a

GAO

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives

October 2005 HOUSING FINANCE

Ginnie Mae Is Meeting 

Its Mission but Faces 

Challenges in a 

Changing Marketplace

GAO-06-9
www.gao.gov/cgi-bin/getrpt?GAO-06-9.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William B. 

Shear at (202) 512-8678 or shearw@gao.gov.

Highlights of GAO-06-9, a report to the 

Chairman, Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, House of 

Representatives 

October 2005

HOUSING FINANCE

Ginnie Mae Is Meeting Its Mission but 

Faces Challenges in a Changing 

Marketplace 

Despite its declining share of the overall MBS market, Ginnie Mae continues 

to serve its key public policy goal of providing a strong secondary market 

outlet for federally insured and guaranteed housing loans. Ginnie Mae MBS 

financed more than 90 percent of new FHA-insured and VA-guaranteed loans 

in fiscal year 2004, and the agency appears to face relatively little 

competition in this market. Ginnie Mae’s total volume has declined in recent 

years, however, and its share of the overall MBS market has fallen from 42 

percent of new securities in 1985 to 7 percent in 2004. This drop is largely 

the result of the decline in the market share of the FHA and VA loan 

programs and the concurrent rise in the securitization of non-governmentbacked mortgages. 

Further declines in Ginnie Mae’s volume could potentially have implications 

for borrowers, the liquidity of its securities, and federal revenues. For 

example, Ginnie Mae’s securities could become less liquid, although it is 

unclear at what levels of volume this would occur. In addition, Ginnie Mae’s 

program revenues could decline if its volume decreased. In fiscal year 2004, 

program revenues exceeded expenses by $295 million, which helped reduce 

the federal budget deficit. 

Ginnie Mae faces a number of challenges in responding to changes in the 

marketplace, meeting stakeholders’ needs, and managing its operations, and 

the agency has been taking steps to address these challenges. For example, 

it has expanded its product mix to reach more borrowers and has begun 

disclosing more information on loans underlying its securities to help 

investors better predict risk. GAO and others have identified opportunities 

for improvement in Ginnie Mae’s data integrity and internal controls. The 

agency has begun addressing these issues, but it contracts out most of its 

operations, so ensuring that it has sufficient staff capabilities to plan, 

monitor, and manage its contracts is essential. 

Share and Volume of Ginnie Mae and Total Market for Mortgage-Backed Securities 

0

.5

1.0

1.5

2.0

2.5

3.0

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

0

10

20

30

40

50

Percentage Dollars in trillions

Ginnie Mae Total market Ginnie Mae share of total 

Source: GAO analysis of data from the 2005 Mortgage Market Statistical Annual, Volume II: The Secondary Market.

MBS issuance:

The Government National 

Mortgage Association, commonly 

known as Ginnie Mae, is a wholly 

owned government corporation 

that guarantees mortgage-backed 

securities (MBS) backed by pools 

of federally insured or guaranteed 

mortgage loans. The agency 

supports federal housing programs 

by facilitating the securitization of 

loans backed by the Federal 

Housing Administration (FHA), 

Department of Veterans Affairs 

(VA), Rural Housing Service, and 

the Office of Public and Indian 

Housing within the Department of 

Housing and Urban Development 

(HUD). Concerned that Ginnie 

Mae’s share of the overall MBS 

market has declined significantly, 

you asked us to address (1) the 

state of Ginnie Mae’s market share 

and guarantee volume, (2) the 

potential implications of changes in 

its share and volume, and (3) the 

challenges Ginnie Mae faces and 

steps it is taking and could take to 

address these challenges. 

GAO is making no 

recommendations. Ginnie Mae 

agreed with this report’s 

conclusions. 
Page i GAO-06-9 Ginnie Mae

Contents

Letter 1

Background 2

Results in Brief 6

Ginnie Mae Securities Finance Most Government-Backed Housing 

Loans, but Represent a Declining Share of the Total MBS 

Market 8

Changes in Ginnie Mae’s Share and Volume Could Have Implications 

for Borrowers, the Liquidity of Its Securities, and Federal 

Revenue 17

Ginnie Mae Faces a Changing Marketplace and Management 

Challenges 22

Observations 35

Agency Comments 37

Appendixes

Appendix I: Objectives, Scope and Methodology 38

Appendix II: Comments from the Department of Housing and Urban 

Development 40

Appendix III: GAO Contact and Staff Acknowledgments 41

Table Table 1: Ginnie Mae’s Revenues and Expenses, Fiscal Years 

1998-2004 20

Figures Figure 1: Ginnie Mae Securitization Process 4

Figure 2: FHA-Insured Single-Family Loans Guaranteed by Ginnie 

Mae Securities, Fiscal Years 1998–2004 9

Figure 3: Composition of Ginnie Mae’s Newly Issued MBS, 2004 10

Figure 4: MBS Market Volume and Ginnie Mae’s Market Share, 

Fiscal Years 1985-2004 15

Figure 5: Ginnie Mae MBS: Outstanding Balances and Income 22

Figure 6: Ginnie Mae’s Commitment Authority Used, Fiscal Years 

1997-2004 31
Contents

Page ii GAO-06-9 Ginnie Mae

Abbreviations

ARM adjustable rate mortgage

Fannie Mae Federal National Mortgage Association

FHA Federal Housing Administration

FHLBank Federal Home Loan Bank

Freddie Mac Federal Home Loan Mortgage Corporation

Ginnie Mae Government National Mortgage Association

HUD Department of Housing and Urban Development

MBS mortgage-backed security

OIG Office of Inspector General

PIH Office of Public and Indian Housing

REMIC Real Estate Mortgage Investment Conduit

RHS Rural Housing Service

VA Department of Veterans Affairs

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Page 1 GAO-06-9 Ginnie Mae

United States Government Accountability Office

Washington, D.C. 20548

A

October 31, 2005 Letr

The Honorable Robert W. Ney

Chairman 

Subcommittee on Housing and

 Community Opportunity

Committee on Financial Services

House of Representatives

Dear Mr. Chairman:

The Government National Mortgage Association, commonly known as 

Ginnie Mae, plays an important role in supporting federal housing 

initiatives by increasing liquidity in the secondary mortgage market. A 

wholly owned government corporation, Ginnie Mae guarantees the timely 

payment of principal and interest on securities issued by private 

institutions and backed by pools of federally insured or guaranteed 

mortgage loans. Securities guaranteed by Ginnie Mae finance the vast 

majority of loans backed by the Federal Housing Administration (FHA) and 

the Department of Veterans Affairs (VA), as well as loans backed by the 

Rural Housing Service (RHS) and the Office of Public and Indian Housing 

(PIH) within the Department of Housing and Urban Development (HUD).

Ginnie Mae plays a significant role in the secondary market and to some 

extent competes directly with private sector entities. However, as a 

government agency housed within HUD, it has less flexibility than a private 

sector company in the way it operates.1

 Partly because of that lack of 

flexibility, Ginnie Mae faces a number of challenges in responding to 

changes in the marketplace and in managing its operations efficiently and 

effectively. In particular, Ginnie Mae must determine if and how it should 

respond to its steadily declining share of the overall market for 

mortgage-backed securities (MBS).

Concerned about this decline in Ginnie Mae’s market prominence, you 

asked us to address (1) the state of Ginnie Mae’s market share and 

guarantee volume, (2) the potential implications of changes in Ginnie Mae’s 

1

This report refers to Ginnie Mae as an “agency” because it is a government corporation 

housed within HUD. See 5 U.S.C. § 105.
Page 2 GAO-06-9 Ginnie Mae

market share and guarantee volume, and (3) the challenges Ginnie Mae 

faces in fulfilling its mission and the steps that have been or could be taken 

to address these challenges. 

To address our objectives, we analyzed data provided by Ginnie Mae and 

industry sources on Ginnie Mae’s guarantee volume and market share, 

interviewed agency representatives, and reviewed agency documents. We 

also interviewed representatives of HUD’s FHA and PIH programs, and its 

Office of the Inspector General (OIG), VA, RHS, and the Federal Housing 

Finance Board and reviewed documents from these entities. In addition, 

we spoke with and gathered relevant documents from a variety of Ginnie 

Mae stakeholders and secondary market participants, including issuers of 

Ginnie Mae securities, institutional investors, investment banks, the 

Federal National Mortgage Association (Fannie Mae), the Federal Home 

Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks 

of Chicago and Seattle, and trade associations such as the Bond Market 

Association. Further, we conducted a literature search and reviewed Ginnie 

Mae’s legislative history and relevant laws, regulations, and guidance, as 

well as reports by HUD’s OIG. We conducted our work in Washington, 

D.C., and Boston from October 2004 through September 2005 in 

accordance with generally accepted government auditing standards. 

Appendix I provides additional details on our scope and methodology.

Background Mortgage lenders keep the loans they originate in the primary market or 

sell them in the secondary, or resale, markets. In turn, purchasers of 

mortgage loans in the secondary markets either hold the loans in their own 

portfolios or, most often, pool together a group of loans to back MBS that 

are sold to investors or held in the originator’s portfolio. Secondary loan 

markets benefit lenders, borrowers, and investors in a number of ways. 

First, they allow lenders to manage their liquidity needs, reduce interest 

rate risk, and generate funds for additional lending. Second, they increase 

the amount of credit available to borrowers and help lower interest rates by 

fostering competition among lenders. Finally, they allow investors to 

further diversify their risks and to sell their interests on active secondary 

markets to other willing investors.
Page 3 GAO-06-9 Ginnie Mae

Ginnie Mae was created in 1968 through an amendment to the National 

Housing Act.2

 Organizationally, Ginnie Mae operates as a unit of HUD, and 

its administrative, staffing, and budgetary decisions are coordinated with 

HUD’s. Ginnie Mae defines its mission as expanding affordable housing in 

America by linking capital markets to the nation’s housing markets, largely 

by serving as the dominant secondary market vehicle for governmentbacked loan programs.3

 These programs, which insure or guarantee 

mortgage loans that are originated in the private sector, are administered 

by a variety of federal agencies, including FHA, VA, RHS, and PIH. The 

government backing provided by these programs expands opportunities for 

homeownership to borrowers who may have difficulty obtaining a 

conventional mortgage.4

Ginnie Mae does not buy or sell loans or issue mortgage-backed securities. 

Rather, it provides guarantees backed by the full faith and credit of the U.S. 

government that investors will receive timely payments of principal and 

interest on securities supported by pools of government-backed loans, 

regardless of whether the borrower makes the underlying mortgage 

payment or the issuer makes timely payments on the MBS. Figure 1 shows 

the process of Ginnie Mae securitization. All mortgages in the Ginnie Mae 

pool must be insured or guaranteed by a government agency and have 

eligible interest rates and maturities.

2

Housing and Urban Development Act of 1968, Pub. L. No. 90-448; see 12 U.S.C. §§ 

1716-1723c. Ginnie Mae’s charter allows it to conduct three primary activities: (1) implement 

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

mortgages, (2) conduct certain management and liquidation functions related to mortgages 

in which federal agencies have a financial interest, and (3) purchase certain federally 

backed mortgages. According to Ginnie Mae officials, at present Ginnie Mae exercises only 

the first of these authorities. 

