. Ginnie Mae issuers are responsible for making these 

advance payments to investors using their own funds and for recovering 

any losses from the federal agencies that insured or guaranteed the 

mortgages. If an issuer cannot ensure the timely payment of principal and 

interest to investors, Ginnie Mae defaults the issuer, acquires the servicing 

of the loans, and uses its own funds to manage the portfolio and make any 

necessary advances to investors. Ginnie Mae charges issuers a monthly 

guarantee fee, which varies depending on the product, for guaranteeing 

timely payment.8

 Issuers also pay a commitment fee to Ginnie Mae each 

time they request authority (commitment authority) to pool mortgages into 

Ginnie Mae-guaranteed MBS.9

Investors in Ginnie Mae-guaranteed MBS face the risk that a mortgage 

will be removed from the MBS pool prematurely—either due to borrower 

default or prepayment of a loan—which reduces the amount of interest 

earned on the security.10 However, investors do not face credit risk—the 

possibility of loss from unpaid mortgages—because Ginnie Mae 

guarantees timely payment of principal and interest. 

Ginnie Mae has several different products. Its original MBS program, 

Ginnie Mae I, requires that all pools contain similar types of mortgages 

(such as single-family or multifamily) with similar maturities and the same 

interest rates. The Ginnie Mae II MBS program, which was introduced in 

1983, permits pools to contain loans with differing characteristics. For 

example, the underlying mortgages can have varying interest rates and a 

 

8

Issuers of Ginnie Mae-guaranteed MBS backed by single-family mortgages pay Ginnie 

Mae a guarantee fee of 0.06 percent of the remaining principal balance of their MBS. 

However, Ginnie Mae provides discounts ranging from 0.01 to 0.03 percent on its 

guarantee for issuers that are pooling single-family mortgages in traditionally underserved 

areas of the country. Issuers of Ginnie Mae-guaranteed MBS backed by multifamily 

mortgages pay a guarantee fee of 0.13 percent. In 2010, Ginnie Mae guarantee fees were 

$567.8 million. 

9

The commitment fee is based on the size of commitment authority request—$500 for the 

first $1.5 million and $200 for each additional $1 million (or part thereof) in commitment 

authority. In 2010, Ginnie Mae collected $83.7 million in commitment fee revenue. 

10Prepayment occurs when a borrower pays off the mortgage before it matures, which 

generally occurs because the home was sold or the mortgage was refinanced into a new 

loan. 
 

Page 7 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

pool can be created using adjustable-rate mortgages. Ginnie Mae’s 

Multiclass Securities Program, introduced in 1994, offers different types of 

structured products, including Real Estate Mortgage Investment Conduits 

(REMIC) and Ginnie Mae Platinum Securities. REMICs tailor the 

prepayment and interest rate risks associated with MBS to investors with 

varying investment goals. These products direct principal and interest 

payments from underlying MBS to classes, or tranches, with different 

principal balances, terms of maturity, interest rates, and other 

characteristics. Platinum Securities allow investors to aggregate MBS 

with relatively small remaining principal balances and similar 

characteristics into new, more liquid securities. The MBS aggregated into 

these structured products retain Ginnie Mae’s full faith and credit 

guarantee. In addition, Ginnie Mae guarantees the timely payment of 

principal and interest on the structured products and charges an 

additional fee to the financial institutions that create them.11 Ginnie Mae 

also requires that these institutions contractually agree to reimburse any 

costs Ginnie Mae may incur to guarantee these products. 

Ginnie Mae defines its mission as expanding affordable housing by 

linking capital markets to the nation’s housing markets. Ginnie Mae does 

this by serving as the dominant secondary market vehicle for 

government-insured or -guaranteed mortgage loan programs. Ginnie 

Mae’s guarantee benefits lenders, borrowers, and investors in a number 

of ways. First, the guarantee benefits lenders by increasing the liquidity of 

mortgage loans, which may lower the cost of raising funds and allow 

lenders to transfer the interest-rate risk of a mortgage to investors.12

Second, the guarantee benefits borrowers by lowering the cost of raising 

funds for lenders, which helps lower interest rates on mortgage loans. 

Finally, Ginnie Mae’s guarantee provides investors with a fixed-income 

security that has the same credit quality as a U.S. Treasury bond. 

 

11The fee for three of the structured products REMICs, Platinum Securities, and Callable 

Trusts—is 7.5 basis points for the first $100 million and 2.5 basis points for amounts of 

more than $100 million. Callable Trusts allow investors the flexibility to redeem or call a 

security prior to its maturity date under certain conditions. In addition to these structured 

products, Ginnie Mae offers stripped MBS, which allow approved financial institutions to 

separate and redirect the principal and interest portions of Ginnie Mae-guaranteed MBS. 

The fee for stripped MBS is 3.125 basis points. In 2010, Ginnie Mae collected $63.4 

million in fees on structured products. 

12Interest-rate risk is the risk that an increase in interest rates will reduce the value of a 

fixed-rate loan. 
 

Page 8 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Ginnie Mae relies on its fee revenues rather than appropriations from the 

general fund to pay for its operations and cover costs related to issuer 

defaults.13 However, the amount of MBS Ginnie Mae can guarantee each 

year is capped by its commitment authority level in HUD’s appropriation. 

For 2010 and 2011, Ginnie Mae was authorized each year to guarantee 

up to $500 billion in MBS.14

Ginnie Mae guarantees the timely payment of principal and interest on 

MBS. For budgetary purposes, Ginnie Mae and other federal agencies 

estimate the net lifetime costs (credit subsidy costs) of their guarantee 

program and include the costs to the federal government in their annual 

budgets. For Ginnie Mae, credit subsidy costs represent the net present 

value of expected cash flows over the life of the securities it guarantees, 

excluding administrative costs. Cash inflows consist primarily of 

guarantee fees charged to MBS issuers and cash outflows includes 

advance payments of principal and interest on delinquent mortgages 

underlying MBS from defaulted issuers. When estimated cash inflows 

exceed expected cash outflows, a program is said to have a negative 

credit subsidy rate. When the opposite happens, a program is said to 

have a positive credit subsidy rate, and therefore require appropriations to 

cover the estimated subsidy cost of new business. Historically, Ginnie 

Mae has estimated that its guarantee program would have a negative 

credit subsidy rate and, as a result, generate budgetary receipts for the 

federal government. These receipts have resulted in substantial balances 

in a reserve account, which is used to help cover unanticipated increases 

in those costs—for example, increases due to higher-than-expected 

issuer defaults or fraud. 

 

13Funding for Ginnie Mae staff is subject to annual appropriations, but Ginnie Mae has 

permanent and indefinite authority to pay for contractors from fee revenues. 

14HUD’s appropriation provides for annual caps on Ginnie Mae’s commitment authority—

the limit on the dollar volume of new securities that the agency can guarantee. Since 

2002, the annual commitment authority Ginnie Mae received has been available for 2 

years. That is, Ginnie Mae can use “carry-over” authority from the prior year to make 

current year commitments. In the 2012 proposed budget, the administration proposed a 

cap of $500 billion in MBS guarantees. 
 

Page 9 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

According to Inside Mortgage Finance data, from calendar year 2007 to 

2010 Ginnie Mae’s share of the MBS market increased from nearly 5 

percent to 25 percent as the total size of the secondary mortgage market 

declined and the role of private-label MBS issuers declined substantially. 

The size of the MBS market decreased from $2.16 trillion in new MBS in 

calendar year 2005 to $1.57 trillion in calendar year 2010, a decline of 

nearly one-third (see fig. 2).15 The overall market decline was driven by 

the housing downturn and increased defaults and foreclosures. This led 

to mortgage lenders tightening their underwriting standards and making 

fewer loans. Also, private-label MBS issuers faced a sharp decline in 

eligible loans and investor demand. As the demand for FHA and other 

federally insured or guaranteed mortgages grew during this time, financial 

institutions increased their issuance of Ginnie Mae-guaranteed MBS to 

finance these federally insured or guaranteed loans.16

 

15Inside Mortgage Finance data are calendar year. 

16The demand for FHA-insured mortgages may have increased in February 2008 after 

changes were made to FHA loan limits as a result of the Economic Stimulus Act of 2008 

(from approximately $360,000 to $730,000 in high-cost areas of the country). 

Ginnie Mae’s Market 

Share and MBS 

Volume Increased 

Substantially from 

2007 to 2010 

In 2010, Ginnie MaeGuaranteed MBS 

Represented 25 Percent of 

the Market 
 

Page 10 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 2: Volume of MBS Issuance by Type, Calendar Years 2000−2010 

Note: Government-sponsored enterprise refers to Fannie Mae and Freddie Mac. 

As Ginnie Mae’s market share increased, the number of Ginnie Mae 

issuers generally stayed the same although their numbers declined from 

2007 to 2008 and increased in 2009 and 2010 (see fig. 3). Moreover, for 

the three quarters of 2011, 371 financial institutions participated in the 

Ginnie Mae-guaranteed MBS program. While most were mortgage banks, 

the issuers with the largest Ginnie Mae-guaranteed MBS portfolios were 

commercial banks. As of June 30, 2011, three commercial banks 

accounted for nearly two-thirds of the dollar amount of outstanding Ginnie 

Mae-guaranteed MBS. According to Ginnie Mae data, concentration 

among issuers generally has remained the same. More specifically, in 

2005, 20 issuers accounted for 92 percent of Ginnie Mae single-family 

MBS issuance; in 2010, 26 issuers accounted for 94 percent of singlefamily MBS. 
 

Page 11 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 3: Number and Types of Institutions Issuing Ginnie Mae-Guaranteed MBS, Fiscal Years 2005–2010 and Share of 

Outstanding MBS by Issuer Type, as of June 30, 2011 

Note: Shares of outstanding MBS do not add to 100 percent due to rounding. 

According to Ginnie Mae data, as Ginnie Mae’s share of the secondary 

mortgage market increased, the volume of Ginnie Mae-guaranteed MBS 

outstanding increased from $412 billion in 2005 to more than $1 trillion in 

2010 (see fig. 4). Concurrently, new guarantees of Ginnie Maeguaranteed MBS increased from about $89.3 billion to nearly $413 

Ginnie Mae-Guaranteed 

MBS Volume Increased to 

More than $1 Trillion 
 

Page 12 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

billion.17 To accommodate the securitization of an increasing volume of 

federally insured and guaranteed mortgages, Congress increased the 

statutory cap on Ginnie Mae’s commitment authority from $200 billion to 

$500 billion over the same period. 

Figure 4: Ginnie Mae Guarantees of New MBS and Cumulative Guaranteed MBS 

Outstanding, Fiscal Years 2005–2010 

The increases in annual volume were due to increases in the volume of 

mortgages insured by FHA or guaranteed by VA, PIH, or RHS that were 

pooled into Ginnie Mae-guaranteed MBS (see fig. 5). Of the agencies, 

FHA accounted for most of the increases in annual volume. FHA-insured 

loans pooled into Ginnie Mae-guaranteed MBS increased from $63.8 

billion in 2005 to $330.2 billion in 2010—and more recently, to $182 billion 

 

17Ginnie Mae MBS include Ginnie Mae I and Ginnie Mae II, which differ in terms of eligible 

loans, collateral, number of issuers participating, pool sizes, servicing fee structure, and 

payment schedule to investors. 
 

Page 13 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

during the first three quarters of 2011. Furthermore, in 2010, nearly all 

single-family mortgages insured by FHA or guaranteed by VA were 

pooled into Ginnie Mae-guaranteed MBS. 

Figure 5: Federally Insured and Guaranteed Mortgages Pooled into New Ginnie 

Mae-Guaranteed MBS, by Agency, Fiscal Years 2005–2010 

Note: Due to their relatively small volume, the figure does not include PIH mortgages, which accounted 

for nearly $40 million of Ginnie Mae-guaranteed MBS volume in 2005 and $516 million in 2010. 

In addition to issuing guaranteed MBS from loans for single-family homes, 

Ginnie Mae issuers increasingly produced MBS backed by other 

mortgage products, such as multifamily loans and reverse mortgages on 
 

Page 14 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

single-family homes (see fig. 6).18 More specifically, the volume of reverse 

mortgages backing Ginnie Mae-guaranteed MBS increased significantly 

starting in 2009 when Ginnie Mae instituted its reverse mortgage 

securities program, which was the main securitization program available 

for FHA reverse mortgage loans during this time. During the first three 

quarters of 2011, financial institutions issued more than $8 billion in 

Ginnie Mae-guaranteed MBS backed by reverse mortgages. 

Figure 6: Ginnie Mae Guarantees of New MBS Backed by Multifamily Loans and Reverse Mortgages, Fiscal Years 2005–2010, 

and Types of Mortgages Backing New Ginnie Mae-Guaranteed MBS, Fiscal Year 2010 

Note: Multifamily loans include loans for construction and purchase. Single-family mortgages include 

loans on manufactured homes but do not include reverse mortgages. 

 

18Multifamily loans finance the purchase, and in some cases, the construction of 

apartment buildings, hospitals, nursing homes, and assisted-living facilities. Home Equity 

Conversion Mortgages are FHA-insured reverse mortgages available to persons 62 years 

or older that allow the homeowner to convert equity in their home to income. 
 