3

For the purposes of this report, the term “government-backed loan” is used to describe a 

mortgage loan that is either insured or guaranteed by a program of the federal government. 

4

Mortgages without explicit government backing are called conventional mortgages.
Page 4 GAO-06-9 Ginnie Mae

Figure 1: Ginnie Mae Securitization Process 

Notes: This chart represents the process for basic Ginnie Mae I and Ginnie Mae II MBS. These 

securities may serve as collateral for other products, such as Ginnie Mae Real Estate Mortgage 

Investment Conduits and Platinum Securities.

a

An issuer is a company or government entity offering securities for sale to investors.

b

A broker-dealer is an individual or firm in the business of buying and selling securities.

Ginnie Mae has several different products. Ginnie Mae’s original MBS 

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

mortgages (e.g., single family) with similar maturities and the same interest 

rates. The Ginnie Mae II MBS program, which was introduced in 1983, 

permits pools to contain loans with more heterogeneous loans. For 

example, the underlying mortgages in a pool can have varying interest rates 

and a pool can be created using adjustable rate mortgages (ARM).5

 Ginnie 

Mae’s Multiclass Securities Program, introduced in 1994, includes, among 

5

An adjustable rate mortgage is a loan type that allows the lender to adjust the interest rate 

during the term of the loan. In contrast, a fixed rate mortgage has an interest rate that does 

not change during the term of the loan.

Borrowers

take out loans

Lenders

originate loans under guidelines

of federal credit programs

Issuersa

(often the lenders or their affiliates) pool loans

and create a mortgage-backed security

Broker-dealersb

market and sell security to investors

Investors

purchase security and receive monthly passthrough of principal and interest from borrowers

Servicers

collect

payment

and disburse

principal and

interest

FHA, VA,

RHS, or PIH

insure or guarantee loans

Ginnie Mae

guarantees investors

timely payment

of principal and 

interest on security

$

mortgage

payments

Source: GAO.
Page 5 GAO-06-9 Ginnie Mae

other things, Real Estate Mortgage Investment Conduits (REMIC) and 

Ginnie Mae Platinum Securities. REMICs are designed to tailor the 

prepayment and interest rate risks associated with MBS to investors with 

varying investment goals. These products direct principal and interest 

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

principal balances, interest rates, and other characteristics. Ginnie Mae 

Platinum Securities allow investors to aggregate MBS with relatively small 

remaining principal balances and similar characteristics into new, more 

liquid securities.

Investors in Ginnie Mae MBS face prepayment risk—that is, the possibility 

that borrowers will pay off their mortgages early, reducing the amount of 

interest earned. However, investors do not face credit risk—the possibility 

of loss from unpaid mortgages—because the underlying mortgages backing 

the pools are federally insured or guaranteed and Ginnie Mae guarantees 

timely payment of principal and interest. FHA’s single-family loan program 

and PIH’s loan guarantee programs insure nearly 100 percent of the loan 

amount. VA guarantees the lender against losses, subject to a cap equal to 

25 percent to 50 percent of the loan amount based on the size of the loan; 

RHS guarantees up to 90 percent of the loan value. Issuers are responsible 

for delinquent loans in pools. When a Ginnie Mae issuer defaults in making 

timely payments of principal and interest to investors, Ginnie Mae makes 

the payments and takes over the issuer’s entire portfolio of governmentbacked loans that stand behind the securities that Ginnie Mae has 

guaranteed. 

Ginnie Mae charges issuers a guarantee fee for providing its guarantee of 

timely payment. The fee varies depending on the product and is six basis 

points for securities backed by single-family loans, which represent the 

majority of Ginnie Mae MBS.6

 Issuers also pay a commitment fee that gives 

them the authority to pool mortgages into Ginnie Mae MBS. Issuers of 

Ginnie Mae securities may also collect a fee to cover the cost of servicing 

the underlying mortgages (generally 44 basis points for Ginnie Mae I 

products and 19 to 69 basis points for the Ginnie Mae II). Ginnie Mae does 

not receive appropriations or borrow money to finance its credit 

operations. The agency’s revenues exceed its expenses, which reduces the 

federal budget deficit.

6

A basis point represents one 1/100th of a percentage point (0.01 percent). A guarantee fee 

of six basis points means that Ginnie Mae charges issuers an annual fee of 6 cents for every 

$100 of guaranteed MBS.
Page 6 GAO-06-9 Ginnie Mae

Results in Brief The vast majority of loans in FHA’s mortgage insurance program and VA’s 

loan guarantee program have historically been pooled into MBS guaranteed 

by Ginnie Mae. In fiscal year 2004, Ginnie Mae guaranteed $149.1 billion in 

MBS, which financed more than 90 percent of new loans issued by FHA’s 

and VA’s loan programs. Because the agency’s MBS are backed solely by 

loans supported by FHA, VA, PIH, and RHS programs, its MBS volume is 

largely a function of the volume of these loan programs. Ginnie Mae 

appears to face relatively little competition in the market for securitizing 

government-backed housing loans. Other major participants in the 

secondary market for mortgages—such as Fannie Mae, Freddie Mac, the 

Federal Home Loan Banks, and state and local government agencies—have 

purchased or securitized a relatively small number of government-backed 

loans in recent years and do not appear to have plans for significant 

expansion into this market. Ginnie Mae’s share of the overall MBS market 

has declined significantly since the 1980s, dropping from about 42 percent 

of newly issued securities in 1985 to about 7 percent in 2004. This decline is 

largely due to two factors: a decline in the number of loans FHA and VA 

have originated, which has not kept pace with growth in the total market, 

and the rapid rise in the securitization of conventional mortgages during 

this period.

Changes in Ginnie Mae’s volume of new and existing securities could affect 

borrowers, the liquidity of the Ginnie Mae securities themselves, and 

government revenues. Competition from other secondary market players 

that reduced Ginnie Mae’s share of the government-backed loan market 

would not necessarily harm borrowers because these new players would 

need to offer products that were competitive with Ginnie Mae’s. But a 

decline in the share of high-quality mortgages included in Ginnie Mae’s 

MBS would lower the securities’ credit quality and may increase the default 

rate of the underlying mortgages, possibly increasing servicing costs and 

interest rates for new borrowers of government-backed loans. In addition, 

significant declines in the volume of Ginnie Mae securities could also 

reduce their liquidity, although it is unclear how low Ginnie Mae’s volume 

would have to be before reduced liquidity became a significant concern. 

Finally, because Ginnie Mae’s program income is based on the principal 

balance of its securities portfolio, declines in Ginnie Mae’s outstanding 

volume could decrease federal revenues. Ginnie Mae’s revenues exceed its 

expenses—by $295 million, net of interest income, in fiscal year 

2004—helping to reduce the federal budget deficit. 
Page 7 GAO-06-9 Ginnie Mae

Ginnie Mae faces a number of challenges in fulfilling its mission of 

supporting borrowers of government-backed loan programs, and we found 

that the agency generally has been taking steps likely to help address these 

challenges:

• Ginnie Mae has responded to a changing mortgage market by improving 

the efficiency and flexibility of some products and expanding its scope 

to provide securitization for new types of loans. For example, Ginnie 

Mae worked with FHA to develop and ensure securitization of new FHA 

hybrid ARM products, which, as of 2004, have provided FHA borrowers 

with additional options previously available only in the conventional 

markets. In 2005, Ginnie Mae began guaranteeing securities that finance 

RHS multifamily loans, providing a new secondary market outlet for this 

program. However, the Veterans Benefits Improvement Act of 2004 did 

not address provisions that have limited investors’ interest in securities 

containing certain VA hybrid ARM products. Similarly, certain FHA 

hybrid ARM products contained terms that, until modified, were 

unattractive to investors and thus to lenders. Ginnie Mae and VA 

officials say that capital market participants may not have been 

sufficiently consulted during the legislative process to ensure that 

provisions of the FHA and VA hybrid ARM programs were consistent 

with Ginnie Mae and conventional secondary market requirements.

• The securities industry has raised concerns for several years that Ginnie 

Mae does not disclose sufficient information on items such as loan 

terms and borrower characteristics for the loans in its pools, hindering 

the ability to predict prepayment rates for Ginnie Mae securities. Ginnie 

Mae’s ongoing MBS Disclosure Initiative, which began in January 2004, 

is providing investors with substantial additional and more frequent 

information on its securities’ loan pools. 

• In 1999, Ginnie Mae was in danger of exhausting the limit of its 

congressionally authorized commitment authority that was available for 

1 year and thus was not able to fully meet commitments it had made to 

capital market participants. To address this problem, since 2002, 

Congress has made Ginnie Mae’s commitment authority available for 2 

years. Other options to address this problem include increasing Ginnie 

Mae’s commitment authority limits or requiring earlier notification to 

Congress on the amount of commitment authority the agency has used.

In addition to responding to the marketplace, Ginnie Mae faces challenges 

in managing its internal operations in an efficient and cost-effective manner 
Page 8 GAO-06-9 Ginnie Mae

and in ensuring that appropriate internal controls are in place. Following 

losses due to fraud in 2002, reviews by HUD’s OIG of Ginnie Mae’s internal 

controls, as well as our review, identified inconsistencies and inaccuracies 

in Ginnie Mae’s data systems. For example, the agency was initially unable 

to provide us with accurate data on the composition of the loans backing 

its portfolio. The agency recently completed a business process 

improvement plan and has other initiatives under way—but not yet fully 

implemented—designed to improve its data integrity and streamline its 

operations. Ginnie Mae operates with a small staff of about 66 people and 

contracts out most of its operations. A 2004 resource management study by 

HUD found Ginnie Mae had sufficient staff resources to perform contract 

administration functions. But given its reliance on contractors, Ginnie Mae 

should continue to focus on ensuring that these staff have sufficient 

training, qualifications, and capabilities to ensure that its contracts are 

planned, monitored, and executed appropriately. 

HUD reviewed a draft of this report and concurred with our findings.

Ginnie Mae Securities 

Finance Most 

Government-Backed 

Housing Loans, but 

Represent a Declining 

Share of the Total MBS 

Market

Ginnie Mae securities finance the great majority of FHA and VA loans, 

suggesting that the agency is fulfilling its basic mission, and faces relatively 

little competition in the market for government-backed mortgage loans. 

However, Ginnie Mae’s share of the total MBS market has declined over the 

last 20 years, both in terms of new issuances and volume outstanding, 

largely because FHA and VA loan origination has not kept pace with growth 

in the overall mortgage market and because securitization of conventional 

mortgages has become far more prevalent.

Ginnie Mae Guarantees 

Securities for the Bulk of 

FHA and VA Single-Family 

Loans

Historically, the vast majority of government-backed housing loans have 

been pooled to back MBS for which Ginnie Mae guarantees the timely 

payment—a trend that continues today. Ginnie Mae issued its first MBS in 

1970, and since that time it has guaranteed a cumulative total of more than 

$2 trillion of MBS. According to Ginnie Mae, its securities historically have 

represented roughly 90 percent of the market for FHA and VA loans. For 

example, between fiscal years 1998 and 2004 Ginnie Mae securities 

financed between about 84 percent and 96 percent of FHA-insured 

single-family loans (see fig. 2). In fiscal year 2004, Ginnie Mae issued a total 

of $149.1 billion in MBS. These MBS financed 91 percent of all eligible loans 

insured or guaranteed by FHA and VA. Ginnie Mae securities also have 
Page 9 GAO-06-9 Ginnie Mae

financed about half of RHS-guaranteed single-family loans since 1999 and 

financed roughly 40 percent of PIH-backed loans in fiscal year 2004.

Figure 2: FHA-Insured Single-Family Loans Guaranteed by Ginnie Mae Securities, 

Fiscal Years 1998–2004

Note: Ginnie Mae’s MBS issuance and the FHA loan endorsement do not occur simultaneously, 

resulting in a lag between the year an FHA loan is endorsed and the year that Ginnie Mae is recorded 

as guaranteeing its securitization. To improve the accuracy of the data, Ginnie Mae recently matched 

most of the FHA loans with the Ginnie Mae MBS in which they were pooled from 1998 until the 

present. Data for Ginnie Mae’s share of VA originations is not presented here because Ginnie Mae is 

still in the process of completing the matching process for its VA portfolio.

In 2004, newly issued Ginnie Mae securities financed $83.8 billion in 

FHA-insured loans, $31.4 billion in VA-guaranteed loans, and $1.6 billion in 

loans guaranteed by RHS and PIH. As shown in figure 3, FHA and VA loans 

represented 72 percent and 27 percent, respectively, of Ginnie Mae’s 

portfolio of new issuances that year, with RHS and PIH representing about 

1 percent. About 92 percent of the loans backing Ginnie Mae MBS were 

single-family loans; the remainder were multifamily loans. Because Ginnie 

Mae’s charter keeps it focused on a discrete portion of the MBS 

market—specifically, that of loans made under FHA, VA, RHS, and PIH 

programs—the volume of Ginnie Mae’s new MBS issuance is linked directly 

to the origination volume of these programs. Changes in Ginnie Mae’s 

market volume over the years are thus largely a reflection of changes in the 

1998 1999 2000 2001 2002 2003 2004

Percentage

Source: GAO analysis of Ginnie Mae data.

0

20

40

60

80

100
Page 10 GAO-06-9 Ginnie Mae

volume of FHA and VA loans, which represent 99 percent of Ginnie Mae’s 

portfolio.

Figure 3: Composition of Ginnie Mae’s Newly Issued MBS, 2004

Ginnie Mae Faces Relatively 

Little Competition in the 

Secondary Market for 

Government-Backed Loans

Although Ginnie Mae securities finance the great majority of the 

government-backed loans it is authorized to support, it does face potential 

competition from other secondary market entities. Federally insured and 

guaranteed loans can be expected to appeal to conventional securitizers 

because these loans carry little to no credit risk. However, Ginnie Mae has 

consistently captured 90 percent or more of the market for FHA and VA 

loans. Market participants told us that Ginnie Mae captured most of the 

market because of the difficulty of competing with the government 

guarantee of timely payment. This guarantee helps Ginnie Mae securities

8%

92%

Multifamily

Single family

27%

72%

1%

RHS/PIH

FHA

VA

Type of loan Type of housing

Source: GAO analysis of Ginnie Mae data.
Page 11 GAO-06-9 Ginnie Mae

command a higher price and, correspondingly, offer a lower yield than 

other MBS of government-backed loans.7

We spoke with a number of secondary market participants that have or 

could become active in the market for government-backed loans, including 

the Federal Home Loan Banks, Fannie Mae, Freddie Mac, state and local 

government agencies, and private label issuers.8

 In general, they have had 

limited or no involvement in Ginnie Mae’s market. Moreover, for a variety 

of reasons, they do not appear to have plans to encroach on Ginnie Mae’s 

market to any substantial degree, as the following examples illustrate:

• The Federal Home Loan Banks (FHLBank) have mortgage programs 

under which they purchase pools of conventional and federally insured 

or guaranteed mortgage loans from member banks.9

 First authorized in 

1998, the programs go by the names of the Mortgage Partnership 

Finance® program and the Mortgage Purchase Program.10 The programs 

were attractive to lenders in part because lenders could use them to sell 

their mortgages without paying guarantee fees. In 2000, FHLBanks took 

over a significant amount of Ginnie Mae’s market share and purchased 

$12.7 billion in FHA and VA loans, representing about 11 percent of the 

combined market for those loans. However, the Federal Housing 

Finance Board, which oversees the FHLBanks, became concerned 

because the program was intended to focus on conventional rather than 

FHA loans. The board took measures to encourage the FHLBanks to 

limit their purchase of FHA loans to no more than one-third of their 

7

“Price” refers to the dollar amount to be paid for a security and “yield” to the rate of return 

it earns. As a security’s price rises, its yield falls because strong demand for a given security 

raises its price for the seller and the return to the investor (yield) declines. Conversely, as a 

security’s price declines, its yield rises.

8

“Private label issuer” is the term commonly used to describe a securities issuer that is an 

entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such 

issuers may include subsidiaries of investment banks or other financial institutions.

9

The Federal Home Loan Bank System is a government-sponsored enterprise that consists 

of 12 Federal Home Loan Banks, which are cooperatively owned by member financial 

institutions—typically commercial banks and thrifts (or savings and loans). The primary 

mission of the FHLBank System is to promote housing and community development, 

generally by making loans, also known as advances, to member financial institutions. See 

GAO, Federal Home Loan Bank System: An Overview of Changes and Current Issues 

Affecting the System, GAO-05-489T (Washington, D.C.: Apr. 13, 2005).

10Mortgage Partnership Finance is a registered trademark of the Federal Home Loan Bank of 

Chicago.
Page 12 GAO-06-9 Ginnie Mae

mortgage purchase program portfolio. After 2000, FHLBanks greatly 

reduced their purchases of FHA loans. From 2001 to 2003, they 

purchased loans representing about 4 percent to 5 percent of the FHA 

market, which then declined further to about 2 percent in 2004. 

• In fiscal year 2004, Fannie Mae purchased 4 percent of all FHA and VA 

originations.11 Its share of FHA and VA originations has varied over time, 

ranging from 1 percent to 6 percent between 1990 and 2004, or just 0.3 

percent to 3 percent of Fannie Mae’s total purchase activity. According 

to Fannie Mae officials, these purchases of government loans consist 

largely of repurchases of delinquent loans. A Fannie Mae official told us 

the company did not systematically purchase FHA loans and in its 

normal course of business did not consider itself a competitor with 

Ginnie Mae. Fannie Mae does not receive credit from HUD toward its 

affordable housing goals by purchasing government-backed loans.12

• Freddie Mac has purchased less than 1 percent of the market of FHA 

and VA loans each year since 1990. Freddie Mac officials said that its 

competition with Ginnie Mae is largely indirect, by encouraging 

conventional lending to the most creditworthy low- and moderateincome borrowers who might otherwise receive a mortgage through 

FHA or VA. Freddie Mac officials also said they do not compete with 

Ginnie Mae in the secondary market directly because it is hard to 

compete with Ginnie Mae’s government guarantee. In addition, as with 

Fannie Mae, government-backed loans do not count toward Freddie 

Mac’s required affordable housing goals. Freddie Mac does purchase 

some mortgage revenue bonds that are collateralized by FHA and VA 

loans and directly purchases some FHA and VA loans that Ginnie Mae 

does not securitize. 

• State and local government entities, including housing finance agencies, 

issue mortgage revenue bonds to raise funds in the capital markets for 

mortgage lending. Because these bonds are tax exempt, investors are 

11Fannie Mae and Freddie Mac are government-sponsored enterprises—congressionally 

chartered, private corporations that are publicly owned—that help ensure that funds are 

available to home buyers by buying mortgages from mortgage originators, such as savings 

and loan associations, commercial banks, and mortgage bankers.

12The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires 

Freddie Mac and Fannie Mae to meet housing goals established by HUD for serving certain 

categories of borrowers, including those who are underserved and have low or moderate 

incomes. Pub. L. No. 102-550 §§ 1331-1334; see 12 U.S.C. §§ 4561-4565 (2000 & Supp. 2004).
Page 13 GAO-06-9 Ginnie Mae

willing to accept a lower interest rate for them. This interest savings is 

passed on through lenders to lower-income families in the form of loans 

with interest rates below the market average. These bonds often finance 

government-backed mortgages. As of 2003, 71 percent of the mortgages 

that revenue bonds financed were insured or guaranteed by a federal 

program—58 percent by FHA, 10 percent by RHS, and 3 percent by VA. 

The overall volume of mortgage revenue bonds issued was $10.7 billion 

in 2003.13

• Private label issuers purchased an estimated 3 percent of FHA and VA 

loans in 2004. These issuers account for an increasingly large share of 

the overall MBS market, but most of their market consists of loans not 

offered by FHA and VA programs, such as jumbo nonconforming loans 

and home equity lines of credit.14 According to RHS officials, private 

label issuers do currently securitize the majority of Section 538 

multifamily loans guaranteed by RHS, but these loans account for less 

than 1 percent of Ginnie Mae’s portfolio. 

Most of the competition for Ginnie Mae’s market share does not come 

directly—that is, secondary market participants are not seeking to 

purchase or securitize significant numbers of government-backed loans. 

Rather, lenders compete with Ginnie Mae indirectly by seeking greater 

market share at the origination level by making conventional loans to 

borrowers who might otherwise use FHA and VA loan programs. Fannie 

Mae and Freddie Mac have an incentive to serve this market because 

lower-income borrowers who might otherwise turn to a governmentbacked loan program can help them meet their housing goals established 

by HUD. In addition, subprime mortgage originations have grown

13Measuring the secondary market share of government-backed loans that these bonds 

represent is difficult because the bonds are often purchased by other secondary market 

entities. For example, Freddie Mac’s reported purchases of FHA loans include loans 

collateralizing mortgage revenue bonds that it holds.

14A jumbo nonconforming loan provides financing for those borrowers who are purchasing 

or refinancing properties that require larger loan amounts than Fannie Mae and Freddie Mac 

will allow—$359,650 for a single-family mortgage in 2005. Home equity lines of credit 

provide a revolving line of credit based on the equity available in a home.
Page 14 GAO-06-9 Ginnie Mae

dramatically in recent years, as many lenders market to less creditworthy 

borrowers who in the past may have received a government-backed loan.15

Ginnie Mae’s Share of the 

Total MBS Market Has 

Declined 

Although Ginnie Mae continues to finance the bulk of government-backed 

loans, its share of the overall MBS market has declined substantially over 

the past 20 years. As shown in figure 4, Ginnie Mae securities represented 

42 percent of all new MBS issued in 1985, but only 7 percent in 2004.16 This 

drop in market share of new issuance is due not to a significant decline in 

Ginnie Mae’s MBS issuance, but rather to rapid growth in the rest of the 

market—Fannie Mae, Freddie Mac, and private label issuers, which we 

refer to as the “conventional” market for MBS. In 1985, Ginnie Mae MBS 

issuance was $46 billion, while the conventional market issued $64 billion. 