Page 15 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

The volume of structured products backed by Ginnie Mae-guaranteed 

MBS increased as the total volume of MBS has increased since 2005. For 

instance, the volume of REMICs issued by financial institutions approved 

to issue Ginnie Mae structured products increased in 2009 and 2010 (see 

fig. 7).19 During the first three quarters of 2011, financial institutions 

issued $102 billion in REMICs, $27 billion in Platinum Securities, and 

$670 million in Callable Trusts. Ginnie Mae’s fee revenues also increased 

from these products, from $20.7 million in 2005 to $63.4 million in 2010. 

As of June 30, 2011, Ginnie Mae had received $45.2 million in fee 

revenues from structured products for 2011. Fees from these products 

represent a small but growing share of annual revenue for Ginnie Mae 

(from 2.6 percent in 2005 to 6.3 percent in 2010). 

 

19The financial institutions that issue structured products are subject to a different 

approval and recertification process than issuers of MBS. In some cases, issuers of 

structured products also may be issuers of MBS. Although Ginnie Mae also offers another 

structured product (stripped MBS), the agency did not guarantee any in 2005–2010. 
 

Page 16 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 7: Volume of Ginnie Mae Structured Products Backed by Ginnie Mae-Guaranteed MBS, Fiscal Years 2005–2010 

Operational risk is the risk of loss resulting from inadequate or failed 

internal processes, people, and systems or from external events. We and 

others, including HUD’s OIG, have identified limited staff, substantial 

reliance on contractors, and the need for modernized information systems 

as operational risks that Ginnie Mae may face.20 Ginnie Mae also faces 

counterparty risk when an issuer fails or defaults, which would require the 

agency to service the underlying loans and ensure that investors receive 

 

20GAO, Housing Finance: Ginnie Mae Is Meeting Its Mission but Faces Challenges in a 

Changing Marketplace, GAO-06-9 (Washington, D.C.: Oct. 31, 2005) and Government 

National Mortgage Association: Greater Staffing Flexibility Needed to Improve 

Management, GAO/RCED-93-100 (Washington, D.C.: June 30, 1993). HUD, Office of the 

Inspector General, Fiscal Year 2009 Government National Mortgage Association Financial 

Statement Audit Management Letter (Washington, D.C., Nov. 3, 2009). 

Ginnie Mae Has Been 

Taking Steps to Better 

Manage Risks 
 

Page 17 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

monthly principal and interest payments. Ginnie Mae has taken a number 

of steps to address both types of risks. A complete listing of Ginnie Mae’s 

planned changes to address operational and counterparty risk can be 

found in appendix II. 

To help mitigate operational risk, Ginnie Mae has developed strategies to 

address staffing gaps, realigned its organizational structure, conducted 

risk assessments on its contracting, and started to improve outdated 

information systems. 

Although Ginnie Mae’s market share and volume of MBS has increased 

in recent years, its (noncontractor) staff levels have been relatively 

constant during this time despite requests for increased staffing 

authority.21 For example, in 2004, when Ginnie Mae’s MBS market share 

was 7 percent, HUD conducted a Resource Estimation and Allocation 

Process (REAP) study, which suggested that Ginnie Mae’s staff be 

increased from 70 to 76 full-time equivalent (FTE) positions. However, 

Ginnie Mae officials told us that its authorized staff levels were not 

increased to the levels suggested in the REAP study until 2010 when the 

agency was given authority for 78 FTEs.22 Between 2005 and 2009, 

Ginnie Mae’s authorized staff level fluctuated between 67 and 72.2 

FTEs.23 Moreover, its actual staff levels trailed its authorized staff levels. 

Table 1 illustrates the number of requested, authorized, and actual FTEs 

from 2005 to 2010. 

 

21We reported previously on Ginnie Mae’s staff resources and found that in 1991 Ginnie 

Mae had 69 employees and little flexibility in determining how to use its resources due to 

staff ceilings imposed by HUD and OMB. In 1991, Ginnie Mae’s staff level was about the 

same as it has been in recent years. In 2009, Ginnie Mae had a staff level of about 72 fulltime equivalents. 

22HUD uses REAP in estimating, justifying, and allocating its staffing resources. REAP is 

used for budget formulation and execution, strategic planning, organizational and 

management analyses, and ongoing management of staff resources. The number of FTEs 

are determined by using workload data analysis and observations gathered from staff 

members and management. 

23Ginnie Mae submits requests for authorization for additional funding to increase staffing 

levels to HUD. 

Ginnie Mae Has Taken 

Steps to Address 

Operational Risks 

Addressing Staffing Gaps 
 

Page 18 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Table 1: Number of Ginnie Mae Requested, Authorized, and Actual FTEs, Fiscal 

Years 2005–2010 

Fiscal yeara Requested 

FTEsb Authorized 

FTEs

Actual FTEs 

employed at the 

beginning of the 

fiscal year

Actual FTEs 

employed at 

the end of the 

fiscal year

2005 76 67 66 65

2006 76 69 65 66

2007 69 67.3 66 64

2008 73 69 64 61

2009 78 72.2 61 59

2010 90 78 59 70

Source: Ginnie Mae. 

a

In 2008, funding was not provided to support the authorized FTE ceiling because, according to 

Ginnie Mae officials, HUD reported an incorrect figure to Congress for the amount needed to fund 

salaries at the authorized level. In 2009, funding was not available until the second half of the year 

due to a continuing resolution in place for the 2009 budget. 

b

Requested FTEs is the number of FTEs Ginnie Mae submits to HUD. However, the number HUD 

presents to OMB may not reflect Ginnie Mae’s original request. 

Most recently, Ginnie Mae’s internal control reviews for 2009 and 2010 

identified a control deficiency due to employee vacancies.24 In 2009, the 

report found multiple vacancies in certain positions relevant to internal 

controls, such as an internal control manager and monitoring analysts. 

The report also found that the vacancies caused employee workloads to 

increase, which could lead to negative performance. In 2010, the report 

stated that while key senior-level positions had been filled, vacancies had 

brought actual FTE levels below the level recommended in the 2004 

REAP study, mainly in the Office of Mortgage-Backed Securities. In 2011, 

the reviews had no findings related to employee vacancies. 

As part of a broad effort to address and mitigate its operational risks 

related to staffing levels, Ginnie Mae has incorporated some principles 

consistent with our internal control and management tool.25 Internal 

 

24Ginnie Mae uses a contractor to conduct internal control reviews to document, test, 

assess, and report on internal controls over financial reporting, as required by OMB 

Circular A-123. A control deficiency is a less serious finding that identifies an internal 

control that might not be designed to prevent or detect and correct issues. 

25GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001) and Human Capital: Key Principles for Effective Strategic Workforce 

Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). 
 

Page 19 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

control and human capital guidance states that agencies should develop 

strategies that are tailored to address gaps in the number and 

deployment of staff, evaluate their organizational structure, and make 

changes based on changing conditions. Consistent with this guidance, 

Ginnie Mae has identified skill gaps in staff resources, developed a plan 

to hire additional staff, and made changes to its organizational structure. 

In 2010, Ginnie Mae officials presented HUD senior management with a 

staffing justification that identified skill gaps in its current staffing. Ginnie 

Mae officials reported needing 160 staff to develop or enhance policies, 

procedures, and related systems to properly manage risks and bring 

some contracted services in-house, such as project management. The 

staffing justification stated that Ginnie Mae did not have sufficient or 

dedicated staff to mitigate certain risks internally. To identify these gaps in 

staffing, Ginnie Mae created a matrix that identified certain roles that were 

not fully staffed. For example, the matrix identified that Ginnie Mae 

needed: 

 dedicated staff to design, develop, and leverage risk-related analytic 

tools to reduce dependency on recommendations of contractors to 

manage Ginnie Mae’s risk; 

 dedicated staff to develop exit and replacement strategies for critical, 

underperforming contractors; 

 dedicated staff to manage and oversee operational risks; 

 dedicated staff to establish and manage loss reserves and portfolio 

modeling; and 

 sufficient staff to develop and maintain systems manuals used by 

employees and Ginnie Mae issuers and servicers. 

In 2011, Ginnie Mae received approval to support a staffing level of 108 

FTEs.26 Ginnie Mae had developed a plan to hire additional staff in two 

phases. For the first phase, Ginnie Mae focused on staffing 25 priority 

 

26Ginnie Mae originally was authorized 76 FTEs for 2011, but after further discussions 

with HUD, it was determined that funds available to Ginnie Mae could support 108 FTEs. 

However, according to Ginnie Mae officials, the agency imposed a hiring cap (at 88 FTEs) 

on itself because of budget uncertainty in 2011. 
 

Page 20 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

positions, of which 9 were in the Office of Mortgage-Backed Securities, 5 

in the Office of Finance, 4 to assist the Chief Risk Officer, 2 in the Office 

of Capital Markets, 3 in the Office of Management Operations, 1 in the 

Office of Program operations, and 1 in the Office of the President and 

Executive Vice President.27

The President’s 2012 budget request included $30 million for additional 

administrative expenses, including hiring up to 249 FTEs. According to 

Ginnie Mae officials, the increase would allow the agency to implement its 

second phase of hiring and increase its staffing levels. However, Ginnie 

Mae officials explained that in July 2011 they reassessed and revised the 

budget request after determining that the requested $30 million would be 

sufficient to hire only 137 FTEs.28 According to Ginnie Mae officials, 

additional flexibility provided in the budget request will enable Ginnie Mae 

to strengthen risk management and oversight, move in-house some 

functions performed by contractors, and provide flexibility for future 

needs. More specifically, if Ginnie Mae does not receive the authority 

requested in its revised 2012 request, officials told us the agency would 

be forced to use its limited resources across its many-risk management 

efforts and would have little capacity to conduct preventative analysis, 

therefore leaving Ginnie Mae to rely on a more reactive approach. 

Ginnie Mae initially proposed realigning its organizational structure to 

support increased staffing levels in November 2010, and amended its 

proposal in March 2011 based on comments received by HUD senior 

management. Ginnie Mae proposed the revisions to create a new office 

and add divisions under an existing office so that new staff could be more 

effectively integrated into the agency. For example: 

 

27Of the 25 priority positions, 23 were new, and 2 were replacement. Currently, the Chief 

Risk Officer operates in the Office of the President and Executive Vice President. 

28Under the proposed budget, the additional FTEs will be funded with revenue from Ginnie 

Mae’s commitment and multiclass fees. Previously, the appropriation for administrative 

costs in the HUD budget funded personnel expenses. Ginnie Mae officials explained that 

OMB set the 249 FTE level and they were not consulted on FTE numbers to include in the 

budget request. Through a memorandum to the House of Representatives and Senate 

Appropriations Committee staff, Ginnie Mae revised its request on July 5, 2011, to 111 

FTEs, estimated to cost $25.4 million. Ginnie Mae explained that the agency’s current 

office space could hold only 111 employees but that they asked the General Services 

Administration to identify additional office space, which likely would not be available until 

mid-to-late 2012. Ginnie Mae also requested flexibility to use the remaining $4.6 million to 

continue hiring staff in 2012 once office space was identified. Ginnie Mae officials 

determined that the $30 million would be sufficient to hire 137 FTEs not 249 FTEs. 
 

Page 21 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

 The proposed structure created an Office of Enterprise Risk to be 

headed by the Chief Risk Officer. The Chief Risk Officer position and 

a Risk Committee were created in 2008 in response to a 2007 HUD 

OIG report identifying a potential conflict of interest between Ginnie 

Mae’s issuer approval and issuer monitoring functions.29

 The proposed structure added two divisions in the Office of Program 

Operations, which manages day-to-day functions for Ginnie Mae’s 

MBS and structured product programs. The Project and Data 

Management Division will oversee and direct initiatives across Ginnie 

Mae, such as the implementation of new disclosure information. The 

Operations Division will focus on managing operations, such as 

pooling loans and creating securities, and will direct Ginnie Mae’s 

contractors who maintain and operate a large part of Ginnie Mae’s 

securitization process. 

Figure 8 illustrates the proposed reorganization.30 As of August 2011, 

officials had received HUD approval to implement the new structure and 

have notified Congress and HUD’s union and await their responses to 

begin implementation. 

 

29HUD, Office of the Inspector General, Audit of Government National Mortgage 

Association’s Financial Statements for Fiscal Years 2008 and 2007 (Washington, D.C., 

Nov. 7, 2008). The Office of Enterprise Risk provides a framework for risk management by 

identifying particular events or circumstances relevant to Ginnie Mae’s objectives, 

assessing them in terms of likelihood and magnitude of impact, determining a response 

strategy, and monitoring progress. The Chief Risk Officer helps to ensure that all key risks 

facing Ginnie Mae are effectively identified, measured, and managed. The Risk 

Committee provides direction and oversight for Ginnie Mae’s risk-management activities. 

Through the Risk Committee, the Risk Officer seeks to ensure that Ginnie Mae has 

developed and continues to maintain a robust risk framework by establishing policies and 

procedures for risk management throughout the organization, monitoring aggregate risk 

and compliance with risk policies, and delegating primary responsibility for day-to-day risk 

management to business units. With the creation of an independent risk office, in October 

2010 Ginnie Mae dissolved its Issuer Review Board, the predecessor to the Risk 

Committee. 

30Ginnie Mae’s other current offices comprise the Office of Finance, which oversees 

financial management and operational controls (for example, over investment of Ginnie 

Mae funds, preparation and execution of the budget, and performance or coordination of 

internal and external audits); the Office of Mortgage-Backed Securities, which establishes 

policies and procedures for, and eligibility of, issuers; the Office of Capital Markets, which 

coordinates creation and marketing of existing and new securities and administers Ginnie 

Mae’s Multiclass Securities Program; and the Office of Management Operations, which 

develops and implements policies and procedures for human capital administration and 

procurement management. 
 