By 2004, Ginnie Mae issuance had grown to $127 billion, but issuance of 

conventional MBS had grown to $1.8 trillion. MBS issuance has risen 

among all segments of the conventional market. The rise in private label 

MBS issuance has been particularly steep in the last few years, rising from 

$136 billion in 2000 to $864 billion in 2004.

15The subprime market serves borrowers who have poor or no credit histories or limited 

incomes who cannot meet the credit standards for obtaining loans in the prime market. 

Many borrowers of government-backed loan programs, which are designed to serve 

lower-income or underserved populations, have those characteristics.

16For the purposes of this report, issuance refers to new MBS issued in a given year and 

outstanding refers to the cumulative amount of existing MBS issued in the past years and 

still held by investors.
Page 15 GAO-06-9 Ginnie Mae

Figure 4: MBS Market Volume and Ginnie Mae’s Market Share, Fiscal Years 1985-2004 

Note: Total market includes Ginnie Mae, Fannie Mae, Freddie Mac, and private label issuers.

Two factors have spurred the growth of the conventional MBS market: the 

increasing number of conventional mortgage originations and the growing 

proportion of these mortgages that are securitized. Mortgage lending in the 

conventional market has grown much more rapidly over the last 20 years 

than lending through FHA and VA programs.17 Conventional mortgage 

originations rose from an estimated $243 billion in 1985 to an estimated 

$2.8 trillion in 2004. In contrast, originations of FHA and VA loans rose from 

$42 billion to $129 billion during that period. In addition, the rate of 

0

.5

1.0

1.5

2.0

2.5

3.0

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

10

20

30

40

50

Percentage Dollars in trillions

Ginnie Mae MBS issuance

Ginnie Mae share of total MBS issuance

Total market MBS issuance

Source: GAO analysis of data from the 2005 Mortgage Market Statistical Annual, Volume II: The Secondary Market.

17Market participants cite several reasons for recent declines in FHA and VA loan volume. 

Among them are (1) increased competition from private mortgage insurers and other 

housing finance institutions; (2) administrative and regulatory requirements that may serve 

as a disincentive to lenders to originate FHA and VA loans; (3) rising home prices, which 

reduce the proportion of homes that can stay within FHA’s and VA’s mortgage limits; and (4) 

a decline in the veteran population that has reduced the number of potential VA borrowers.
Page 16 GAO-06-9 Ginnie Mae

securitization of conventional mortgages has risen rapidly over the last 20 

years; by the end of 2004, almost half of outstanding mortgage debt was 

financed through securitization, according to the Bond Market Association. 

Ginnie Mae’s market share of outstanding MBS has also declined 

significantly over the last 20 years, falling from 54 percent in 1985 to 10 

percent in 2004. Since 2000, Ginnie Mae’s volume of MBS outstanding has 

fallen from $612 billion to $453 billion in 2004, a drop of approximately 26 

percent. The primary factor contributing to this decline has been the 

increase in borrowers who have refinanced out of FHA and VA loan 

programs into conventional loans. Falling interest rates and rising home 

prices have led to a boom in refinancing over the last 10 years, particularly 

from 1997 to 1999 and 2001 to 2004. At the peak of the refinancing boom in 

2003, refinancings represented about 65 percent of mortgage originations. 

As some borrowers with mortgages insured by FHA and guaranteed by VA 

have built up equity in their homes, they have been able to refinance out of 

these programs into conventional loans that may offer more favorable and 

flexible terms and interest rates. This trend may have been facilitated to 

some extent by the increased availability of loans to borrowers who are 

less creditworthy. This has allowed some borrowers who would not 

otherwise have been able to borrow in the conventional market to do so 

rather than using FHA-insured and VA-guaranteed mortgage programs. The 

decline in the outstanding volume of FHA and VA loans has led to a 

corresponding decline in the outstanding volume of Ginnie Mae securities, 

which are mostly composed of those loans.

To a lesser extent, lender repurchases of delinquent FHA-insured and 

VA-guaranteed loans in Ginnie Mae pools have also contributed to the 

decline in Ginnie Mae’s volume of outstanding MBS. Ginnie Mae’s policy 

prior to 2003 allowed lenders and servicers to repurchase loans that were 

in their Ginnie Mae pools if the borrower missed just one payment that 

remained unpaid for 4 consecutive months. According to Ginnie Mae, these 

loans often had a low risk of default; the loan may have had only one 

missed payment followed by resumption of loan servicing by the borrower. 

However, lenders were able to profit by repurchasing these loans for the 

remaining balance because, during an era of falling interest rates, the 

market value of the loans was more than the remaining balance. Data 

obtained from Ginnie Mae officials show that these repurchases of 

delinquent loans reached a peak in 2002, when they totaled $22 billion, and 

that they contributed to the decline in Ginnie Mae’s outstanding volume. To 

address this problem, Ginnie Mae announced a revision to its loan 

repurchase policy in November 2002. Under the new policy, for pools 
Page 17 GAO-06-9 Ginnie Mae

issued on or after January 1, 2003, servicers can repurchase delinquent 

loans only when no payment has been made for 3 consecutive months.18

Ginnie Mae officials as well as issuers we talked with said that these new 

policies appear to have curtailed repurchase activity.

Changes in Ginnie 

Mae’s Share and 

Volume Could Have 

Implications for 

Borrowers, the 

Liquidity of Its 

Securities, and Federal 

Revenue

Ginnie Mae’s share of the government-backed mortgage market has been 

fairly constant. If other secondary market players substantially increased 

their market share of government-backed mortgages, borrowers would be 

unlikely to see higher interest rates or tighter credit immediately, because 

such players would need to offer products that were competitive with 

Ginnie Mae’s. However, a decline in the proportion of high-quality 

mortgages included in Ginnie Mae’s MBS could lower their overall credit 

quality, potentially raising the cost of servicing the underlying mortgages 

and thus interest rates paid by borrowers. In addition, any decline in the 

volume of Ginnie Mae’s MBS could potentially reduce their liquidity, 

although it is unclear whether reduced liquidity is likely to be a significant 

concern in the foreseeable future. Finally, declines in Ginnie Mae’s 

outstanding volume would reduce its fee revenue from its MBS programs. 

Because Ginnie Mae’s program income exceeds its expenses, a drop in 

income could affect its contribution to reducing the federal budget deficit.

Ginnie Mae’s Benefits to 

Borrowers of 

Government-Backed Loans 

May Not Be Dependent on 

Its Market Share

As noted earlier, Ginnie Mae has consistently guaranteed MBS for the great 

majority of FHA and VA loans, but its share of the total MBS market has 

declined significantly since 1985. Borrowers of government-backed loan 

programs have benefited from the Ginnie Mae guarantee because it helps 

make such loans more accessible and keep borrowers’ interest rates down. 

New issuance of Ginnie Mae MBS has remained fairly constant, generally 

ranging from $150 billion to $200 billion annually from 1998 to 2004. Ginnie 

Mae’s share of the MBS market for government-backed loans would likely 

decline only if other secondary market players such as the Federal Home 

Loan Banks, Fannie Mae, Freddie Mac, state and local government entities, 

18Under the new policy, repurchases of loans issued on or before December 1, 2002, are 

permitted where for 4 consecutive months at least one missed payment remains uncured (a 

“rolling” delinquency) or else a consecutive 3 month delinquency warranted repurchase 

consideration. For pools issued on or after January 1, 2003, loans to be repurchased must be 

delinquent for 3 consecutive months. Loans with rolling delinquencies issued in pools on or 

after January 1, 2003, are not eligible for repurchase. See HUD, Ginnie Mae MBS Guide, 

Ginnie Mae 5500.3, Rev. 1 (Washington, D.C.; July 1, 2003), ch. 18.
Page 18 GAO-06-9 Ginnie Mae

and private label issuers chose to become more active in the securitization 

of these loans. In such a scenario, interest rates would probably not rise or 

credit tighten for borrowers because such players would need to offer 

products that were competitive with Ginnie Mae’s, thus benefiting 

borrowers to a similar degree. As noted earlier, however, such a scenario is 

unlikely in the near future, as other secondary market participants 

generally appear to have chosen not to directly compete with Ginnie Mae 

because of the government guarantee.

As we have seen, Ginnie Mae’s outstanding volume of MBS has declined in 

recent years because the outstanding volume of FHA and VA loans has 

fallen as growing numbers of borrowers refinance in the conventional 

market. However, those FHA and VA borrowers who are able to take 

advantage of refinancing options are generally the most creditworthy of the 

programs’ borrowers. The result has been a decline in the overall credit 

quality of FHA and VA loans in recent years indicated by increased default 

and foreclosure rates in government mortgage insurance and guarantee 

programs. As a result, the loan quality underlying Ginnie Mae’s securities 

has declined. Thus far, investors have not been directly affected by this 

development because of the government guarantee. 

However, the cost of servicing the government-backed loans in Ginnie 

Mae’s pools could rise in such a scenario, since managing delinquencies 

and the foreclosure process is the most costly component of servicing. 

According to Ginnie Mae, the servicing fees issuers are allowed to charge 

are sufficient to cover any significant increase in servicing costs resulting 

from declines in credit quality. However, increased servicing costs could 

result in smaller profits for Ginnie Mae issuers, potentially reducing 

lenders’ willingness to make government-backed loans and increasing 

borrowers’ interest rates. In addition, any increase in prepayment rates due 

to borrower defaults could reduce the price investors are willing to pay for 

Ginnie Mae MBS, which could also act to raise interest rates for borrowers.
Page 19 GAO-06-9 Ginnie Mae

Changes in Ginnie Mae’s 

Volume Could Potentially 

Affect the Liquidity of Its 

Securities

A market is said to be liquid if the instruments it trades can be bought by 

investors or sold in the markets quickly and easily with little impact on 

market prices. Liquid assets have relatively lower yields and higher prices 

than illiquid assets.19 One key factor affecting the liquidity of MBS is the 

size of the market in which they are traded—all other things being equal, 

larger markets are generally more liquid than smaller markets. In addition, 

standardized pools—that is, pools of mortgages with similar interest rates 

and terms—are generally more liquid than pools of mixed mortgage 

products, which cannot be traded as readily because they are more difficult 

to value and thus riskier. For this reason, Ginnie Mae I securities are more 

liquid than Ginnie Mae II securities (whose pools consist of loans with 

more variability).

Market participants we spoke with provided mixed opinions about the 

current liquidity of Ginnie Mae securities. Some dealers said that Ginnie 

Mae securities were quite liquid and traded easily, while others noted that 

they were less liquid than other MBS, such as those issued by Fannie Mae 

and Freddie Mac. One institutional investor told us that Ginnie Mae 

securities that are traded in smaller volumes—such as those backed by 

hybrid ARMs—could face liquidity issues. Another noted that the liquidity 

of Ginnie Mae securities could be a concern for very large trades, such as 

those of more than $1 billion.