Page 22 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 8: Ginnie Mae’s 2011 Proposal for Reorganization 

Between 2005 and 2010, as Ginnie Mae’s volume and issuer activity 

increased and staff levels remained largely the same, the agency 

increasingly relied on contractors. In 2005, we reported that in 2004 

approximately 81 percent of Ginnie Mae’s activities were contracted out 

and concluded that ensuring the agency had sufficient staff capabilities to 

plan, monitor, and manage its contracts was essential. According to 

Increased Reliance on 

Contractors 
 

Page 23 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Federal Procurement Data System-Next Generation data, from 2005 

through 2010, Ginnie Mae obligated approximately $599 million on 

contracts.31 As shown is figure 9, while the amount of obligations had 

been increasing since 2005, they increased significantly in 2009 and 

2010. Contract obligations in 2010 were more than 14 times the 

obligations in 2005 due, in part, to increases in volume and market share, 

expenses related to servicing nonperforming loans in defaulted issuers’ 

portfolios, and the need to use contracts to implement planned 

improvements to technology systems. Further, the number of active 

contracts and orders increased from 18 in 2005 to 37 in 2010.32

Figure 9: Amount of Ginnie Mae Contract Dollars Obligated, Fiscal Year 2005−2010 

Note: All dollars have been adjusted to constant dollars to reflect inflation based on the 2010 price 

index from the Bureau of Economic Analysis. 

 

31All contract dollars have been adjusted to constant dollars to reflect inflation based on 

the price index for 2010 from the Bureau of Economic Analysis. In addition, according to 

Ginnie Mae officials obligated amounts represent a maximum level of spending on 

contracts and actual amounts of spending may be lower. 

32Orders refer to task orders, which are requests to a contractor to perform a specific type 

of work under an existing contract. Task order contracts generally are used when the 

precise quantities of supplies or services that will be required during the contract period 

are unknown. A task order contract permits flexibility in quantities and delivery scheduling. 
 

Page 24 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

According to Ginnie Mae officials, they have contracted out many 

functions because the agency has flexibility to use agency revenues to 

procure contractors. That is, statutorily Ginnie Mae has more flexibility to 

spend funds for contracting expenses because they can be funded from 

agency revenues without annual appropriations. To pay for staff, Ginnie 

Mae has to seek annual appropriations that have to be approved by HUD, 

OMB, and Congress. As a result, Ginnie Mae has relied on contractors to 

develop and operate information technology systems, manage and 

dispose of acquired mortgage portfolios, and conduct monitoring reviews 

of issuers. According to Ginnie Mae officials, throughout its history the 

agency has operated with a business model that includes a small staff 

that is largely supported by contractors because of the difficulty in 

securing annual appropriations and not being able to use agency 

revenues to pay for staff. Officials explained they have not conducted a 

formal benefit-cost assessment of using contractors but believe such a 

heavy reliance on contractors may not be cost-effective. 

Ginnie Mae depends on contractors to provide a variety of services, 

including those related to guaranteeing MBS, such as collecting data from 

issuers and processing monthly principal and interest payments to 

investors. In addition, Ginnie Mae relies on several contractors to take 

over the servicing responsibilities on pooled loans when issuers default. 

Table 2 illustrates some core functions at Ginnie Mae performed by 

contractors and the total amounts obligated from 2005 to 2010.33

 

33We were unable to obtain an accurate account of the number of contract staff FTEs 

because neither Ginnie Mae nor HUD’s contracting office tracked these data. The 

Consolidated Appropriations Act of 2010, requires the heads of civilian agencies, including 

HUD, to annually submit to OMB an inventory of service contracts. However, 

implementation of the act is in progress. In May 2011, we reported that civilian agencies 

did not have the ability to collect FTE information from contractors, or the amount 

invoiced. See GAO, OMB Service Contracts Inventory Guidance and Implementation, 

GAO-11-538R (Washington, D.C.: May 27, 2011). In addition, OMB plans to issue a 

proposed rule that will require agencies to collect information on the number of direct-labor 

hours expended on services performed by contractors and subcontractors, among other 

things and expects this information to be collected in a phased approach over the next 4 

years based on contract type and total estimated value of a contract. In addition to 

collecting this information, all agencies are required to ensure that contractor personnel 

are not performing inherently governmental functions. The Office of Federal Procurement 

Policy recently issued new guidance to agencies on managing the performance of 

inherently governmental and critical functions. 76 Fed. Reg. 56227 (Sept. 12, 2011). 
 

Page 25 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Table 2: Description of Select Contracted Functions at Ginnie Mae and Total Obligated Amounts, Fiscal Years 2005–2010 

Contracted function Description of contracted services 

Total obligated amounts, fiscal years 

2005–2010 (dollars in millions)a

Servicing of loans in its singlefamily, manufactured housing, 

and mulitfamily portfoliob

Four contractors perform default services, which include 

servicing current, delinquent, and defaulted loans, 

foreclosure services, management and disposition of 

acquired property, and preparation and submission of 

insurance or guarantee claims to FHA, VA, RHS, and PIH. 

 Single-family housing: $143.59

 Single-family housing: 70.35 

 Manufactured housing: 14.32 

 Multifamily housing: 5.95 

Administration of MBS program 

(front office) 

Performs pool processing and certification, central 

payment, and transfer agent services functions. 

129.11 

Administration of MBS program 

(back office) 

Provides back-office support for Ginnie Mae to operate 

its securitization program, including its review of new 

issuer applications, the monthly collection of data from 

issuers, and risk analysis and monitoring. 

105.81 

Structured products transaction 

financial advisor 

Assists Ginnie Mae in the review and execution of each 

multiclass securities transaction, including the review of 

each transaction to ensure compliance with Ginnie Mae 

policies and procedures. 

32.92 

Issuer compliance and financial 

statement reviews 

Performs issuer and financial statement reviews in 

accordance with Ginnie Mae guidance. 

12.02 

Policy and financial analysis 

model and budget support 

Provides support for running the existing model, 

developing the new model, and supporting the Ginnie 

Mae budget process. 

9.09 

Technical advisory services Provides support for Ginnie Mae’s plan to modernize its 

operational infrastructure and maintains compliance with 

information technology development rules and standards. 

8.59 

Contractor reviews Performs reviews of contracts that have expended more 

than $1 million in a fiscal year in accordance with 

procedures developed by Ginnie Mae. 

3.84 

Internal control reviews Conducts internal control reviews in accordance with 

OMB requirements. 

3.17 

Sources: Ginnie Mae and GAO analysis of Federal Procurement Data System-Next Generation data. 

a

All dollars have been adjusted to constant dollars to reflect inflation based on the 2010 price index 

from the Bureau of Economic Analysis. 

b

The amounts for servicing loans include obligation amounts and does not include revenue or 

reimbursement amounts Ginnie Mae may have received for this function. 

Ginnie Mae has used its own staff and third-party assessments of 

contracts to oversee its contractors but plans to provide additional staff 

resources to supplement the third-party assessments. According to 

HUD’s contractor monitoring guide and handbook on procurement 

policies and procedures, a Government Technical Representative (GTR) 

should be assigned to oversee and monitor the contractor’s performance. 
 

Page 26 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

For example, the guidance requires that GTRs monitor the contract for 

timeliness and review invoices for accuracy.34 Since 1993, Ginnie Mae 

has relied on third-party contractors to conduct Contract Assessment 

Reviews (CAR) in accordance with procedures developed by Ginnie Mae. 

In general, the CARs guidance outlines that the third-party contractor 

should focus on determining whether the contractors complied with the 

terms of their contracts, conducted appropriate billing, and maintained 

adequate internal controls to minimize risk to Ginnie Mae. The CAR 

reports also provide information on any potential risks to Ginnie Mae 

based on other completed audits and reviews. These reviews are to be 

conducted on contracts that have expended more than $1 million. 

Ginnie Mae officials explained they had plans to supplement these 

reviews in 2011 with the hiring of additional Ginnie Mae staff to conduct 

on-site reviews and oversight concurrent with, and independently of, the 

third-party contractors. However, due to changes to its budget, 

implementation of this plan has been put on hold until 2012 or 2013. 

Officials explained that in previous years staffing limitations required 

waiting until the following review to address issues identified in the 

previous review. In some instances, there might be a significant time lag 

between reviews. One review might cover a 15-month period while 

another would cover a 9-month time frame. Ginnie Mae officials explained 

the timing of the reviews often depended on the time needed to procure 

the contractors rather than on a set schedule. 

Based on our nonprobability sample of 33 CAR reports from 2005 to 

2010, the reports produced some findings. These findings included 

questionable costs, information technology controls, and accounting 

controls. For instance, one contractor did not have proper procedures to 

review timesheets and improperly billed Ginnie Mae for $2,621. The 

contractor agreed to develop formalized procedures and reimburse 

Ginnie Mae for the improper payment. Additionally, in a few instances the 

third party conducting the review had difficulty accessing necessary files 

to complete contractually required procedures. Ginnie Mae officials 

explained that they now work to address any access issues with 

contractors at the beginning of the contractor’s reviews. 

 

34We met with GTRs who oversaw five contracts and discussed how they oversaw these 

contracts in accordance with HUD guidance. 
 

Page 27 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

While our review of a sample of CARs identified some findings, the 2010 

HUD OIG management letter discussed problems relating to one 

contractor and recommended associated improvements in internal 

controls, including assessing the effectiveness of CAR procedures. More 

specifically, in October 2009 Ginnie Mae identified accounting 

irregularities at its servicer of manufactured home loans. Agency officials 

subsequently asked the contractor that performs internal control reviews 

to do a more in-depth review of the servicer, including a file review.35 The 

internal control review confirmed the servicer had not completely or 

accurately processed manufactured home loan transactions for Ginnie 

Mae. As a result, Ginnie Mae officials explained they developed a 

corrective action plan and decreased the size of the portfolio managed by 

the servicer from $26 million in August 2010 to about $4.7 million in 

August 2011.36 The HUD OIG management letter suggested that internal 

control over Ginnie Mae’s manufactured housing servicer needed 

improvement and stated one of the causes for the finding was that the 

prior year CAR did not include procedures to review specific loan-level 

details. The HUD OIG made four recommendations—the one specific to 

CAR procedures stated Ginnie Mae should assess the effectiveness of 

and update CAR procedures if needed.37 Ginnie Mae officials told us that 

they have addressed the HUD OIG recommendations and have updated 

review procedures for this servicer and its other servicers of single-family 

and multifamily properties. 

Subsequent to these reviews, Ginnie Mae began to take other steps to 

address operational risks related to contracting that are consistent with 

the principle identified in our internal control and management tool to 

consider risks associated with major suppliers and contractors.38 More 

specifically, Ginnie Mae has conducted risk assessments of its contracts 

and potential operational risks, and plans to review the proposed 

 

35According to revised OMB Circular A-123, federal agencies must perform an annual 

review to document, test, and assess the internal controls in place on financial reporting. 

36Ginnie Mae officials explained they decreased the size of the portfolio by establishing 

policy and procedures based on OMB guidance to write off loans in the servicer’s 

defaulted portfolio. 

37The other recommendations included two related to clarifying the servicer’s procedures 

and role and one on improving procedures to prevent recurrence of specific accounting 

issues. 

38GAO-01-1008G. 
 

Page 28 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

recommendations and determine how to implement them.39 However, as 

of October 2011, none of the recommendations have been implemented. 

In December 2010, the Chief Risk Officer staff analyzed Ginnie Mae 

contracts and identified approximately 12 contracts that could pose 

operational risk to Ginnie Mae. The purpose of the risk assessment was 

to assess the inherent risks associated with activities its top contractors 

executed and to determine what controls the agency had in place or 

should have in place to mitigate risks.40 The potential risks to Ginnie Mae 

included (1) lack of a contingency plan if the contractor ceased work with 

Ginnie Mae, (2) poor internal controls, (3) nonperformance under contract 

terms, and (4) failure of operations.41 The analysis included short-term 

recommendations related to better management of internal controls—for 

example, increasing training requirements for GTR staff on areas of the 

greatest risk exposure to Ginnie Mae such as cost overruns and 

inadequate recordkeeping. Long-term recommendations included 

increasing the number of Ginnie Mae staff to reduce the dependency on a 

few key staff. Targeted recommendations included developing 

 a transition plan to automate manual processes that might lead to 

operational errors to help address the risk of failure of operations and 

 formal contract reporting on projects with performance metrics to help 

avoid nonperformance under contracts. 

Ginnie Mae also contracted with a firm to provide recommendations for 

enhancing its risk-management capabilities. In June 2011, the contractor’s 

study recommended that Ginnie Mae systematically assess staff 

overseeing its contracts to identify any gaps in expertise—for example, by 

annually using a checklist or other mechanism to identify expertise. In 

addition, the study suggested that Ginnie Mae develop a system to track 

any contract-related incidents so that any issues would be handled 

promptly. The study noted that as Ginnie Mae continues to grow, 

 

39We also have been examining contracting risks associated with professional and 

management support service contracts at multiple agencies (including HUD and Ginnie 

Mae). We plan to issue a separate report on these topics at a later date. 

40Contracts identified as top contracts included those that serviced loans in the singlefamily, manufactured housing, and mulitfamily portfolio; performed administrative functions 

of the MBS program, such as pool processing; and conducted issuer compliance reviews. 

41Ginnie Mae officials explained these risks were identified based on views from Ginnie 

Mae staff and not on actual occurrences. 
 

Page 29 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

establishing formalized processes for contract-related incidents would be 

important. 

Although Ginnie Mae has conducted risk assessments on its contracts, it 

has not yet implemented the recommendations from these assessments. 

According to Ginnie Mae officials, they have deferred implementing the 

recommendations from the December 2010 risk assessment because 

staff working for the Chief Risk Officer also have been conducting another 

assessment on ways to improve contract management and procurement 

processes. Officials explained that once this review was complete, they 

would review recommendations from all three assessments and develop 

a plan to implement them collectively. Ginnie Mae officials also explained 

that during 2012, the Chief Risk Officer plans to work with senior 

management to assess the recommendations in the June 2011 study and 

prioritize their implementation relative to other competing projects 

currently underway at the agency, such as technology improvements and 

updates to its statistical model used to forecast cash flows to and from the 

program. We discuss technology improvements in the following 

paragraphs and the statistical model in the next section of this report. 

Concurrent with its other risk assessments, Ginnie Mae began to change 

its procurement practices in an effort to reduce its reliance on contractors 

for critical functions.42 More specifically, as part of senior management 

performance plans for the 2011 calendar year, managers have been 

directed to develop and put in place a contracting environment that 

leverages contractors and Ginnie Mae staff more effectively. For instance, 

some senior management performance plans include a directive to 

conduct a needs assessment for every contract that is new, has the 

option to extend, or has ended. These assessments consider whether the 

contract should be recompeted to bring targeted services or work 

products in-house, thereby reducing contractor expenses and reliance. 

Officials explained they also plan to include this directive in 2012 calendar 

year performance plans. Officials also told us that these needs 

assessments are required for all contract actions. As of August 2011, of 

the nine contracts for which needs assessments might be conducted, four 

have been completed. According to Ginnie Mae officials, the results of the 

assessments for two contracts identified possible ways to bring certain 

 

42OMB defines critical functions as those necessary for an agency to effectively maintain 

control of its mission and operations. 
 

Page 30 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

functions in-house, such as one contract for project management, which 

may save $600,000. In 2012, Ginnie Mae officials expect to complete 17 

needs assessments. 

Senior managers also told us they have been reviewing current contract 

provisions to make sure Ginnie Mae staff understood all the elements of a 

contract. For example, management reviewed one contract with a large 

technology component and found that the system documentation and 

user manuals had not been consistently updated. According to officials, 

Ginnie Mae recognizes the need for updated documentation and is in the 

process of modernizing the data system used by the contractor, which 

includes new system documentation and user manuals. 

Ginnie Mae has been working on an ongoing initiative to improve its 

information technology systems. According to officials, Ginnie Mae has 

been working on the first phase of its business process improvement 

initiative for the last few years based on a plan developed in conjunction 

with OMB. The main goal of the initiative is to modernize the agency’s 

technology by consolidating processes and eliminating redundant 

systems. Some of the weaknesses included outdated data systems, a 

reliance on paper-based processes, and a lack of integrated data 

systems. According to our internal control management and evaluation 

tool, management should derive critical operating data from its 

information management function and support efforts to make 

improvements in the systems as technology advances.43

According to Ginnie Mae, the first phase of the initiative resulted in the 

creation of nine new information technology system initiatives. Seven of 

these initiatives have been in place since October 2009. For instance, one 

system allows Ginnie Mae to receive enhanced reporting and provide 

status information to issuers. Another allows Ginnie Mae issuers to provide 

pool information electronically. According to Ginnie Mae, these systems let 

Ginnie Mae modernize its technology by merging legacy systems into a 

centralized database. Ginnie Mae officials further explained that they have 

been modernizing the pooling information system so that it can be 

integrated with the enterprise-wide data system. In addition, Ginnie Mae 

has been drafting a strategy document for its ongoing initiative to look for 

 

43GAO-01-1008G. 

Actions to Improve 

Information Systems 
 

Page 31 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

additional business improvement opportunities in its information technology 

systems. 

To manage its counterparty risk, Ginnie Mae has processes in place to 

oversee issuers that include approval, monitoring, and enforcement. In 

response to changing market conditions and increased market share, 

Ginnie Mae revised its approval and monitoring procedures. In addition, 

Ginnie Mae has several planned initiatives to enhance its management of 

counterparty risk; however, many have not yet been fully implemented. 

Issuers are subject to the requirements outlined in the Ginnie Mae MBS 

guide and all participant memorandums, some of which have been made 

more stringent in recent years due to changes in industry and market 

conditions.44 In September 2008, Ginnie Mae issued a notice to 

participants that it was raising the issuer approval standards and 

requirements due to industry and market conditions. For example, newly 

approved issuers became subject to a 1-year probationary period, which 

begins after their first issuance or acquisition of a servicing portfolio. 

Before this time, new issuers had no probationary period. In addition, for 

newly approved and already existing issuers, the Office of MortgageBacked Securities monitors required risk thresholds, such as delinquency 

levels and loan matching statistics.45

 

44Ginnie Mae, MBS Guide, 5500.3, Rev. 1. 

45Issuer required risk thresholds include default, financial, and insurance risk. Default risk 

is based on delinquency ratio. More specifically, Ginnie Mae uses three indicators of 

delinquencies (1) DQ3+Delinquency Ratio: Number of loans in the issuer’s Ginnie Mae 

portfolio that either are in the foreclosure process or 3 or more months delinquent divided 

by total number of loans remaining in the portfolio; (2) DQ2+Delinquency Ratio: Number of 

loans in the issuer’s Ginnie Mae portfolio that either are in the foreclosure process or 2 or 

more months delinquent divided by total number of loans remaining in the portfolio; and 

(3) DQP Delinquency Ratio: Accumulated amount of delinquent principal and interest 

payments divided by total monthly fixed installment control due the issuer. For 

DQ3+Delinquency, the ratio cannot be more than 5 percent for larger issuers or 9 percent 

for smaller issuers. Larger issuers are those with more than 1,000 loans, and smaller 

issuers, those with less than 1,000 loans. For DQ2+Delinquency, the ratio cannot be more 

than 7.5 percent for larger issuers or 10 percent for smaller issuers. For DQP 

Delinquency, the ratio cannot be more than 60 percent for larger issuers or 90 percent for 

smaller issuers. Financial risk refers to net worth amounts. Insurance risk includes loan 

matching, which refers to the verification of the government insurance status of underlying 

mortgages to allow for the more timely identification and follow-up of loans lacking 

appropriate insurance documentation. 

Ginnie Mae Has Taken 

Steps to Revise Some of its 

Counterparty Risk 

Management Processes 

Strengthened Approval 

Procedures 
 

Page 32 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

New and existing single-family issuers also must meet increased net 

worth and liquid asset thresholds.46 Initially, new issuers in the singlefamily and reverse mortgage program had to have a minimum net worth 

of $250,000. In 2008, the minimum increased to $1 million. In October 

2010, the minimum net worth requirement was raised to $2.5 million.47 At 

the same time, Ginnie Mae announced a new liquid asset requirement, 

which requires single-family issuers to maintain liquid assets that are 20 

percent of the issuer’s Ginnie Mae required net worth requirement. 

According to the policy memorandum Ginnie Mae issued, the increased 

liquid asset requirement is intended to help ensure funds would be 

available when cash was needed for mortgage buyouts or to pay for 

potential indemnification requests from federal guarantee programs.48

Existing single-family issuers had until October 2011 to meet the 

increased net worth and liquid asset thresholds. 

Corresponding to changes in Ginnie Mae’s market share, the number of 

new issuer applications and approvals increased from 2008 to 2010 (see 

fig. 10). For the first three quarters in 2011, the agency received 73 new 

applications, approved 32 new issuers, and 85 applications were denied 

or withdrawn. Ginnie Mae’s process for screening applications includes a 

review of the applicant’s net worth and its performance as an FHA lender. 

In addition, the applicant may be required to undergo a special servicer 

review if the applicant is not an approved Fannie Mae or Freddie Mac 

seller or servicer, or Ginnie Mae believes the applicant warrants a more 

in-depth review. According to Ginnie Mae officials, the special servicer 

review (conducted by Ginnie Mae staff and its contractors) began in 2008 

as an on-site review of the financial, management, and operational 

capacity of selected new applicants and existing issuers. As of June 30, 

2011, the agency had conducted 32 special servicer reviews on new 

applicants since 2008, for which 27 were approved and 5 rejected. 

Officials explained one of Ginnie Mae’s goals is to decrease the approval 

 

46Ginnie Mae also increased net worth and liquid asset thresholds for multifamily issuers. 

47Before October 2010, additional net worth was calculated as 1 percent of remaining 

principal balance (RPB) plus the amount of available commitment authority between $5 

million and $20 million, plus 0.2 percent of RPB greater than $20 million. As of October 

2010, additional net worth was calculated as 0.2 percent of the issuer’s RPB plus the 

amount of available commitment authority. See “All Participant Memoranda” 10-17. 

48Indemnification agreements require the lender to repay FHA for any losses that it incurs 

after a loan has gone into default and the property has been sold. 
 

Page 33 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

time for issuers from approximately 1 year to 6–8 months. They plan to 

hire additional staff to review applications and have one of their 

contractors help obtain the necessary documentation from issuers. 

However, the creation of these new positions has been on hold due to 

decreases in the FTE levels for 2011 and potential budget decreases for 

2012. Ginnie Mae also has been considering raising its application fee to 

deter issuers that might have little intention of issuing MBS but think 

approval from a federal entity would reflect well on their business. 

Figure 10: Number of New Issuer Applications and Approvals, Fiscal Years 

2005−2010 

Note: Ginnie Mae did not track the number of applications denied before 2009. From 2010 through 

the third quarter of 2011, Ginnie Mae had 69 applications under review. In 2010, new issuer 

approvals and denied or withdrawn applications may exceed new applications because of a lag in the 

timing of the reviews from prior fiscal years. 

Ginnie Mae officials also told us they planned to expand the number of 

issuers by marketing Ginnie Mae and its products to smaller financial 

institutions, such as credit unions and state housing finance agencies 

because the concentration of the MBS portfolio among a few issuers 

represents some level of risk to Ginnie Mae. For instance, if one large 
 

Page 34 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

issuer were to fail, Ginnie Mae would be responsible for servicing more 

mortgages than if a small issuer failed. Officials said that the risk posed 

by concentration may be mitigated because these issuers generally were 

regulated at the federal level. 

Monitoring processes for issuers include the approval process for 

commitment authority, reviews of quarterly and monthly summary reports, 

and on-site reviews of issuers. Ginnie Mae has modified some of these 

processes in recent years by requiring issuers to request commitment 

authority more frequently and developing additional quarterly and monthly 

summary reports. The agency also plans to add other monitoring tools. 

According to Ginnie Mae officials, the agency uses its ability to limit or 

modify commitment authority requests as a primary risk-management tool 

(by limiting commitment authority, the agency reduces the flow of funds to 

the issuer). To deal with increased demand, in 2005, Ginnie Mae created 

two processes for granting commitment authority—streamlined and 

nonstreamlined requests. Issuers that meet required risk thresholds set 

by Ginnie Mae go through the streamlined process, which limits the 

number of approvals needed for the request.49 Issuers that do not meet 

these thresholds or are on Ginnie Mae’s watch list would be considered 

under the nonstreamlined process, which requires additional scrutiny by 

Ginnie Mae staff and additional approvals by Ginnie Mae management.50

Before 2005, the agency used the same process for those that did and 

did not meet required risk thresholds. Officials explained the change was 

made to increase the efficiency of the process for issuers who met 

required thresholds. 

Whether streamlined or not, officials explained requests for commitment 

authority now require more frequent approvals. Before 2008, issuers 

generally would request commitment authority annually. However, Ginnie 

 

49Issuer required risk thresholds exist for default risk (which includes thresholds for 

borrower delinquency), financial risk (which includes requirements for adjusted net worth, 

adjusted net income, and other financial ratios), insurance risk (which includes 

requirements for loan matching rates with FHA, VA, RHS, and PIH), and compliance score 

(which includes the results of issuer reviews). 

50Issuers are added to the watch list if they exceed performance thresholds for default, 

financial, insurance risk, and compliance risk. In addition, officials explained that Ginnie 

Mae can add issuers to the watch list at their discretion if it is determined the issuer poses 

a risk that is not captured in the performance thresholds. 

Modified Monitoring 

Procedures 
 

Page 35 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Mae issuers currently apply for commitment authority in an amount equal 

to the securities they plan to issue during the next 4 months. Therefore, 

issuers generally must request the authority every 2 to 3 months, which 

allows Ginnie Mae to take an in-depth look at the issuer’s performance 

and compare it against its required risk thresholds. In 2010, Ginnie Mae 

also revised its guidance to require that streamlined requests receive 

management-level review rather than just a staff-level review in the Office 

of Mortgage-Backed Securities. 

The commitment authority process has been subject to internal reviews 

from 2006 through 2011, but these reviews found no material 

weaknesses. Specifically, Ginnie Mae’s annual internal control review 

generally examines the commitment authority process. Although control 

deficiencies—that is, less serious findings that identify an internal control 

that might not be designed to prevent or detect and correct issues—were 

identified from 2008 through 2011, officials explained the deficiencies did 

not result in any issuer being granted commitment authority that should 

not have received it. For instance, in 2008, Ginnie Mae was unable to 

locate the files for the sample of 25 files selected by the internal auditor to 

conduct its review. In 2009–2011, the required commitment authority 

checklist was not always completed according to guidance.51 To address 

the 2008 finding, Ginnie Mae officials explained that management was 

directed to enforce the guidance and the filing system was changed. For 

the 2009–2011 findings, Ginnie Mae updated procedures in its manual 

and amended the checklist twice. 