Any reduced liquidity resulting from a continued decline in Ginnie Mae’s 

market share could have some effect on the costs to borrowers of 

government-backed loans. However, it is not clear how significant the 

decline would have to be before liquidity became a significant concern that 

materially affected the pricing of Ginnie Mae securities and thus interest 

rates for borrowers of government-backed loans. Ginnie Mae officials told 

us that their securities had at least adequate liquidity. They noted, for 

example, that the bid-ask spread on Ginnie Mae securities was comparable 

with the spread for Fannie Mae securities, one indication that liquidity is 

not currently an issue.20 The officials said that if volume continued to 

19The less risky an asset, the more investors will pay for it and the lower the interest rate, or 

yield, that they will require from it. 

20Bid-ask spreads represent the difference between the price at which an investor can buy a 

bond and can sell the same bond. Bid-ask spreads are sometimes used as an indicator of 

liquidity, since small spreads can suggest active trading and efficient pricing.
Page 20 GAO-06-9 Ginnie Mae

decline, liquidity could become a significant concern in the future, although 

it is unknown at what levels of volume this would occur.

Changes in Ginnie Mae’s 

Outstanding Volume Could 

Affect Its Contribution to 

Reducing the Federal 

Budget Deficit

Revenues from Ginnie Mae’s MBS guarantee programs exceed the cost of 

operating them. Since fiscal year 1985, the agency has not had to borrow 

from the U.S. government to finance its operations and its excess funds go 

into a receipt account held as capital reserves. As shown in table 1, in fiscal 

year 2004 Ginnie Mae had total revenues of $815.5 million and expenses of 

$77.8 million. The excess of its revenues over expenses, net of interest 

income, is invested in U.S. government securities and reduces the amount 

that the Treasury must borrow from the public to finance government 

programs—that is, it reduces the deficit.21 In fiscal year 2004, this amount 

was $295 million.

Table 1: Ginnie Mae’s Revenues and Expenses, Fiscal Years 1998-2004

Source: Ginnie Mae.

Most of Ginnie Mae’s revenue comes from MBS program income, which 

totaled $372.8 million in fiscal year 2004. Ginnie Mae charges issuers a 

guarantee fee that is based on the aggregate principal balance of an issuer’s 

21Ginnie Mae’s interest income does not have a direct effect on its contribution to offsetting 

the federal budget deficit. Interest income that Ginnie Mae receives is, from the Treasury’s 

point of view, offset by the Treasury’s cost of paying it.

Dollars in millions

Fiscal Year

Ginnie Mae revenues and 

expenses 1998 1999 2000 2001 2002 2003 2004

Interest income $362.7 $380.3 $415.8 $430.3 $398.9 $389.3 $442.7

MBS program income 392.3 405.0 408.2 438.7 446.0 406.1 372.8

Other income 12.4 13.3 8.0 9.5 6.2 4.2 —

Total revenues 767.4 798.6 832.0 878.5 851.1 799.6 815.5

Total expenses 45.6 51.8 47.2 49.4 56.8 68.1 77.8

Excess of revenues over 

expenses 674.7 746.8 762.8 805.3 794.3 731.5 737.7

Excess of revenues over 

expenses, net of interest income 312.0 366.5 347.0 375.0 395.4 342.2 295.0
Page 21 GAO-06-9 Ginnie Mae

outstanding MBS, and collects commitment fees for the authority to pool 

mortgages into Ginnie Mae MBS.22

Ginnie Mae’s program income allows it to cover the expenses it incurs in 

carrying out its programs and initiatives, including the cost of hiring 

contractors, paying staff salaries and benefits, printing, and performing 

other administrative functions. Ginnie Mae also incurs credit-related 

expenses—for example, it must maintain reserves against losses and issuer 

defaults in order to ensure a ready source of funds to meet its guarantee of 

timely payment. At the end of fiscal year 2004, Ginnie Mae had reserves of 

about $10.4 billion. 

Ginnie Mae’s fee income is based on the principal balance of its securities 

portfolio, so the agency’s revenues largely depend on the volume of its 

outstanding securities. As we have seen, Ginnie Mae’s share of the MBS 

market has declined in the last 20 years. In fiscal years 2000 through 2004, 

Ginnie Mae’s principal balance outstanding also declined, falling from 

$603.4 billion to $453.4 billion and reducing program income from $408.2 

million to $372.8 million (see fig. 5). As a result, during that period, the 

agency’s excess of revenues over expenses (net of interest), which reduces 

the federal budget deficit, declined from $347 million to $295 million.23

Ginnie Mae’s program income continues to exceed its expenses and, 

according to Ginnie Mae officials, is likely to do so for the foreseeable 

future. However, if its outstanding volume continued to decline, program 

income and excess revenues, which reduce the federal budget deficit, 

could also be expected to continue falling.

22Other fees charged by Ginnie Mae include new issuer fees, handling fees, multiclass fees, 

and fees for transferring servicing to Ginnie Mae when issuers default on their securities. 

23The amount of Ginnie Mae’s excess of revenues over expenses is also affected, of course, 

by changes in its expenses. Ginnie Mae’s expenses rose from $47.2 million to $77.8 million 

from fiscal years 2000 to 2004.
Page 22 GAO-06-9 Ginnie Mae

Figure 5: Ginnie Mae MBS: Outstanding Balances and Income

Ginnie Mae Faces a 

Changing Marketplace 

and Management 

Challenges

Ginnie Mae faces challenges in a number of areas. First, it must respond to 

changes in the marketplace and meet the needs of its stakeholders. To meet 

this challenge, the agency has expanded its product offerings and taken 

other initiatives to maintain its viability. Second, Ginnie Mae must 

adequately disclose loan information that MBS investors need to assess 

prepayment risk. The agency has recently improved this disclosure, though 

these improvements are not yet complete. Third, Ginnie Mae must work 

within the limits of its commitment authority. In 1999, it instituted 

procedures to ration its commitment authority when the agency faced the 

possibility of reaching the limit of its authority by year’s end. To help 

prevent the problem from recurring, Congress changed Ginnie Mae’s 

commitment authority cycle from 1 year to 2 years and could consider 

further steps. Fourth, inconsistencies and inaccuracies exist in some 

aspects of Ginnie Mae’s data systems, although measures to improve these 

systems are under way. Finally, given Ginnie Mae’s small staff and reliance 

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004

320

340

360

380

400

420

440

460

Principal balance

outstanding

(dollars in billions)

Program income

(dollars in millions)

MBS principal balance (in billions)

MBS program income (in millions)

Source: GAO analysis of Ginnie Mae data.
Page 23 GAO-06-9 Ginnie Mae

on contractors, the agency faces the challenge of ensuring that its capacity 

to plan, manage, and oversee contractors is adequate.

Ginnie Mae’s Activities Have 

Responded to a Changing 

Market Environment

Ginnie Mae has faced and continues to face the challenge of fulfilling its 

mission of supporting government-backed loan programs in a changing 

market environment. Among the significant market changes over the last 

20 years have been the growing availability of private mortgage insurance 

and subprime loans, rapid development of the conventional secondary 

mortgage market, alterations in the volume and characteristics of 

government-backed loan programs, and the proliferation of new mortgage 

loan products, such as hybrid ARMs. Ginnie Mae recently completed or has 

under way several initiatives that are likely to help respond to the needs of 

its stakeholders in a changing marketplace, although additional efforts may 

be needed in some areas. Among the steps Ginnie Mae has taken are the 

following:

• As part of its Business Improvement Initiative, in October 2004 Ginnie 

Mae began a formal process of soliciting recommendations from 

business partners and other stakeholders to improve its MBS and 

Multiclass Securities programs. In March 2005, the agency publicly 

released the suggestions it had received, including, among others, 

changing technological processes and developing new securitization 

products. Ginnie Mae officials say they are currently in the process of 

evaluating the suggestions.

• Ginnie Mae played a role in developing FHA’s hybrid ARM products.24

Ginnie Mae and FHA officials say that they worked together to 

encourage Congress to permit FHA to insure hybrid ARMs, in large part 

because the agency wanted to remain competitive with conventional 

markets, in which such products had become increasingly popular. 

Ginnie Mae developed a securitization program, as Ginnie Mae II 

securities, for these products, and in 2004 FHA began offering 3-, 5-, 7-, 

and 10-year hybrid ARM products in addition to its standard 1-year ARM.

24Hybrid ARMs offer a fixed interest rate for a set period of time. After this period—say, 5 

years—the rate is adjusted periodically. These products were authorized by the fiscal year 

2002 VA/HUD Appropriations bill. Pub. L. No. 107-73 § 206; see 12 U.S.C. § 1715z-16, as 

amended.
Page 24 GAO-06-9 Ginnie Mae

• In February 2005, Ginnie Mae began guaranteeing securities backed by 

RHS multifamily loans, which support affordable multifamily housing in 

rural areas.25 RHS officials told us that this created the first consistent 

secondary market for these loans and that Ginnie Mae’s involvement 

would increase access to these loans and would lower borrower costs 

by increasing lenders’ liquidity. The officials also noted that Ginnie Mae 

had actively supported RHS by ensuring that the multifamily loan 

program could be securitized as Ginnie Mae I securities. 

• The Ginnie Mae II Program was created to provide issuers and investors 

with more flexibility in pooling different kinds of loans—such as 

adjustable rate mortgages—into Ginnie Mae securities. By their nature, 

Ginnie Mae II securities are less homogeneous than Ginnie Mae I 

securities. As a result, they are considered less predictable and investors 

demand a higher yield from these securities. In 2003, the Ginnie Mae II 

product was restructured to make it more competitive. Among other 

changes, the agency narrowed the spread on the note rates that could be 

included in the pools, so that the loans backing the securities would be 

more homogenous.26 In addition, the range of servicing fees that issuers 

could charge was widened to provide more flexibility. As a result, Ginnie 

Mae says there is now a smaller gap in pricing between Ginnie Mae I and 

Ginnie Mae II securities. But one broker-dealer we spoke with 

complained that to ensure sufficient loan volume for a Ginnie Mae II 

pool, issuers sometimes must include mortgages that would otherwise 

qualify for a Ginnie Mae I.

• In July 2004, Ginnie Mae expanded its Targeted Lending Initiative, which 

was created to provide financial incentives for lenders to increase loan 

volumes and raise homeownership levels in underserved areas. Under 

the program, which began in 1996, Ginnie Mae reduced its guarantee fee 

by up to 50 percent for approved issuers that originate or purchase 

eligible loans in designated communities and place them in Ginnie Mae 

pools. The expansion brought additional areas into the program, 

25In January 2004, Congress amended Ginnie Mae’s charter legislation to specify that Ginnie 

Mae has the authority to guarantee securities backed by loans made under the Section 538 

Rural Rental Housing Guaranteed Loan Program. Consolidated Appropriations Act, 2004, 

Pub. L. No. 108-199 § 774.