Since 2007, according to Ginnie Mae, one of the two contractors that 

manage the administration of the MBS program has created 30 new 

monthly and quarterly monitoring reports, which staff from the Office of 

Mortgage-Backed Securities review.52 Ginnie Mae officials explained that 

these reports were generally created because new programs, such as the 

reverse mortgage program, were developed that required new monitoring 

requirements, or enhancements were identified to existing monitoring 

 

51The Ginnie Mae desk manual on operational procedures, which provides guidance on 

the commitment authority process, requires Ginnie Mae staff to complete a checklist of 

required steps in the process. 

52The Ginnie Mae contractor that provides back-office support for the administration of the 

MBS program provides reports to Ginnie Mae on a monthly or quarterly basis. Ginnie Mae 

officials explained the contractor also can supply additional, custom reports at the 

agency’s request. 
 

Page 36 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

processes, which required additional reporting. Among other new reports, 

in 2008 the contractor created a monthly summary report addressing 

active issuers. The report summarizes issuer risks (in areas such as 

default and financial condition) and results of issuer compliance reviews.53

However, Ginnie Mae has not updated its guidance to reflect this new 

report. 

Officials explained that Ginnie Mae staff rely on the summary information 

prepared by the contractor that combine information on all issuers rather 

than creating individualized reports. In fact, our analysis of 10 issuer files 

revealed that Ginnie Mae staff had not prepared monthly management 

worksheets for any of these issuers as Ginnie Mae’s guidance requires.54

Ginnie Mae officials said they plan to revise guidance in 2012 to reflect 

the move from staff preparing reports for individual issuers to reliance on 

contractor-prepared summary reports. 

In addition, Ginnie Mae officials explained that they have been enhancing 

data systems to assess counterparty risk. More specifically, according to 

the Chief Risk Officer, the agency’s highest priority is to develop a 

counterparty risk-management system by March 2012. The new system 

aims to help Ginnie Mae identify its total counterparty risk exposure with 

all entities, such as issuers and contractors. The system would include 

information on issuers, such as rating data and risk calculations, and an 

algorithm to predict issuer default. In addition, the system would 

incorporate a scorecard to help Ginnie Mae have a comprehensive view 

of issuers, including information on issuer required risk thresholds. 

Ginnie Mae also monitors issuers through on-site reviews conducted by a 

contractor. Ginnie Mae has implemented two new types of reviews since 

2008 to provide additional monitoring of new and existing issuers and 

increased the frequency of reviews on new issuers. Previously, there 

 

53The Ginnie Mae MBS guide outlines the thresholds that issuers must maintain. 

54We reviewed documentation of a nonprobability sample of 10 issuers to understand the 

types of monitoring Ginnie Mae and its contractors conducted. To select the issuers, we 

used a certainty sample to select the three largest issuers based on overall portfolio size 

and also one newly approved issuer approved after Ginnie Mae changed its process. The 

other six issuers were selected at random and included three that were on Ginnie Mae’s 

watch list and three that were not. 
 

Page 37 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

were two types of issuer reviews—basic and special.55 In 2010, Ginnie 

Mae added a findings resolution field review, which differs from the other 

reviews because the issuer is not given prior notice of the review. The 

purpose of this review is to test whether corrective actions for prior 

findings have been implemented. According to Ginnie Mae officials, 

seven finding resolution field reviews have been conducted since the 

review was implemented. 

According to Ginnie Mae’s January 2011 revisions to its MBS guide, new 

issuers are subject to on-site basic or special reviews by contractors after 

6 months of the start of their Ginnie Mae issuance activity, and then 

annually for 2 years from the start of activity. Before this revision, 

contractors reviewed new issuers 6 months after their issuance activity 

started but did not conduct the annual reviews. Our review of information 

on the frequency of new issuer reviews indicated that of the five new 

issuers whose issuance activity began between December 2010 and 

March 2011, none had been reviewed after 6 months of program 

participation as required. According to Ginnie Mae officials, two reviews 

were completed in September 2011 (3 months late) and the other three 

were delayed due to scheduling issues and competing priorities. 

Existing issuers are subject to on-site basic or special reviews by 

contractors no less than once every 3 years, but may be reviewed more 

frequently based on their ability to meet performance thresholds and 

other factors. For example, an issuer review may be prompted by an 

issuer’s portfolio size, monthly reporting portfolio statistics, a sudden 

increase in issuance activity, monitoring of delinquency reporting, 

previous review results and findings, a request from the Risk Committee, 

or other information received by Ginnie Mae indicating potential risk to the 

agency. We reviewed a March 2011 schedule for reviews of 196 issuers 

and found that 174 reviews were conducted within the 3-year time frame. 

According to Ginnie Mae officials, the 22 issuers not reviewed were not 

 

55On-site reviews can be basic (lower-risk) or special (higher-risk). The basic review has 

smaller pool and loan sample sizes. In 2008, Ginnie Mae began conducting special 

servicer reviews to evaluate certain new issuer applicants and existing issuers that posed 

a potential risk to Ginnie Mae. From 2008 to June 30, 2011, it has conducted 32 such 

reviews on new applicants and 6 on existing issuers. 
 

Page 38 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

active issuers during the 3-year time frame.56 Ginnie Mae officials 

explained that each year its contractor develops a schedule of the issuer 

reviews to be conducted in each quarter based on the factors identified 

earlier in this report. Currently, officials explained they work with the 

contractor that maintains the database on issuer reviews to develop the 

schedule with which issuers will be reviewed during the next time frame. 

However, they plan to enhance the development process by creating an 

additional factor for consideration—a scoring system that summarizes the 

results of prior issuer reviews—and coordinating with the Chief Risk 

Officer. Officials were unclear on the timeline for implementing this plan 

due to competing priorities with technology improvements. 

From 2005 to 2010, Ginnie Mae issued 3,971 findings from the basic and 

special issuer reviews. As of June 2011, 3,699 were cleared (93 percent), 

and 268 were referred (7 percent) to Ginnie Mae by the contractor for 

final resolution because they had not been cleared within the required 

time frame (see fig. 11). Findings from the issuer reviews fall into three 

risk categories (high, medium, and low).57 High-risk findings must be 

addressed within 21 days of the review, medium-risk findings within 45 

days, and low-risk findings within 120 days. Findings are reflected as 

“cleared” if an issuer submits a resolution plan that includes evidence that 

the original cause of the finding has been corrected and a policy, 

procedure, or action was implemented to prevent the recurrence of the 

finding. Findings are considered “open” if they are not addressed in these 

time frames. Ginnie Mae can take a variety of enforcement actions 

against issuers, which we discuss in detail in the following paragraphs. 

 

56More specifically, 14 of the 22 issuers that were not reviewed did not have issuance 

activity until 2010 and may not be required to be reviewed until 2013; the remaining 8 

were not eligible for a review because they no longer had a portfolio of Ginnie Maeguaranteed MBS. 

57A high-risk finding is classified as having an immediate impact on investors, issuers, or 

Ginnie Mae, such as not having sufficient funds to cover the principal and interest 

payments to investors. A medium-risk finding is classified as having a substantial impact 

on investors, issuers, or, Ginnie Mae, such as principal and interest bank account 

reconciliations not being accurate. A low-risk finding is classified as having low impact on 

investors, issuers, or Ginnie Mae, such as principal and interest bank account 

reconciliations not being timely. 
 

Page 39 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Figure 11: Number of Issuer Reviews and Findings, Fiscal Years 2005–2010 

According to Ginnie Mae officials, they do not have a database in place 

for tracking the resolution or timing of individual findings. However, they 

have been developing this capability through their information technology 

systems and expect it to be completed by June 2012, unless delayed by 

other priorities. To monitor the resolution or timing of findings, officials 

stated they received a weekly report from the contractor that lists all 

reviews completed over a certain period. The report includes the number 

of findings from each review and actions pending from issuers to close 

out any findings. If a finding has been referred to Ginnie Mae, the issuer 

is flagged in the system used to monitor issuers. 

Ginnie Mae’s internal control reviews from 2008 to 2011 repeatedly 

identified that the guidance used to conduct the issuer reviews should be 

updated to mitigate the risk of the current field review process not 

incorporating tests that address changing risks in the MBS market. Ginnie 

Mae officials told us that they have not updated the guidance because the 
 

Page 40 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

internal control review was not specific about what risks were not being 

identified by the issuer reviews. However, they said that they have made 

changes to their issuer reviews and monitoring procedures—such as the 

unannounced on-site reviews and remote monitoring procedures on the 

movement of funds—during this time that were not reflected in updates to 

their guidance.58 Officials expected to update their guidance by the end of 

2012. They explained the delay in updating the guidance in 2009 was due 

to the increase in the number of new issuers in 2008 and 2009, the need 

to conduct more issuer reviews on both new and existing issuers, and a 

delay in adding more funds to the contract to update the guidance. 

As mentioned previously, issuers found to not be in compliance are 

placed on Ginnie Mae’s watch list or are subject to more scrutiny during 

the commitment authority approval process. In addition, Ginnie Mae may 

declare the issuer in default and terminate the issuer. As of June 2011, 27 

single-family active issuers (of 165) were on the watch list. These 27 

single-family issuers had an average portfolio size of about $4.8 billion. 

Issuers on the watch list generally receive a quarterly monitoring letter 

detailing the reason for being on the watch list and are given 30 days to 

respond and take action. According to Ginnie Mae officials, they do not 

track how long issuers stay on the watch list. 

Ginnie Mae’s desk manual on operational procedures and its MBS guide 

list the types of enforcement actions it can take against noncomplying 

issuers. However, Ginnie Mae officials explained they plan to update this 

guidance by December 2011 because the violations listed may warrant a 

wide range of responses based on the severity of the violations. For 

example, if an issuer is defaulted by one of the government-sponsored 

enterprises, this action would warrant a more severe response than 

missing a deadline to post a letter of credit. However, the guidance 

currently does not distinguish among types of violations based on 

severity. Based on its monitoring of issuers, Ginnie Mae may issue a 

notice of intent to default if an issuer has violated the guidelines identified 

in the MBS guide, such as a missed pass-through of monthly principal 

and interest payment to an investor. Officials explained the most common 

enforcement actions used against issuers were the notice of intent to 

default an issuer. From 2005 to 2010, Ginnie Mae issued 46 notices of 

 

58Ginnie Mae developed remote monitoring procedures of issuers focused on monitoring 

the movement of funds in financial accounts related to MBS. 

Enforcement Procedures 

Include Planned Updates 
 

Page 41 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

intent to default (see fig. 12). Officials told us that they issued most of the 

notices because issuers committed an operational error, such as a 

missed payment, and that issuers rectified the errors in a timely manner. 

Once an issuer receives a notice of intent to default, the issuer has 30 

days to respond. If the issuer does not respond in 30 days, Ginnie Mae 

takes action on the violation based on the information available. In the 

first three quarters of 2011, Ginnie Mae issued seven notices of intent to 

default. 

Figure 12: Number of Notices of Intent to Default, Fiscal Years 2005–2010 

During 2005–2010, Ginnie Mae defaulted 21 issuers. Officials said the 

reasons for defaults have included suspensions by FHA, terminations by 

Fannie Mae, bankruptcy, or failure to submit audited financial statements. 

When an issuer is defaulted, Ginnie Mae takes over responsibility for 

servicing that issuer’s portfolio.59 Currently, Ginnie Mae has a large 

portfolio of single-family loans it is responsible for servicing due in part to 

the default of Taylor, Bean & Whitaker Mortgage Corporation in 2009. 

 

59As mentioned previously, Ginnie Mae relies on four contractors to service its singlefamily, manufactured housing, and multifamily portfolios. 
 

Page 42 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Ginnie Mae defines its mission as expanding affordable housing by 

linking capital markets to the nation’s housing markets. Ginnie Mae has 

been fulfilling its mission by securitizing the growing volume of federally 

insured and guaranteed mortgage loans. Changes in the housing market 

and the economic downturn have increased the volume and market share 

of Ginnie Mae-guaranteed MBS significantly in the last 5 years. Although 

Ginnie Mae’s portfolio of guaranteed MBS outstanding has grown, 

increasing the financial exposure to the federal government, it has 

mechanisms in place to help offset this financial exposure. As mentioned 

previously, Ginnie Mae charges issuers a guarantee fee and has 

accumulated reserves over the years. In addition, the mortgages that 

back Ginnie Mae-guaranteed MBS are fully or partially insured against 

default by another federal agency, such as FHA, VA, RHS, or PIH. 

Finally, Ginnie Mae has a number of practices in place to mitigate its 

operational and counterparty risks and has enhanced or plans to enhance 

these practices. Nevertheless, the methods by which Ginnie Mae 

measures the expected costs and revenues stemming from its growing 

commitments may not take full advantage of available data and 

techniques for accurately assessing program costs. 

According to Ginnie Mae’s financial statements, income to Ginnie Mae, 

mainly in the form of a guarantee fee paid by issuers, exceeded Ginnie 

Mae’s costs by an average of about $700 million each year from 2006 

through 2010.60 As of September 30, 2010, excess revenues allowed 

Ginnie Mae to accumulate a capital reserve of about $14.6 billion.61

Ginnie Mae has not required appropriations from the general fund to 

cover any losses.62

Ginnie Mae uses fee revenue to cover the cost of issuer defaults by 

making timely payment of principal and interest to investors in Ginnie 

Mae-guaranteed MBS when an issuer is unable to do so. Although Ginnie 

Mae forecasts the severity of defaults, a higher-than-expected 

 

60Ginnie Mae received approximately $568 million in guarantee fee income in 2010. 

61Capital reserves refers to accumulated net earnings to withstand potential downturns in 

the housing market that could cause issuer defaults to increase. The funds with the U.S. 

Treasury (cash) readily available to pay claims was $6.7 billion. 

62Ginnie Mae has the statutory authority to keep its fee revenue in a reserve account 

rather than remitting the balance to the general fund at the end of the fiscal year. 

Although Ginnie Mae 

Continues to Fulfill Its 

Mission, Its Model for 

Estimating Costs and 

Revenues Could Be 

Improved 

Ginnie Mae’s Revenues 

Have Covered Losses from 

Issuer Defaults 
 

Page 43 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

delinquency and default rate on those mortgages could require Ginnie 

Mae to make payments to investors using its accumulated reserves. 

Additionally, while mortgages backing Ginnie Mae-guaranteed MBS 

generally must be insured or guaranteed by another federal agency, such 

as FHA, borrower defaults may result in lower fee and claim payments to 

Ginnie Mae in some instances.63

 For instance, if the number of borrowers who prepaid or stopped 

paying their mortgages was greater than Ginnie Mae expected, 

guarantee fees paid by issuers would be less than expected. 

 For delinquent loans it acquires from defaulted issuers, Ginnie Mae 

makes advances of principal and interest to cover any late payments 

on those mortgages in the MBS pools. If the borrower made late 

payments and eventually defaulted, Ginnie Mae might not recover the 

entire value of the loss, although the mortgage was insured. For 

example, for FHA-insured mortgages, Ginnie Mae has to incur the 

cost to foreclose on a defaulted borrower but receives only a 

percentage of the associated costs. 

During 2005–2010, Ginnie Mae defaulted 21 issuers and took over the 

portfolio for approximately $28.8 billion in mortgages (see fig. 13). While 

the number of issuers defaulting has varied from two to five in recent 

years, the number of loans involved increased during this period. In 2009, 

Ginnie Mae defaulted a large issuer—Taylor, Bean & Whitaker Mortgage 

Corporation—and took over the portfolio for approximately $26.2 billion in 

mortgages.64 In general, the actual cost of a defaulted portfolio for Ginnie 

Mae cannot be determined until insurance or guarantee claims are 

processed and the number of fraudulent or delinquent mortgages 

determined. As of June 2011, Ginnie Mae’s disbursed $7.4 billion as a 

 

63When a borrower defaults on an acquired mortgage, Ginnie Mae seeks reimbursement 

from the federal agency that insured or guaranteed the mortgage. In some instances, 

some mortgages that are in pools may not be insured due to fraud or error. 

64According to its 2010 financial statement, Ginnie Mae determined that about $4.5 billion 

of the loans in the defaulted issuer portfolio, including those from Taylor, Bean & Whitaker 

Mortgage Corporation, were delinquent. Ginnie Mae used its reserve fund to buy these 

mortgages from its MBS pools and now owns the loans; however, it expects to recover the 

majority of these funds through foreclosure and filing claims with FHA. That is, as owner of 

the loans, Ginnie Mae can conduct foreclosure proceedings on delinquent borrowers and 

file claims with FHA to recover the insured portion of the mortgage not recovered during 

foreclosure proceedings. 
 

Page 44 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

result of the 21 defaults.65 However, according to its 2010 financial 

statements after considering forecasted receipts from claims and 

recoveries, Ginnie Mae estimated that its defaulted issuer portfolio at that 

time of about $4.5 billion would result in net costs of approximately $53 

million. 

Figure 13: Information on Ginnie Mae Issuer Defaults, Fiscal Years 2005–2010 

Note: In August 2009, Ginnie Mae defaulted the Taylor, Bean & Whitaker Mortgage Corporation for 

failing to provide audited financial information in a timely manner and violating Ginnie Mae’s program 

requirements for issuers. 

For budgetary purposes, Ginnie Mae annually estimates the expected 

subsidy costs to the federal government of its guarantee activity. Ginnie 

Mae’s subsidy cost estimates to date have indicated that the program 

would generate net revenues, meaning that the fees Ginnie Mae collects 

were expected to exceed its losses on a present value basis.66 These 

estimates take into account forecasted fees and expected losses in the 

event of an issuer default. Once an issuer defaults, Ginnie Mae would take 

over the issuer’s portfolio as its own loan portfolio. As a result, the initial 

 

65This number represents the disbursements Ginnie Mae incurred due to issuer defaults. 

For 2011 (as of June 30), Ginnie Mae has defaulted one issuer. 

66Pursuant to the statutory provisions under which Ginnie Mae operates, its net earnings 

are used to build reserves. For the guaranteed portfolio, Ginnie Mae determines a reserve 

for loss, which is established to the extent management believes issuer defaults are 

probable and FHA, RHS, VA, and PIH insurance or guarantees are insufficient to recoup 

Ginnie Mae expenditures. As of September 30, 2010, Ginnie Mae reported a reserve for 

loss of approximately $1 billion on a guaranteed portfolio of approximately $1 trillion. 

Re-estimated Subsidy 

Costs Resulted in Lower 

Net Revenue Estimate 
 

Page 45 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

subsidy cost estimates take into account potential losses on the 

guaranteed portfolio as well as potential losses on its loan portfolio from the 

defaulted issuers. Agencies typically update or re-estimate the subsidy cost 

estimates annually to reflect actual program performance and changes in 

expected future performance. 

Ginnie Mae performed a re-estimate for the first time at the end of 2010 

and officials told us that they plan on performing annual re-estimates 

going forward. The 2010 re-estimate lowered expected net revenues by 

$720 million from the previous estimate.67 Ginnie Mae officials explained 

that they performed the re-estimate of their portfolio in 2010 because for 

the first time the agency and OMB had developed a methodology upon 

which both parties could agree. Ginnie Mae officials noted that they faced 

challenges in developing a re-estimate methodology. Officials explained 

the nature of their business posed a challenge because Ginnie Mae does 

not have a yearly cohort of loans like other federal guarantee programs.68

Ginnie Mae officials also stated the re-estimate was performed due to the 

default of the Taylor, Bean & Whitaker Mortgage Corporation in 2009. 

 

67Since 2000, Ginnie Mae has had a negative subsidy, which has ranged from negative 

0.29 percent in 2000 to negative 0.22 percent in 2010. The 2012 budget showed an 

upward re-estimate of the 2010 rate to negative 0.20 percent. Since 1998, Ginnie Mae’s 

negative subsidies related to MBS guaranteed through September 30, 2010, have 

resulted in a positive budgetary impact of $6.59 billion. However, with the upward reestimate this amount was reduced to $5.87 billion. 

68Ginnie Mae uses a single cohort to re-estimate the subsidy cost of its portfolio, rather 

than re-estimating for annual cohorts based on obligation dates. 
 

Page 46 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Although Ginnie Mae has made some changes to the model it uses to 

forecast cash flows for the program, it has not implemented certain 

practices identified in Federal Accounting Standards Advisory Board 

(FASAB) guidance.69 While Ginnie Mae, as a government corporation, 

follows private sector accounting standards rather than FASAB 

accounting standards, we believe FASAB guidance on preparing cost 

estimates for federal credit programs represent sound internal control 

practices for evaluating Ginnie Mae’s model. Ginnie Mae uses a statistical 

model to forecast cash flows, including guarantee fee income and costs 

related to issuer defaults, to develop a credit subsidy cost for the federal 

budget and to calculate a reserve for loss for its financial statements.70

Ginnie Mae’s model uses historical trends on the default and prepayment 

characteristics of loans in its guaranteed MBS and estimates of future 

events, such as issuer defaults, to forecast 30 years of costs and 

revenues to the program. 

Ginnie Mae officials explained they recognized improvements could be 

made to their model. In 2009, Ginnie Mae hired a contractor to redesign 

its model over a 2-year period. Ginnie Mae hired additional staff to assist 

with the development of the model in March 2011. The contractor 

completed the new version of Ginnie Mae’s revised model in August 

2011.71 Examples of changes made to the model since 2009 include the 

following: 

 Changing the data used in the model from FHA loan-level data to 

Ginnie Mae data, which includes data on other loans in Ginnie Maeguaranteed MBS, such as PIH, VA, and RHS loans. 

 

69Federal Accounting Standards Advisory Board, Federal Financial Accounting and 

Auditing Technical Release 6: Preparing Estimates for Direct Loan and Loan Guarantee 

Subsidies under the Federal Credit Reform Act (January 2004). The guidance is used to 

identify specific practices that, if fully implemented by credit agencies, will enhance their 

ability to reasonably estimate loan program costs. The guidance was developed by an 

interagency group including members from OMB, the Department of the Treasury, GAO, 

and various credit agencies to provide detailed implementation guidance on how to 

prepare reasonable credit subsidies. In our view, the guidance represents sound internal 

control practices that also could be applied to an agency’s development of a model used 

to generate budget and financial statement credit subsidy estimates. 

70The statistical model that Ginnie Mae uses to project cash flows is called the Policy and 

Financial Analysis Model. 

71The cost of the contract to redesign its model was approximately $1.8 million in the first 

2 years and more than $193,000 in each of 3 subsequent years. 

Ginnie Mae’s Model Does 

Not Implement Certain 

Practices Identified in 

Federal Guidance for Cost 

Estimation of Credit 

Programs 
 

Page 47 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

 Incorporating econometric methods similar to those used in FHA’s 

model.72

 Changing the types of scenarios used for stress testing.73 Previously, 

Ginnie Mae relied on vendor-provided scenarios rather than using 

customized scenarios tailored to Ginnie Mae. 

Ginnie Mae staff recently obtained FHA’s estimates of borrower default 

and prepayment and are intending to use these for future credit subsidy 

estimates, credit subsidy re-estimates, and financial statements.74

However, the current model still does not implement certain practices 

identified in FASAB guidance and risk-budgeting guidance. According to 

FASAB guidance, managers of federal credit programs should develop 

cost estimate models that include the following characteristics: 

 Estimates should be based on the best available data of the 

performance of the loans or loan guarantees, including data from 

related federal agencies. Furthermore, agency documentation 

supporting the estimates should include evidence of consultation with 

relevant agencies. 

 Estimates also should include a sensitivity analysis to identify which 

cash flow assumptions have the greatest impact on the performance 

of the model. In addition, according to academic risk-budgeting 

guidance, it is important that stress testing, which is a form of 

sensitivity analysis, use realistic scenarios to provide accurate 

indications of the effect of variability in economic and market factors.75

 

72FHA’s model uses statistical methods—called econometrics—to forecast borrower 

default and prepayment based on how economic conditions, such as housing prices and 

interest rates, influence borrower behavior. 

73A stress test is a “what-if” scenario that is not a prediction or expected outcome of the 

economy but shows the outcome of the model in extreme economic circumstances. 

74According to Ginnie Mae officials, their 2011 financial statements will be provided in 

November 2011, and the credit subsidy estimate and re-estimate are to be provided in 

February 2012 as part of HUD’s 2013 budget. 

75D. Neil Pearson, Risk Budgeting: Portfolio Problem Solving with Value-at-Risk (New 

York: John Wiley & Sons, Inc., 2002). 
 

Page 48 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

 Estimates can rely on informed opinion (i.e., management 

assumptions), but these assumptions only should be used in lieu of 

available data and on an interim basis. Moreover, agency 

documentation supporting the assumptions should demonstrate how 

the assumptions were determined. 

Although FASAB suggests that estimates be based on the best available 

data, Ginnie Mae did not fully evaluate the benefits and costs of using 

data to develop borrower default and prepayment estimates from relevant 

agencies, including FHA. More specifically, it did not consider or assess 

the benefits of using FHA’s default and prepayment model, rather than 

spending resources on developing its own model. According to Ginnie 

Mae officials, they took steps intended to improve the revised model by 

using their own loan-level data as a basis for developing estimates of 

borrower default and prepayment. However, Ginnie Mae did not perform 

or document any analyses to determine what other data from FHA—or 

VA, RHS, and PIH—could improve its model or help assess its costeffectiveness. Ginnie Mae officials explained that they used their own 

loan-level data in the revised model because they could incorporate data 

on mortgages from all of the guaranteeing agencies, without obtaining 

data from each of the agencies that insure or guarantee mortgages in 

Ginnie Mae-guaranteed MBS. However, since approximately 80 percent 

of loans pooled into Ginnie Mae-guaranteed MBS are FHA-insured 

mortgages, there may be some benefits of incorporating elements of 

FHA’s data or model. These benefits include its cost-effectiveness and 

the potential for more detailed loan-level data than Ginnie Mae collects on 

FHA mortgages. Similarly, there may be benefits to incorporating VA data 

on loans it guarantees, which represented 16 percent of loans pooled in 

Ginnie Mae-guaranteed MBS in 2010. 

More specifically, FHA’s models include certain data elements that Ginnie 

Mae’s model does not, such as identifying which loans are FHA 

streamlined refinancing products and reverse mortgages.76 An FHA 

official with whom we spoke explained that these types of mortgages 

have different borrower default and prepayment characteristics. In 

addition, the official explained that including information identifying these 

types of mortgages would improve the predictive quality of any model of 

default and prepayment. For example, according to 2009 FHA data, 

 

76As noted earlier, the growth in FHA-insured reverse mortgages pooled into Ginnie Maeguaranteed MBS has outpaced growth in other mortgage types. 