26For example, under the old policy, a Ginnie Mae II pool could include mortgage loans with 

both 5-1/2 percent and 6-1/2 percent coupon rates (a spread of 100 basis points). Under the 

new policy, the spread in a given pool can be no greater than 50 basis points. 
Page 25 GAO-06-9 Ginnie Mae

including “colonias” along the Southwest border region and additional 

Renewal Communities and Urban Enterprise Zones designated by 

HUD.27 In September 2005, Ginnie Mae announced it was temporarily 

expanding the Targeted Lending Initiative further to include counties in 

the states of Alabama, Louisiana, and Mississippi that were declared 

federal disaster areas as a result of Hurricane Katrina.28

Ginnie Mae still faces certain barriers to financing government-backed loan 

programs. For example, VA and Ginnie Mae officials have expressed 

concern that recently enacted changes in the law authorizing certain hybrid 

ARM products in VA’s loan guarantee program did not address a limitation 

that has made these products difficult to securitize. Although the Veterans 

Benefits Act of 2004 made certain modifications to the program’s 

provisions for adjusting interest rates for VA’s 5-, 7-, and 10-year hybrid 

ARM products, the act continued a restriction on annual rate adjustments 

(those made after the initial rate adjustment) to a maximum increase or 

decrease of 1 percentage point.29 While this restriction may benefit 

borrowers by limiting interest rate increases, Ginnie Mae and VA officials 

said that a 1 percentage point annual cap was inadequate to attract interest 

from investors who purchased such products. Further, the terms of VA’s 

hybrid ARM products are no longer the same as the corresponding hybrid 

ARMs offered by FHA, bifurcating the market and making securities 

containing these types of loans less liquid. According to Ginnie Mae, this 

lack of liquidity results in higher interest rates for veterans and 

nonveterans alike. VA officials said that the capital markets and Ginnie Mae 

27The underserved areas under the expanded Targeted Lending Initiative include urban and 

rural Empowerment Zones and Enterprise Communities (distressed communities eligible 

for certain tax benefits designed to attract or retain jobs or businesses); Renewal 

Communities (distressed areas in need of economic and social renewal); adjacent eligible 

central city areas; areas with a majority population of Native Americans; and “colonias” 

(rural communities along the U.S.-Mexico border that lack adequate infrastructure and 

other basic services).

28Loans backing Ginnie Mae securities, where the property is located in a designated county, 

are being given Targeted Lending Initiative status, effective for securities with an issue date 

of October 1, 2005, through September 1, 2009. 

29Pub. L. No. 108-454 § 405(b); see 12 U.S.C. § 3703A(c), as amended. In a hybrid ARM 

mortgage loan, the interest rate is fixed for an initial multiyear period, and then is adjusted, 

based on market rates, on an annual basis. Prior to enactment of the 2004 act, the annual 

adjustment rate for VA hybrid ARM loans was limited to a maximum increase or decrease of 

1 percentage point. Under the act, the initial adjustment rate for VA’s 5-, 7-, and 10-year 

hybrid ARM products can be prescribed by the VA Secretary, but annual adjustments after 

that are limited to an increase or decrease of 1 percentage point.
Page 26 GAO-06-9 Ginnie Mae

may not have been sufficiently consulted on this adjustment during the 

legislative process to ensure that provisions in the VA hybrid ARM program 

were consistent with the requirements of Ginnie Mae and conventional 

secondary markets. 

A similar situation occurred with respect to an FHA single-family insured 

ARM product. The fiscal year 2002 VA/HUD appropriations bill limited 

annual interest rate adjustments on FHA’s hybrid ARMs to 1 percentage 

point if the initial interest rate term was fixed for 5 years or less and 

imposed a lifetime cap of 5 percentage points.30 These caps were intended 

to assist FHA borrowers, but lenders and capital market participants 

expressed concern that Ginnie Mae securities backed by these ARMs 

would be unattractive to investors—and thus lenders—since equivalent 

products in the conventional market typically included annual caps of 2 

percent and lifetime caps of 6 percent. In response, an amendment to the 

authorizing legislation, enacted in December 2003, made the annual cap 

applicable only to loans having a fixed term for the first three or fewer 

years31—a change that FHA said was needed to meet the needs of home 

buyers, lenders, and the secondary mortgage market. Following the 2003 

amendment, FHA issued an interim final rule in March 2005 that raised the 

cap on adjustments to annual interest rates for 5-year ARMs from 1 to 2 

percentage points and raised the lifetime cap on interest rate adjustments 

for those loans to 6 percentage points.32 Ginnie Mae officials noted that 

these problems could have been avoided had Congress initially consulted 

more closely with capital market participants.

30Pub. L. No. 107-73 § 206 (2001).

31The amendment changed the annual cap by applying the 1 percent annual adjustment 

limitation only to ARMs having a fixed term for the first 3 or fewer years. As a result, annual 

adjustments for FHA’s 5-year hybrid ARMs could exceed 1 percent. See Pub. L. 108-186 § 301 

(2003).

3270 FR 16080 (Mar. 29, 2005).
Page 27 GAO-06-9 Ginnie Mae

Ginnie Mae Is in the Process 

of Expanding Disclosure on 

Loan Information to Help 

Investors Better Predict 

Prepayment

Investors in Ginnie Mae securities do not face credit risk, since the 

mortgages underlying these securities are federally insured or guaranteed 

and because Ginnie Mae guarantees timely payment of principal and 

interest. However, MBS investors do face prepayment risk, because they 

are purchasing cash flows that can stop when borrowers pay their loans in 

full early. Mortgage loans are prepaid for several reasons, most commonly 

when the house is refinanced, sold, or destroyed, or when the borrower 

goes into foreclosure. Prepayment rates tend to increase in periods of 

declining interest rates, when borrowers have the opportunity to lower 

their interest payments by refinancing.33 When mortgages are prepaid, 

voluntarily or involuntarily, investors receive their principal, but not further 

interest payments. In an environment of declining interest rates, 

prepayments may force investors to reinvest prematurely at a lower 

interest rate and to incur transaction costs.34

Historically, the rate of prepayment for Ginnie Mae securities has been 

lower than for other MBS because borrowers of government-backed 

mortgages are generally first-time or low- to moderate-income home buyers 

who are less likely to be able to incur the cost of refinancing or relocating. 

According to research by securities trading firms, between 1980 and 1990 

Ginnie Mae securities consistently prepaid at lower rates than their 

conventional counterparts. However, since that time, prepayment rates for 

conventional MBS have changed relative to those for Ginnie Mae MBS.35

Since 1990, Ginnie Mae’s prepayment rates have been slower than those of 

their conventional equivalents in the initial 18 months to 2 years after loan 

origination. But after this initial period, as the loans seasoned, Ginnie Mae’s 

prepayment rates have generally risen compared with conventional MBS. 

Ginnie Mae securities backed by seasoned loans are currently prepaying at 

a much faster rate than did similar securities during the 1990s.

33As noted earlier, some investors use REMICs to reduce prepayment risk by investing in 

tranches that absorb less of a security’s prepayment variability.

34Conversely, prepayments can benefit investors during a period of rising interest rates 

because investors can then redirect their cash to investments that offer higher returns.

35This rate is often expressed as the “conditional prepayment rate,” which measures 

prepayments in a given year as a percentage of the current outstanding loan balance. For 

example, a conditional prepayment rate of 10 percent means that 10 percent of the pool’s 

current loan balance pool is likely to prepay over the next year.
Page 28 GAO-06-9 Ginnie Mae

Three factors in particular seem to have influenced the increase in Ginnie 

Mae’s rate of prepayment—refinancings, delinquencies, and repurchases. 

As explained earlier, expanded access to credit, rising home prices, and 

falling interest rates have allowed more FHA and VA borrowers to 

refinance into conventional loans.36 With the added equity built up in their 

homes, borrowers have been able to reduce their monthly costs by 

refinancing without paying the federal programs’ insurance premiums. In 

addition, delinquency and default rates for FHA and VA loans—which have 

traditionally been higher than those for conventional loans—have been 

steadily increasing in recent years.37 The delinquency rate on all FHA 

mortgages increased from 6.7 percent in 1990 to 12.2 percent in 2004. By 

contrast, the delinquency rate for conventional mortgages has remained 

relatively stable and stood at 1.6 percent in 2003. Finally, as noted earlier, 

before July 2003 Ginnie Mae’s policy allowed loan servicers to repurchase 

loans from Ginnie Mae’s pools if a borrower missed only one payment and 

left it unpaid for 4 months. These repurchases, which peaked in 2002, 

caused a temporary acceleration in the prepayment rates of Ginnie Mae’s 

MBS.

Market participants we met with expressed concerns about the accelerated 

rate of prepayment on Ginnie Mae securities in recent years. Institutional 

investors often employ complex models—which rely in part on detailed 

information about the underlying loan pools—to forecast prepayment rates 

and help price MBS. Investors we spoke with noted that predicting 

prepayment risk on Ginnie Mae securities had become increasingly difficult 

because of rapid shifts in the marketplace, such as the expansion in the 

availability of conventional credit and increases in FHA and VA 

delinquencies, and uncertainty about future developments.38

36Falling interest rates resulted in a rapid rate of refinancings in the entire mortgage market, 

and prepayment rates of both conventional MBS and Ginnie Mae MBS rose as a result.

37Loans are considered in default when they are delinquent for more than 90 days. 

38Economists make a distinction between risk and uncertainty. Risk refers to variation in 

potential outcomes to which an associated probability can be assigned. For example, MBS 

investors can estimate the probability of prepayment on underlying loans based on the 

prepayment rates of similar loans in the past. Uncertainty, by contrast, is the lack of 

knowledge concerning the probability distribution of future events. When market 

conditions are uncertain and contain unknown variables, predicting prepayment rates can 

be difficult because the past behavior of loans may not be an accurate guide to the future.
Page 29 GAO-06-9 Ginnie Mae

In the past, the securities industry has also expressed concerns that 

developing models to predict prepayment of Ginnie Mae MBS has been 

particularly difficult because Ginnie Mae has not always provided the same 

degree of detail on its loans as conventional securitizers. In written 

comments to Ginnie Mae, the Bond Market Association—a trade 

association representing securities dealers—said that while Ginnie Mae 

had begun providing more information than ever before about the 

mortgages backing its securities, there was still “significant room for 

improvement.” One broker-dealer noted to us that information was 

particularly lacking on hybrid ARM products in Ginnie Mae pools. A second 

broker-dealer said that additional information on geography and occupancy 

rates for multifamily loans would help better estimate the risk of 

delinquency—and thus prepayment—of securities backing those loans. 

Market participants also noted that having information on borrower credit 

scores would be useful.

To address concerns about its disclosures, in January 2004 Ginnie Mae 

began its MBS Disclosure Initiative, which was designed to provide 

investors with additional information that would allow them to better 

forecast prepayment rates. Prior to the initiative, Ginnie Mae’s disclosures 

on the loans underlying its securities included such things as the weighted 

average age of the loan, the number of loans in the pool, the unpaid 

principal balance, and the average original loan size. With the initiative, the 

agency began providing expanded disclosures—at issuance—of loan data 

that it was already collecting and began disclosing new data items about 

FHA and VA single-family loan pools, including original loan-to-value ratios, 

loan purpose, property type, average original loan size, and year of 

origination. In addition, in September 2004 Ginnie Mae began updating its 

MBS disclosures every month instead of quarterly. Ginnie Mae said that in 

December 2005 it would begin disclosing additional details on the reasons 

for prepayments of the loans backing Ginnie Mae MBS, including the 

number of loans that were paid off in full by borrowers, repurchased by 

issuers because of delinquency, and liquidated due to foreclosure. Ginnie 

Mae officials told us that the recent changes made disclosures on Ginnie 

Mae securities comparable with those for Fannie Mae’s and Freddie Mac’s. 