Ginnie Mae’s Estimates May 

Not Have Been Based on the 

Best Available Data 
 

Page 49 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

borrowers who refinanced their mortgage under the streamlined refinance 

program had higher early payment delinquency rates than those with 

other refinanced mortgages. Our review of Ginnie Mae’s August 2011 

revised model showed that it did not identify reverse or streamlinedrefinanced mortgages. 

However, since our review of the model, Ginnie Mae officials said they 

have received data from FHA on estimates of borrower default and 

prepayment and are intending to use this information for preparing future 

credit subsidy estimates, credit subsidy re-estimates, and financial 

statements. FHA’s estimates of borrower default and prepayment does 

include data on streamlined-refinance mortgages. Ginnie Mae officials 

have not yet incorporated data on reverse mortgages, which are modeled 

separately by FHA, or explored and documented VA estimates of defaults 

and prepayments in their model. According to Ginnie Mae officials, they 

are using FHA data to approximate the experience expected of VA loans 

rather than using VA data directly (by adjusting these data for expected 

differences for prepayment and default experience). However, the 

analysis underlying these adjustments have not been documented. 

According to FASAB, sensitivity analysis should be performed to improve 

the accuracy of a model. A stress test provides an analysis of the 

sensitivity of a model’s forecasted cash flows in response to extreme 

changes in economic conditions. According to academic risk budgeting 

guidance, using realistic stress test scenarios is important to accurately 

indicate the effect of variability in economic and market factors. More 

specifically, stress test scenarios should consider the impact of 

movements of individual market factors and interrelationships or 

correlations among these factors. 

Although Ginnie Mae recently has developed more customized stress test 

scenarios in its revised model, some of these scenarios may not be realistic 

because they do not reflect the interrelationships between economic and 

capital markets factors. For example, Ginnie Mae’s revised model includes 

customized scenarios that focus on mortgage rate movements. More 

specifically, mortgage rates in one scenario were lowered by 300 basis 

points, or 3 percent, but no other economic variables, such as housing 

prices and unemployment rates, were changed. Ginnie Mae’s revised 

model stated that this scenario consistently produced the lowest cumulative 

defaults across its FHA and VA portfolio. However, as we previously 

Ginnie Mae’s Sensitivity 

Analysis Does Not Include 

Factors That Could Affect the 

Accuracy of Its Model 
 

Page 50 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

reported, an economic scenario involving a mortgage rate decrease, which 

included rising unemployment and falling house prices, could produce 

more realistic model results.77 This is an example of a scenario that could 

create a different—yet plausible—scenario for defaults under various 

economically stressful conditions. If the scenarios Ginnie Mae used were 

unrealistic, it could affect the accuracy of its model. 

Ginnie Mae relies on management assumptions rather than data to 

forecast issuer defaults and mortgage buyout rates.78 For example, 

Ginnie Mae’s management assumptions for the costs of future issuer 

defaults were $300 million in 2011 and $25 million annually from 2012 to 

2015. Ginnie Mae officials were not able to provide documentation on the 

basis for these assumptions and have explained they have had difficulty 

forecasting the risk that an issuer would default because defaults are 

dependent on both economic and noneconomic factors. However, Ginnie 

Mae officials acknowledged that issuers that have a higher concentration 

of federally insured or guaranteed mortgages in their portfolio may face a 

greater risk of default if these mortgages default at high rates, and they 

could not continue making the required advances to investors. In addition, 

Ginnie Mae’s model does not incorporate data on the mortgage buyout 

rate but includes a management assumption that issuers will buy out all 

mortgages after default. The mortgage buyout rate affects Ginnie Mae’s 

cash flows because mortgage buyouts reduce the guarantee fee revenue 

on the MBS backed by the loans. However, Ginnie Mae officials told us 

changes in interest rates may influence an issuer’s decision to buy a 

defaulted mortgage out of an MBS pool. More specifically, officials 

explained that if an issuer’s borrowing rate (cost of capital) is higher than 

the interest rate on a delinquent mortgage, the issuer is less likely to buy 

the mortgage out of the pool and will choose to continue making 

advances to investors. When the issuer’s borrowing rate is lower than the 

interest rate on a delinquent mortgage, the issuer is more likely to buy the 

mortgage out of the pool at an earlier opportunity. Officials said they plan 

to include quantitative estimates on issuer defaults and interest rates in 

determining mortgage buyout rates in future iterations of the model, but 

 

77See GAO, Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the 

Fund Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 28, 2001). 

78The rate at which issuers buy defaulted or prepaid mortgages out of their Ginnie Maeguaranteed MBS. 

Ginnie Mae Relies on 

Management Assumptions 

Instead of Data to Forecast 

Issuer Defaults and Mortgage 

Buyout Rates 
 

Page 51 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

the agency does not have a timeline for incorporating these data and the 

analysis into the model. 

Because Ginnie Mae’s revised model does not fully implement certain 

practices identified in FASAB guidance, the model may lack critical data 

needed to produce a reliable credit subsidy rate and reserve for loss 

amount, which could affect Ginnie Mae’s ability to provide more informed 

budgetary cost estimates and financial statements. Ginnie Mae also may 

be forgoing opportunities to further enhance its model in the most costeffective way possible by not regularly consulting with other agencies and 

evaluating their data. In addition, economic scenarios used to conduct 

stress tests on its revised model may not be sufficiency realistic, which 

may impact the accuracy of the model. Further, Ginnie Mae’s reliance on 

management assumptions rather than quantitative estimates for issuer 

defaults and mortgage buyout rates also may impact the accuracy of the 

model and a lack of documentation on how these assumptions were 

developed limits the transparency of the model. Ultimately, because of 

these limitations on its model, Ginnie Mae could be limited in its ability to 

accurately portray the extent to which Ginnie Mae’s programs represent a 

financial exposure to the government. 

During the recent financial crisis and in response to continuing stresses in 

housing markets, Ginnie Mae has assumed an increasingly prominent 

position in the secondary mortgage market. However, risks have 

accompanied its growth. The agency has faced an increased reliance on 

contractors to perform many critical functions, while at the same time 

coping with relatively flat staffing levels and outdated information 

technology. Although Ginnie Mae has conducted risk assessments on its 

contracts and enhanced some processes, technology, and staffing, or 

planned to do so, a number of recommendations from these assessments 

and initiatives remain in planning or under development—warranting 

vigorous and continued commitment and follow through from senior 

management. 

In recent years, Ginnie Mae also received a salient demonstration of 

counterparty risk when it defaulted a major issuer and had to assume and 

service a $26 billion loan portfolio. This and other issuer defaults and 

issuance volume surpassing a trillion dollars highlight the need for 

comprehensive risk mitigation and monitoring. As with operational risks, 

the agency has several planned initiatives to enhance its management of 

counterparty risk, which have yet to be fully implemented. These actions 

are critical to Ginnie Mae’s efforts to enhance its operations and we 

Conclusions 
 

Page 52 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

encourage the agency to complete their implementation as soon as 

practicable. 

Finally, although Ginnie Mae revenues exceeded costs thus far (including 

the costs of defaults) and the agency has a positive capital reserve, it has 

had to lower net revenue projections in a recent re-estimate of program 

costs. A combination of factors, including changed economic conditions, 

increased Ginnie Mae market share and volume, and the results of the reestimate suggest that now is an opportune time for the agency to 

reexamine its data sources and methodologies, and identify opportunities 

to improve inputs and analyses for the statistical model it uses to forecast 

cash flows to and from the program. Ginnie Mae has acknowledged that it 

could improve the model and has said they will use FHA’s estimates of 

borrower default and prepayment for preparing future credit subsidy 

estimates, credit subsidy re-estimates, and financial statements. For 

example, Ginnie Mae officials explained they are using FHA data to 

approximate the experience expected of VA loans rather than using VA 

data directly. However, the analysis underlying these adjustments have 

not been documented. Therefore, without fully documenting, it is not 

possible to assess the rigor of this analysis. Given that VA was 16 

percent of Ginnie Mae’s portfolio in 2010, evaluating and documenting the 

accuracy of its assumptions going forward and assessing whether its 

assumptions are sufficiently accurate for VA loans or if it should use data 

directly from VA is important. We identified several areas in which the 

agency could better implement certain practices identified in federal 

guidance for estimating program costs, including using the best available 

data, conducting sensitivity analyses, and assessing and documenting 

reasons for using management assumptions (judgment) rather than data. 

By consulting other agencies, assessing different modeling inputs and 

approaches, and leveraging other agencies’ datasets, Ginnie Mae could 

provide more informed budgetary cost estimates and financial 

statements. In addition, Ginnie Mae could realize opportunities to further 

enhance its model in a cost-effective way. Further, by developing 

quantitative estimates for issuer defaults and mortgage buyout rates, 

Ginnie Mae could better predict potential impacts on the costs and 

revenues of its programs. With more informed budgetary cost estimates 

and financial statements, Congress could more confidently use this 

information to understand the extent to which Ginnie Mae’s credit 

programs represent a financial exposure to the government. 
 

Page 53 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

To help ensure that Ginnie Mae is developing the most accurate model 

for estimating costs and revenues, we recommend that the Secretary of 

Housing and Urban Development direct Ginnie Mae to take steps to 

ensure its model more closely follows certain practices identified in 

Federal Accounting Standards Advisory Board guidance for estimating 

subsidy costs of credit programs. More specifically, Ginnie Mae should 

take the following four actions: 

1. Assess and document that it is using the best available data in its 

model and most appropriate modeling approach. For example, Ginnie 

Mae should determine if other agencies’ datasets (such as FHA, VA, 

RHS, or PIH) provide for more detail that could lead to better 

predictability. Ginnie Mae should also determine whether using other 

models for prepayment and defaults are sufficient for accurately 

estimating future guarantee fee revenue. 

2. Conduct and document sensitivity analyses to determine which cash 

flow assumptions have the greatest impact on the model. 

3. Document how management assumptions are determined, such as 

those for issuer defaults and mortgage buyout rates. 

4. Assess the extent to which management assumptions, such as those 

for issuer defaults and mortgage buyout rates, can be replaced with 

quantitative estimates. 

Recommendations for 

Executive Action 
 

Page 54 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

We provided copies of this draft report to HUD, VA, USDA, OMB, and the 

Federal Housing Finance Agency for their review and comment. Ginnie 

Mae (HUD) provided written comments that have been reprinted in 

appendix III. Ginnie Mae, OMB, VA, and the Federal Housing Finance 

Agency provided technical comments, which we incorporated as 

appropriate. USDA did not have any comments. The President of Ginnie 

Mae wrote that Ginnie Mae is working towards implementing our 

recommendation for conducting sensitivity analyses relating to issuer risk 

and behavior, but neither agreed nor disagreed with our other specific 

recommendations that are also intended to better ensure that Ginnie Mae 

is developing the most accurate model for estimating costs and revenues. 

Rather, Ginnie Mae noted that limited funding and resources constrained 

its ability to develop its model to forecast cash flows for the program 

consistent with our recommendations. However, as we also note, Ginnie 

Mae devoted significant resources to designing its models, but did not 

fully implement certain practices identified in FASAB guidance when 

redesigning its model. More specifically, Ginnie Mae hired a contractor in 

2009 to redesign its model over a 2-year period, which cost approximately 

$1.8 million. The expected additional cost for the subsequent 3-year 

period of the contract is $193,000. 

Ginnie Mae agreed with a number of our findings. In particular, the 

President of Ginnie Mae noted that he agreed with the report’s analysis 

that limited staff, substantial reliance on contractors, and the need for 

modernized information systems are operational risks that Ginnie Mae 

can face. In addition, Ginnie Mae agreed with our observation about the 

importance of completing ongoing and planned initiatives for enhancing 

its risk-management processes, as soon as practicable, to improve 

operations. Finally, while Ginnie Mae agreed that its model could be 

further enhanced by incorporating some general FASAB guidance, the 

President of Ginnie Mae stated some aspects of the guidance did not 

provide a relevant framework for the nature of Ginnie Mae’s business. We 

recognize these differences, and as discussed in the report, our analysis 

focuses on particular aspects of FASAB guidance that are specific to 

developing cost estimate models and we believe the guidance that we 

cite provides a relevant framework for Ginnie Mae. 

Ginnie Mae also discussed a number of other issues that were beyond 

the scope of this review. For example, Ginnie Mae stated that its 

negative credit subsidy calculation is overstated because OMB currently 

does not allow Ginnie Mae to reduce the negative subsidy to reflect 

administrative costs. Additionally, Ginnie Mae noted that FCRA-type 

accounting presented a challenge because the agency could not use 

Agency Comments 

and Our Evaluation 
 

Page 55 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

funds generated from previous fiscal years’ negative subsidy payments to 

cover the cost of defaulted issuers. For this study, we did not assess the 

accounting that Ginnie Mae is required to perform. To achieve the 

objectives of this report, we reviewed Ginnie Mae’s financial statements 

and their subsidy estimate and re-estimate to understand how Ginnie 

Mae’s portfolio may affect financial exposure to the federal government 

and how well Ginnie Mae has been managing this exposure. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution of this report until 30 

days from the report date. At that time, we will send copies of this report 

to the Secretary of Housing and Urban Development, appropriate 

congressional committees, and other interested parties. In addition, this 

report will be available at no charge on the GAO website at 

http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

Mathew Scirè at sciremj@gao.gov or (202) 512-8678. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix IV. 