Caps on Ginnie Mae’s 

Commitment Authority 

Have Created Potential 

Constraints

In developing its annual budget, Ginnie Mae officials told us they must 

estimate the amount of the agency’s commitment authority—the limit on 

the total dollar volume of securities that the agency can guarantee. The 

Office of Management and Budget reviews Ginnie Mae’s commitment 

authority estimates before they are finalized and included in the President’s 
Page 30 GAO-06-9 Ginnie Mae

budget request to Congress. Ginnie Mae estimates the amount of the 

commitment authority it will need for future years based on the actual 

authority used by the federal guarantee programs it served in the previous 

year. The agency also considers commitment authority allocations it 

actually made to issuers in the previous year and includes them as part of 

the estimate, adding an additional percentage to that estimate to cover 

unanticipated events in the marketplace. The Secretary of HUD is required 

by statute to notify Congress when Ginnie Mae has utilized 75 percent of its 

commitment authority and when HUD estimates that the agency will 

exhaust this authority before the end of a fiscal year.39 If Ginnie Mae 

exhausts the limit placed on its commitment authority, it must suspend 

issuance of new MBS until Congress provides additional authority. Under 

these circumstances, an issuer may either have its request returned or 

leave it with Ginnie Mae to be processed on a first-come, first-served basis 

after additional commitment authority is restored. 

In 1999, fearing it would reach the limit before the end of the year, Ginnie 

Mae instituted procedures to ration its commitment authority. It 

temporarily limited the approval of commitment requests to the amount 

estimated to cover issuer needs for no more than a 60-day period. 

According to industry participants we spoke with, this step was disruptive 

to lenders and issuers and caused concern that Ginnie Mae would not have 

the authority it needed to honor commitments it had already made. One 

trade association told us that that this situation had resulted in some loss of 

credibility for Ginnie Mae.

According to Ginnie Mae, the agency had not adequately estimated the 

demand for its guarantee in 1999, in part because of unexpectedly high 

levels of new construction and mortgage refinancing activity that year. 

Since that time, the agency has taken steps to help ensure that it is no 

longer in danger of reaching the limit of its commitment authority. Since 

2002, the commitment authority Ginnie Mae has received as part of HUD’s 

annual appropriations is available for 2 years. Congress annually provides 

commitment authority but the authority is available for two years. This 

means Ginnie Mae can use “carryover” authority from the prior year to 

make current year commitments. According to agency officials, this change 

from a 1- to a 2-year cycle has given Ginnie Mae more flexibility in planning 

how to use its commitment authority and should reduce the need to ration 

it again in the future. In addition, the actual commitment authority 

39Pub. L. No. 99-289, 100 Stat. 412; codified at 12 U.S.C. § 1721 Note.
Page 31 GAO-06-9 Ginnie Mae

available to Ginnie Mae at any given time may be above the additional 

amount authorized annually, because since fiscal year 2002, the agency has 

carried over unused authority from the prior year. Thus, as shown in figure 

6, although Ginnie Mae’s new commitment authority limit has been $200 

billion each year since fiscal year 1999, the actual authority available for 

Ginnie Mae to use has been higher beginning in 2002. In fact, in fiscal year 

2003, Ginnie Mae was able to meet program demands. Having the ability to 

rely on unused authority carried over from prior years has meant that the 

agency has not had to ration or suspend issuer commitments since 1999. 

Thus, if Ginnie Mae exceeds its annual commitment limit, for a particular 

year, it has the authority to do so but only to the extent of its carryover 

authority. However, given uncertainty of demand in the marketplace, 

carryover authority still may not be enough. 

Figure 6: Ginnie Mae’s Commitment Authority Used, Fiscal Years 1997-2004

Note: Ginnie Mae has been able to carry over unused commitment authority since fiscal year 2002. 

0

50

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003 2004

Dollars in billions

Total commitment authority available

Total commitment authority allocated

New commitment limit authorized

Source: GAO analysis of U.S. Department of Housing and Urban 

Development Congressional Budget Justifications, 1998-2005.
Page 32 GAO-06-9 Ginnie Mae

Federal agencies often face difficulties estimating potential demand for 

loan guarantees, in part because the budget process requires them to 

forecast demand nearly 2 years in advance. Our 2005 report on the FHA and 

RHS loan guarantee programs discussed options that Congress could 

consider to prevent suspensions of those programs related to exhaustion of 

their commitment authority.40 Some of the options discussed in that report 

could be applicable to Ginnie Mae. For example, Congress could establish a 

higher limit on Ginnie Mae’s commitment authority, although such a step 

could increase the government’s exposure to risk. Congress could also 

require Ginnie Mae to provide more frequent updates on the amount of 

commitment authority it has used. This would involve little additional 

administrative burden and would provide additional and timelier 

information for determining whether to provide supplemental commitment 

authority before the end of a fiscal year. Because both of these options 

could have various implications, their specific impacts would depend on 

how the changes were structured and implemented. 

Ginnie Mae Has Taken Steps 

to Improve Its Data 

Integrity, but Improvements 

Are Not Yet Complete

In November 2002, officials of First Beneficial Mortgage Corporation, one 

of Ginnie Mae’s approved issuers, were convicted of engaging in fraudulent 

pooling practices. According to information from HUD’s Office of the 

Inspector General (OIG) the company used forged documents to pool loans 

that were collateralized with nonexistent properties and that were not 

insured or guaranteed by a federal agency, as required of Ginnie Mae 

securities.41 Ginnie Mae declared First Beneficial in default and incurred a 

loss of approximately $20 million. HUD’s OIG, among others, investigated 

the First Beneficial case and subsequently audited Ginnie Mae’s internal 

controls, completing its report in March 2003. The investigation and audit 

identified inconsistencies and inaccuracies in Ginnie Mae’s data systems 

and other internal control weaknesses.42 Most notably, the OIG found that 

Ginnie Mae, its issuers, and the agencies it serves did not all use a single 

common and unique case number as the primary management control for 

identifying and tracking loans in the MBS pools. Instead, each entity 

assigned its own tracking number, making comparisons of loan data 

40GAO, Housing Finance: Options to Help Prevent Suspensions of FHA and RHS Loan 

Guarantee Programs, GAO-05-227 (Washington, D.C.: Mar. 15, 2005).

41See United States v. McLean, 131 Fed. Appx. 34, 2005 U.S. App. Lexis 7564 (2005).

42HUD, OIG, Government National Mortgage Association Review of Internal Controls, 

Audit 2003-AT-0001 (Washington, D.C.; Mar. 5, 2003).
Page 33 GAO-06-9 Ginnie Mae

difficult and hindering efforts to ensure that the loans in Ginnie Mae’s pools 

were federally insured or guaranteed. The OIG’s report also found that 

Ginnie Mae did not have adequate controls in place to ensure the reliability 

of its data—for example, it could not ensure the accuracy of its data entry 

procedures, had not sufficiently verified all loans to ensure they were 

federally insured or guaranteed, and did not make sure that all issuers were 

in fact eligible to issue Ginnie Mae securities. As a result, Ginnie Mae 

potentially could not identify ineligible loans in its pools.

Ginnie Mae has taken several measures to address many of the internal 

control and data weaknesses identified in the HUD OIG’s reports. For 

example, the agency has developed and implemented policies, controls, 

and training designed to make data entry more accurate and is working to 

better integrate its multiple data systems. Further, 99 percent of Ginnie 

Mae’s portfolio is made up of loans backed by FHA and VA, and the agency 

now matches the loans in its data systems against those in FHA’s and VA’s 

databases. However, Ginnie Mae, FHA, and VA still do not use the same 

case numbers, which would eliminate the need for time-consuming 

matching. Ginnie Mae officials told us that they are analyzing aligning case 

numbers as part of an ongoing Business Process Improvement Initiative. 

However, such a change would be difficult because it would require 

systems changes for both Ginnie Mae and its issuers.

OIG officials told us that Ginnie Mae had largely addressed the deficiencies 

they had observed in the loan data and that that the OIG was generally 

satisfied with the agency’s efforts to address internal control weaknesses. 

However, we identified additional data integrity issues during our review. 

For example, Ginnie Mae was initially unable to provide us with a 

breakdown of loans in its portfolio—that is, percentages of FHA, VA, RHS, 

and PIH loans. This basic data could not be provided, the agency said, 

because a programming error had resulted in the underreporting of FHA 

loans and the overreporting of VA loans. Ginnie Mae officials 

acknowledged that their data systems should be improved and that they do 

not have easy access to as much of their information as they should.

Adequate Contract 

Management and Oversight 

Is Essential for Ginnie Mae

Ginnie Mae operates with a small staff—in fiscal year 2004, the agency had 

about 66 employees—and contracts out most of its transactional and 

support work. Ginnie Mae has stated that this centralized management 

model is designed to allow a relatively small group of agency employees to 

manage a large number of outsourced projects, improving the quality, 

timeliness, and consistency of their work. In fiscal year 2004, 
Page 34 GAO-06-9 Ginnie Mae

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

including key operations such as accounting and technical support, Ginnie 

Mae servicing of defaulted loans, internal control reviews, preparation of 

assessment rating tools, issuer compliance reviews, and information 

systems management. 

Concerns about Ginnie Mae’s oversight of its contractors have existed for 

several years. Our 1993 review of Ginnie Mae’s staffing found that the 

agency was not adequately monitoring its contractors’ activities.43 At that 

time, the largest contractor told us the agency did not have the resources to 

adequately review its contractors’ work, and Ginnie Mae itself 

acknowledged that it did not. Similarly, in a 1997 review of HUD’s 

contracting activity, HUD’s OIG found that Ginnie Mae was not in 

compliance with contracting and procurement procedures.44 The review 

found that in some instances Ginnie Mae contractors were performing 

tasks that were inherently governmental functions and that aspects of the 

bidding process hindered competition.45 At that time, Ginnie Mae had its 

own contracting officer; however, as of January 1999, Ginnie Mae began 

using HUD’s contracting officer and its staff to award contracts.

Internal control issues continue to be a potential concern at Ginnie Mae, as 

evidenced by losses due to fraud in the First Beneficial case, the HUD OIG’s 

2003 report, and our own findings of problems with some aspects of the 

agency’s management information systems. Because Ginnie Mae has a 

small staff and contracts out most of its operations, appropriate contract 

management and oversight are inherently key components in improving the 

agency’s data systems and internal controls. Unlike the time of the 1997 

OIG report, Ginnie Mae’s contracting staff are now supplemented by 

assistance from HUD’s contracting staff. In addition, the agency has 

initiatives under way to improve its information technology infrastructure 

and to streamline its business processes, some of which involve contract 

management. For example, Ginnie Mae officials told us that in 2002 the 

agency created the Procurement Management Division to more stringently 

43GAO, Government National Mortgage Association: Greater Staffing Flexibility Needed to 

Improve Management, GAO/RCED-93-100 (Washington, D.C.: June 30, 1993).