Mathew J. Scirè 

Director, 

Financial Markets and 

 Community Investment 
Appendix I: Scope and Methodology 

Page 56 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

To describe changes in the Government National Mortgage Association’s 

(Ginnie Mae) market share and volume, we collected and analyzed data 

from Ginnie Mae and Inside Mortgage Finance, a firm that collects data 

on the primary and secondary mortgage markets. The data from Ginnie 

Mae covered fiscal years 2005–2010 and part of fiscal year 2011 

(October 2010 through June 2011).1

 We analyzed information on the 

number and types of institutions that issue Ginnie Mae-guaranteed 

mortgage-backed securities (MBS) and the share of outstanding MBS by 

type of issuers. We included information on the amount of federally 

insured and guaranteed mortgages pooled into new Ginnie Maeguaranteed MBS; the amount of new guaranteed MBS backed by reverse 

mortgages, multifamily loans; and the volume of Ginnie Mae structured 

products. The data from Inside Mortgage Finance covered calendar years 

2005–2010. We analyzed information on the volume of MBS issuance by 

Ginnie Mae issuers, private-label issuers, and government-sponsored 

enterprises, and cumulative outstanding guaranteed MBS. We assessed 

the reliability of the data provided by Ginnie Mae by reviewing 

documentation on the systems that produced the data, performing 

electronic testing, and conducting interviews with relevant officials at 

Ginnie Mae and its contractors. To assess the reliability of the data 

provided by Inside Mortgage Finance, we interviewed an official at the 

firm and reviewed documentation that describes how market information 

is collected. We determined that the data were sufficiently reliable for the 

purposes of this report. We also reviewed Ginnie Mae’s 2009 and 2010 

reports to Congress. 

To describe the reasons for changes in Ginnie Mae’s market share and 

volume, we interviewed officials from the Department of Housing and 

Urban Development (HUD)—more specifically, from Ginnie Mae, the 

Federal Housing Administration (FHA), Office of the Inspector General, 

Public and Indian Housing; the Department of Agriculture’s Rural Housing 

Service; the Department of Veterans Affairs; Fannie Mae and Freddie 

Mac (government-sponsored enterprises); the Federal Housing Finance 

Agency and the Mortgage Bankers Association. 

To assess the types of risks Ginnie Mae faces and how it manages these 

risks, we conducted a literature review of risks that may be prevalent in 

the MBS market for Ginnie Mae and government-sponsored enterprises. 

 

1

Unless otherwise stated, the years shown in this report are in fiscal years. 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 57 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

We also interviewed officials from Ginnie Mae, Fannie Mae, and Freddie 

Mac to determine what risk these agencies face and how they are 

managed. From this review and discussion, we identified counterparty 

and operational risk as the key risks facing Ginnie Mae.2

 For both of these 

risks, we reviewed and identified principles in our internal control and 

management tool relevant to managing these risks.3

 We also identified 

human capital principles in our prior work on the topic. We compared 

these principles to the steps that Ginnie Mae took to manage its risk. For 

operational risk, we focused on risks present in the agency’s 

management of human capital, contracting, and technology. We 

assessed Ginnie Mae’s staffing and organizational realignment plans to 

determine if Ginnie Mae developed strategies to address gaps in staffing 

needs and evaluated its organizational structure and made changes 

based on changing conditions. We collected information on the number of 

full-time equivalent positions requested, authorized, and actual in 2005–

2010 and part of 2011 (October 2010 through June 2011). We assessed 

the reliability of the information provided by reviewing documentation that 

HUD’s budget office and Ginnie Mae’s administrative officer maintain and 

conducting interviews with relevant officials. We determined that the data 

were sufficiently reliable for the purposes of this report. We reviewed 

HUD’s 2004 Resource Estimation and Allocation Process study. We also 

reviewed proposed 2012 budget documents produced by the Office of 

Management and Budget. 

To assess how Ginnie Mae managed risks associated with contracting, 

we reviewed Ginnie Mae’s guidance and other HUD and federal 

contracting standards. We obtained and analyzed Federal Procurement 

Data System-Next Generation data to determine the amount of Ginnie 

Mae contract dollars awarded from 2005 to 2010.4

 We assessed the 

reliability of the data by reviewing documentation on the systems that 

produced the data, conducting interviews with relevant officials at Ginnie 

Mae and HUD’s Office of the Chief of Procurement, and reviewing the 

internal controls on the data. We also reviewed the number of active 

 

2

Our engagement focused on these risks and might not address all risks that are relevant 

to Ginnie Mae. 

3

GAO-01-1008G. 

4

We ran the output on August 16, 2011. In addition, all contract dollars were adjusted to 

constant dollars to reflect inflation based on the 2010 price index from the Bureau of 

Economic Analysis at the Department of Commerce. 
Appendix I: Scope and Methodology 

Page 58 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

contracts and orders during that time period. We reviewed a 

nonprobability sample of 14 contracts selected either because the 

activities involved represented a core business function or Ginnie Mae 

identified the activities as key business functions that could result in 

operational risk if problems occurred with the contract.5

 In addition, we 

examined a nonprobability sample of 33 third-party Contract Assessment 

Reviews conducted between 2005 and 2010.6

 We also interviewed 7 

contractors from our nonprobability sample of 14 contracts to gain an 

understanding of the work performed and how they were monitored. The 

interviews included four contractors that received some of the largest 

obligation amounts from 2005–2010 and three third-party contractors who 

conducted reviews on the majority of these contracts. We interviewed 

Government Technical Representatives for five contracts to understand 

their role and how they monitored contracts. We also reviewed risk 

assessments conducted by Ginnie Mae and its review contractor in 

December 2010 and June 2011 and determined if these studies followed 

our principles (from our internal control and management tool) for 

agencies to consider risks associated with major suppliers and contracts. 

We reviewed the 2011 performance plans for senior management that 

contained directives to assess contracts. In addition, we met with HUD 

Inspector General officials and reviewed Ginnie Mae financial statements 

from 2006 to 2010, management letters from 2008 to 2010, and program 

audits on the MBS program and information technology. To assess how 

Ginnie Mae managed risks associated with its information technology, we 

reviewed Ginnie Mae’s information technology improvement initiative and 

discussed the initiative and additional plans with Ginnie Mae officials. 

For counterparty risk, we assessed Ginnie Mae’s MBS policies and 

guidance, including processes for issuer approval, monitoring, and 

enforcement. We interviewed Ginnie Mae officials and contractors about 

how issuers are approved and monitored and the changes made to these 

processes in recent years. We collected and reviewed data from Ginnie 

Mae from 2005 to 2010 and part of 2011 (October 2010 through June 

2011) and described the number of new issuer applications, approvals, 

 

5

Due to the large volume of contractors at Ginnie Mae, we did not conduct an in-depth 

analysis of the monitoring of all contractors. 

6

However, some of the contracts were not included in our review because Ginnie Mae 

does not conduct third-party contract assessments on those contracts that have not 

expended $1 million. 
Appendix I: Scope and Methodology 

Page 59 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

reviews, and findings. We assessed the reliability of these data and 

determined they were reliable for our purposes. In addition, we met with 

HUD Inspector General officials and reviewed 2008 and 2009 program 

audits on the MBS program. We also reviewed A-123 internal control 

reviews performed by a third-party contractor from 2006 to 2011 to 

determine the types of findings and recommendations on Ginnie Mae’s 

approval, monitoring, and enforcement processes. We reviewed Ginnie 

Mae’s risk committee minutes from 2008 to 2010 to determine the role of 

the committee and how risks were monitored. We reviewed 

documentation on a nonprobability sample of 10 issuers to understand 

the types of monitoring Ginnie Mae and its contractors conducted. To 

select the issuers, we used a certainty sample to select the three largest 

issuers based on overall portfolio size and also one newly approved 

issuer approved after Ginnie Mae made changes to its process. The other 

six issuers were selected at random and included three that were on 

Ginnie Mae’s watch list and three that were not. We also selected 5 of the 

10 issuers to interview based on size, institution type, and results from 

monitoring reviews. Two of the issuers selected also were investors and 

sponsors of structured products. We also looked at examples of monthly 

and quarterly reports prepared by Ginnie Mae’s contractor that report 

such information as issuer performance thresholds. We reviewed 

documentation on risk-management ideas, planned initiatives, and risk 

assessments performed by the agency’s contractor. We also reviewed 

the performance plans of senior management in the office of the Chief 

Risk Officer and the Office of Mortgage-Backed Securities to determine 

what goals were in place for the year. 

To determine how recent changes in Ginnie Mae’s market share and 

volume might affect financial exposure to the federal government and the 

agency’s ability to meet its mission, we interviewed officials from Ginnie 

Mae and its contractor that conducts modeling, the Office of Management 

and Budget, and FHA. We reviewed Ginnie Mae’s guidance and financial 

statements. We obtained and analyzed data on the potential risks of 

changes in Ginnie Mae’s market share and volume on its mission. More 

specifically, we analyzed data on FHA and Department of Veterans 

Affairs loan securitization rates from Inside Mortgage Finance for 
Appendix I: Scope and Methodology 

Page 60 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

calendar years 2005–2010.7 To gain an understanding of how Ginnie 

Mae’s program might produce financial exposure to the federal 

government, we obtained data from Ginnie Mae on issuer defaults, 

including the number of pools, loans, and remaining balance of the assets 

needed to be serviced from 2005 to 2010 and part of 2011 (October 2010 

through June 2011). We also obtained data as of June 30, 2011, on the 

associated costs Ginnie Mae incurred due to issuer defaults. We 

analyzed Ginnie Mae’s revenue and expense data to identify the extent to 

which its guarantee fee revenues covered its costs from 2005 through 

2010 and part of 2011 (October 2010 through June 2011). We assessed 

the reliability of the data provided by Inside Mortgage Finance and Ginnie 

Mae by means such as interviewing relevant officials and reviewing 

documentation on the systems that produced the data. We determined 

that the data were sufficiently reliable for the purposes of this report. 

In addition, to determine how Ginnie Mae forecasts costs and revenues, 

we reviewed the Federal Credit Reform Act of 1990 and budget 

documents produced by the Office of Management and Budget. We also 

reviewed Ginnie Mae’s statutes and documentation related to the 

development of the annual subsidy estimate, including the credit subsidy 

re-estimate for 2010 and Ginnie Mae’s model used to forecast cash flows. 

Furthermore, we reviewed Federal Accounting Standards Advisory Board 

guidance for cost estimation of federal credit programs, academic 

research on risk budgeting, and FHA’s 2010 actuarial review. We 

compared this information with Ginnie Mae’s revised model. 

We conducted this performance audit from September 2010 to November 

2011 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

 

7

The data from Inside Mortgage Finance were limited to mortgages insured by FHA and 

guaranteed by VA and excluded mortgages guaranteed by the Rural Housing Service and 

Public and Indian Housing. We determined that using data on FHA and VA was sufficient 

to assess Ginnie Mae’s overall securitization rates because these mortgages accounted 

for more than 95 percent of Ginnie Mae-guaranteed MBS issued in 2005–2010. 
Appendix II: Ginnie Mae’s Planned and 

Proposed Changes to Address Operational 

and Counterparty Risk 

Page 61 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

As mentioned previously, Ginnie Mae has several planned and proposed 

initiatives to address operational and counterparty risk. Table 3 provides a 

listing of these plans. 

Table 3: Planned and Proposed Changes to Address Operational and Counterparty Risk, as of September 30, 2011 

Type of risk and related 

activity Planned or proposed change Expected completion date 

Operational risk 

Staffing levels Phase One—staff 25 priority positions across the 

agency 

Upon approval of Ginnie Mae requested 2012 

budget 

Organizational structure Complete reorganization Upon approval of Congress and HUD union 

Contracting Use additional staff resources to supplement thirdparty contract assessment reviews On hold due to budget uncertainties 

Contracting Implement recommendations from three risk 

assessments done on contracting 

During 2012 

Information systems Complete draft information technology strategy 

document 

Ongoing 

Counterparty risk 

Approval process Decrease issuer approval time Yet to be determined 

Approval process Expand number and types of issuers Yet to be determined 

Monitoring issuers Update guidance 2012 

Issuer reviews Create scoring system for issuer findings and work 

with Chief Risk Office to develop schedules 

Yet to be determined 

Issuer reviews Develop database to track the resolution and 

timing of issuer findings 

June 2012 

Issuer reviews Update guidance used to conduct issuer reviews June 2012 

Risk management Develop counterparty risk-management system, 

including issuer scorecard 

March 2012 

Source: GAO analysis of Ginnie Mae information. 

Appendix II: Ginnie Mae’s Planned and 

Proposed Changes to Address Operational 

and Counterparty Risk 
Appendix III: Comments from Ginnie Mae 

Page 62 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Appendix III: Comments from Ginnie Mae 
Appendix III: Comments from Ginnie Mae 

Page 63 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 
Appendix IV: GAO Contact and Staff 

Acknowledgments 

Page 64 GAO-12-49 Ginnie Mae’s Capacity to Manage Growth 

Mathew Scirè, (202) 512-8678 or sciremj@gao.gov

In addition to the contact named, Andy Pauline (Assistant Director), 

Serena Atim Agoro-Menyang, Jennifer Alpha, Marcia Carlsen, Kathryn 

Edelman, Carol Henn, Julia Kennon, John McGrail, Luann Moy, Marc 

Molino, Nadine Garrick Raidbard, Paul G. Revesz, Barbara Roesmann, 

and Heneng Yu made key contributions to this report. 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(250529)
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