44HUD, OIG, HUD Contracting, 97-PH-163-0001 (Washington, D.C.; Sept. 30, 1997).

45“Inherently governmental functions” are intimately related to the public interest and thus 

must be performed only by government employees. Examples include such things as 

determining whether contract costs are reasonable and collecting and disbursing public 

funds.
Page 35 GAO-06-9 Ginnie Mae

oversee existing contracting and procurement procedures and to provide 

additional training for staff in contract planning and development. In 

addition, Ginnie Mae officials say they have built incentives into their 

performance rating system to increase staff accountability for contract 

planning and oversight and to provide incentives designed to foster 

effective contract planning and monitoring.

Ginnie Mae’s staff of about 66 are responsible for performing inherently 

governmental functions and for overseeing the contractors that perform 

most of the agency’s operations. Based on a 2004 HUD resource 

management study that found that Ginnie Mae had sufficient staff to 

perform contract administration functions, Ginnie Mae officials told us 

they believe that their staffing levels are adequate.46 But given its reliance 

on contractors, Ginnie Mae should continue to focus on ensuring that staff 

have the training, qualifications, and capabilities they need to ensure that 

contracts are planned, monitored, and executed appropriately. 

Observations Despite its declining share of the overall MBS market, Ginnie Mae 

continues to serve its key public policy goal of providing a strong 

secondary market outlet for federally insured and guaranteed housing 

programs, helping to improve their access and affordability for low- to 

moderate-income borrowers. The decline in Ginnie Mae’s share of the 

overall MBS market should not necessarily be a major source of concern, 

since it is largely a function of the rapid growth in the conventional MBS 

market. Unlike firms in the conventional market, however, Ginnie Mae has 

relatively little control over the volume of its securities, which depends on 

the volume of FHA and VA loan programs. Changes in the volume and 

market share of government-backed housing loans are largely the result of 

policies and decisions made by Congress and the agencies themselves. 

Improvements to Ginnie Mae’s product line benefit government-backed 

loan programs by making them more liquid, but the impact on these 

programs’ volume is relatively marginal. A further decline in Ginnie Mae’s 

volume could have certain implications related to credit quality, liquidity, 

and the agency’s contribution to offsetting the federal budget deficit. But 

just how much Ginnie Mae’s volume could decline in the near future is 

unclear, as is the magnitude of any potential effects on the market or 

federal budget.

46We did not assess HUD’s resource management study or verify its findings.
Page 36 GAO-06-9 Ginnie Mae

Ginnie Mae faces the challenge of adjusting its product mix and policies to 

address changes in the marketplace while continuing to meet the needs of 

both borrowers who rely on affordable housing programs and of industry 

stakeholders such as issuers and investors. Ginnie Mae has added a 

number of new products over the years, has made a serious effort to solicit 

feedback from its business partners, and has expanded its disclosures for 

investors. The agency has also expanded the types of loans that Ginnie Mae 

securities can finance, and RHS and PIH officials have commended Ginnie 

Mae’s proactive efforts to assist their loan programs. But some changes 

remain beyond its scope—for instance, conditions in FHA and VA hybrid 

ARM products that have limited investor interest. Closer consultation by 

lawmakers with Ginnie Mae and capital market participants could help 

ensure that congressionally mandated provisions of loan programs are 

consistent with Ginnie Mae and conventional secondary market 

requirements. 

Ginnie Mae also faces the challenge of avoiding the need to ration its 

commitment authority, which can cause disruption among secondary 

market participants and harm Ginnie Mae’s credibility. Beginning in 2002, 

Congress made the agency’s commitment authority available for 2 years 

rather than 1 year to provide more flexibility, but Ginnie Mae could again 

bump up against its commitment level cap in the future. Other options to 

address this problem include raising Ginnie Mae’s commitment authority or 

requiring the agency to notify Congress when it appears the agency may 

reach its cap. Each of these measures could have various implications that 

would need to be considered.

Like any agency, Ginnie Mae faces challenges in managing its internal 

operations in an efficient and cost-effective manner, and in ensuring that 

appropriate internal controls are in place. This may be especially 

challenging for Ginnie Mae because it operates with a small staff of about 

66 and contracts out most of its operations. Certain weaknesses in Ginnie 

Mae’s data integrity, along with losses resulting from fraudulent activity in 

the First Beneficial case, indicate the need for continued improvements in 

data systems and internal controls. Ginnie Mae has taken some important 

steps on these issues and has ongoing initiatives, such as its Business 

Process Improvement Plan. However, given certain data integrity issues we 

identified, the recency of the First Beneficial case, and that Ginnie Mae’s 

business plan was only recently approved, it is too early to assess the 

results of Ginnie Mae’s recent efforts. Finally, given its reliance on 

contractors to carry out most of its operations, Ginnie Mae will need to pay 

particular attention to ensuring that its staff have sufficient resources, 
Page 37 GAO-06-9 Ginnie Mae

training, and qualifications to ensure that the agency’s contracts are 

planned, monitored, and executed appropriately. 

Agency Comments On behalf of HUD, Ginnie Mae provided written comments on a draft of 

this report, which are reprinted in appendix II. Ginnie Mae agreed with the 

report’s analysis of the challenges it faces and with the report’s findings on 

initiatives Ginnie Mae has taken to address these challenges. It also agreed 

with our observations related to the importance of improving Ginnie Mae’s 

data systems and maintaining effective contract management. In addition, 

Ginnie Mae provided us with technical comments, which we have 

incorporated where appropriate.

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

report date. At that time, we will send copies to the Secretary of Housing 

and Urban Development. We will also make copies available to others upon 

request. In addition, this report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

If you have any questions about this report, please contact me at (202) 

512-8678 or shearw@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix III.

Sincerely yours,

William B. Shear

Director, Financial Markets and 

 Community Investment 
Page 38 GAO-06-9 Ginnie Mae

Appendix I

Objectives, Scope and Methodology ApApenednxidexiIs

Our report objectives were to evaluate (1) the state of Ginnie Mae’s market 

share and guarantee volume, (2) the potential implications of changes in 

Ginnie Mae’s market share and guarantee volume, and (3) challenges 

Ginnie Mae faces in fulfilling its mission and the steps that have been or 

could be taken to address these challenges. 

To assess the state of Ginnie Mae’s market share and guarantee volume, we 

obtained data on issued and outstanding mortgage-backed securities 

(MBS) from the agency’s Integrated Pool Management System and 

Portfolio Analysis Display System, which obtains its source data from 

Ginnie Mae’s Mortgage-Backed Securities Information System. We tested 

the reliability of these data by comparing them within the two data systems 

and with data from the 2005 Mortgage Market Statistical Annual and the 

Bond Market Association—sources used widely in the industry to analyze 

MBS activity. We also compared loan data provided by Ginnie Mae with 

data maintained by the Department of Veterans Affairs (VA), Rural Housing 

Service (RHS), and the Office of Public and Indian Housing (PIH) within 

the Department of Housing and Urban Development (HUD).

Our initial comparisons showed significant discrepancies between Ginnie 

Mae’s source data and that of industry sources. Because Ginnie Mae’s MBS 

issuance and agency loan endorsement do not occur simultaneously, a lag 

exists between the date that the loan is endorsed and the date Ginnie Mae 

is recorded as guaranteeing its securitization. Thus, to provide accurate 

information on Ginnie Mae’s market share and volume for a given point in 

time, individual loans must be matched to the Ginnie Mae MBS in which 

they were pooled. When we began our review, no data for VA, RHS, or PIH 

loans had been matched with their pool, and data for Federal Housing 

Administration (FHA) loans had been matched only since 2001. At our 

request, Ginnie Mae completed the matching of FHA data from 1998 to 

2004.

Our initial comparison of the portion of Ginnie Mae’s MBS portfolio 

collateralized by each loan program—that is, by FHA, VA, RHS, and PIH—

showed discrepancies as well. As previously discussed, Ginnie Mae could 

provide us only with estimated percentages because a programming error 

in the system resulted in the underreporting of FHA loans and the 

overreporting of VA loans. Because of our request, Ginnie Mae noticed the 

error and corrected it, and we were able to obtain accurate data on the 

percentage of loans from each program that were used to collateralize 

Ginnie Mae MBS. With the corrections Ginnie Mae made, we found the data 

to be reliable for our purposes. 
Appendix I

Objectives, Scope and Methodology

Page 39 GAO-06-9 Ginnie Mae

To address all of the objectives, we spoke with and gathered relevant 

documents from secondary market participants, including five Ginnie Maeapproved issuers and five dealers/institutional investors in Ginnie Mae 

securities. Among other things, we discussed with them their perceptions 

of Ginnie Mae and its products and their reasons for investing in or issuing 

Ginnie Mae securities rather than other MBS products. The issuers were 

judgmentally selected and represented more than 46 percent of the MBS 

Ginnie Mae issued in 2003. Three of the issuers focused on single-family 

FHA loans and the remaining two on multifamily and VA loans. 

Dealers/institutional investors were also judgmentally selected; among 

them were the largest broker-dealers of Ginnie Mae MBS, Real Estate 

Mortgage Investment Conduits, and Platinum securities. We also 

interviewed and obtained documentation from representatives of 

secondary market participants that may compete with Ginnie Mae, 

including Fannie Mae, Freddie Mac, the National Council for State Housing 

Finance Agencies, and the Federal Home Loan Banks of Chicago and 

Seattle. We also interviewed representatives of and reviewed documents 

from Ginnie Mae, HUD’s FHA and PIH programs and its Office of the 

Inspector General (OIG), VA, RHS, and the Federal Housing Finance Board. 

In addition, we spoke with relevant trade associations, including the Bond 

Market Association, National Association of Home Builders, Mortgage 

Bankers Association, and National Association of Realtors. We conducted a 

literature search and reviewed Ginnie Mae’s legislative history, relevant 

laws, regulations, budget documents, performance, and annual reports and 

guidance, and studies and reports by HUD’s OIG and others. We conducted 

our work in Washington, D.C., and Boston from October 2004 through 

September 2005 in accordance with generally accepted government 

auditing standards. 
Page 40 GAO-06-9 Ginnie Mae

Appendix II

Comments from the Department of Housing 

and Urban Development ApendxiI
Page 41 GAO-06-9 Ginnie Mae

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact William B. Shear, (202) 512-8678 or shearw@gao.gov

Staff 

Acknowledgments

In addition to the contact named above, Jason Bromberg, Assistant 

Director; Heather Atkins; Daniel Blair; Christine Bonham; Diane Brooks; 

Emily Chalmers; William Chatlos; Carlos Diz; Austin J. Kelly; Marc Molino; 

Mitchell B. Rachlis; Paul Thompson; and Franklyn Yao made key 

contributions to this report.

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Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548