Ginnie Mae: Risk Management and Cost Modeling Require Continuing Attention
Published: 2011-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Government National Mortgage Association (Ginnie Mae) has increased its role in the secondary mortgage market significantly. Ginnie Mae is a wholly owned government corporation in the Department of Housing and Urban Development (HUD). It guarantees the timely payment of principal and interest of mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans, such as Federal Housing Administration (FHA) loans. GAO was asked to (1) describe how Ginnie Mae's volume of MBS and market share have changed, (2) assess the risks Ginnie Mae faces and how it manages these risks, and (3) determine what effect recent changes in Ginnie Mae's market share and volume may have on financial exposure to the federal government, including mission. To address these objectives, GAO analyzed data on volume and market share and assessed their reliability. GAO also reviewed guidance and Ginnie Mae's credit subsidy calculations and estimation model, and interviewed agency officials and others.
section_title: What GAO Found
paragraphs: From 2007 to 2010, the volume of Ginnie Mae-guaranteed MBS and its share of the secondary mortgage market increased substantially. Ginnie Mae-guaranteed MBS outstanding grew from $412 billion to more than $1 trillion, and market share grew from 5 percent to more than 25 percent. As the demand for FHA and other federally insured or guaranteed mortgages grew during this time, financial institutions increased their issuance of Ginnie Mae-guaranteed MBS to finance these federally insured or guaranteed loans. Ginnie Mae has taken steps to better manage operational and counterparty risks, and has several initiatives planned or underway. The agency may face operational risk--the risk of loss resulting from inadequate or failed internal processes, people, or from external events--and counterparty risk--the risk that issuers fail to provide investors with monthly principal and interest payments. GAO and others, including HUD's Inspector General, have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as operational risks that Ginnie Mae may face. For example, although Ginnie Mae's market share and volume of MBS have increased in recent years, its staffing levels were relatively constant and actual staff levels trailed authorized levels. In addition, between 2005 and 2010, the agency increasingly relied on contractors. Ginnie Mae has identified gaps in resources and conducted risk assessments on its contracts but has not yet fully implemented changes based on these analyses. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement. In response to changing market conditions and increased market share, Ginnie Mae revised its approval and monitoring procedures. Ginnie Mae also has several planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, but these plans have not been fully implemented. It will be important for Ginnie Mae to complete these initiatives as soon as practicable to enhance its operations. The growth in outstanding Ginnie Mae-guaranteed MBS resulted in an increased financial exposure for the federal government as Ginnie Mae fulfills its mission of expanding affordable housing by linking capital markets to the nation's housing markets. Nonetheless, Ginnie Mae's revenues have exceeded its costs and it has accumulated a capital reserve of about $14.6 billion. However, GAO found that in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing certain practices identified in FASAB guidance that GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data which could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae's ability to accurately report to the Congress the extent to which its programs represent a financial exposure to the government. Ginnie Mae should enhance the model it uses to forecast cash flows for the program by (1) assessing potential data sources, (2) conducting sensitivity analyses, and (3) assessing and documenting its modeling approaches and reasons for using management assumptions, among others. In written comments, Ginnie Mae agreed with GAO's recommendation to conduct sensitivity analyses, but neither agreed nor disagreed with the other recommendations.

section_title: Letter
paragraphs: In fiscal year 2010, the Government National Mortgage Association  (Ginnie Mae) supported more than $1 trillion in outstanding federally  insured or guaranteed mortgages by increasing liquidity in the secondary  mortgage market. A wholly owned government corporation, Ginnie Mae  guarantees the timely payment of principal and interest on securities  issued by financial institutions and backed by pools of federally insured or  guaranteed mortgage loans. Ginnie Mae defines its mission as expanding  affordable housing by linking capital markets to the nation’s housing  markets. Ginnie Mae relies on approved issuers to issue and service their  mortgage-backed securities (MBS), and on agencies, such as the Federal  Housing Administration (FHA) and the Department of Veterans Affairs  (VA), to guarantee the underlying mortgages against borrower default.
The economic crisis and housing downturn of the past 3 years has had a  significant effect on Ginnie Mae. As the conventional mortgage market  tightened and the subprime market contracted, borrowers increasingly  turned to federally insured or guaranteed mortgage loan programs, such  as those offered by FHA and VA, to finance their homes. As a result,  Ginnie Mae’s total outstanding MBS volume and market share increased  substantially. Specifically, the volume of new Ginnie Mae-guaranteed  MBS (backed by single-family mortgages), which comprised the majority  of Ginnie Mae-guaranteed MBS, increased from $83.4 billion in 2005 to  $388.9 billion in 2010. In addition, during this time frame, Ginnie Mae  defaulted a large issuer—Taylor, Bean & Whitaker Mortgage  Corporation—due to issues with its financial statements (such as their  timeliness) and the withdrawal by FHA of its mortgagee status, which  resulted in Ginnie Mae acquiring and servicing a $26 billion loan  portfolio.
Concerned about the rapid increase in Ginnie Mae’s share of the overall  MBS market and potential risks Ginnie Mae faces, you asked us to  examine Ginnie Mae’s capacity to manage this growth. The objectives of  this report are to (1) describe how Ginnie Mae’s market share and volume  have changed in recent years; (2) assess Ginnie Mae’s risks and how  these risks are managed; and (3) determine what effect recent changes in  Ginnie Mae’s market share and volume may have on financial exposure  to the federal government, including its ability to meet its mission.
To address these objectives, we collected and analyzed data on Ginnie  Mae’s market share and volume. We used data from Ginnie Mae for  2005–2011 (third quarter) and from Inside Mortgage Finance for calendar  years 2005–2010. We assessed the reliability of these data by  performing electronic testing, reviewing existing information about the  data and systems that produced them, and interviewing agency officials  knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of this report. We also interviewed  officials from the Department of Housing and Urban Development  (HUD)—more specifically from Ginnie Mae, FHA, Office of the Inspector  General (OIG), and Public and Indian Housing (PIH); the Department of  Agriculture’s Rural Housing Service (RHS); VA; Fannie Mae and Freddie  Mac (government-sponsored enterprises); the Federal Housing Finance  Agency; and the Mortgage Bankers Association.
After assessing Ginnie Mae’s risks, we identified operational and  counterparty risk as the key risks facing Ginnie Mae. For operational risk,  we focused on risks present in the agency’s management of human  capital, contracting, and information technology. We assessed Ginnie  Mae’s staffing and organizational realignment plans; reviewed Ginnie  Mae’s guidance and other HUD and federal contracting standards; and  analyzed Ginnie Mae’s list of contracts, dollar values of contracts, and  range of services. We also reviewed a nonprobability sample of contracts  and contract assessment reviews to gain an understanding of the types of  functions contractors perform and how these contractors were monitored.  The sample of contracts was selected based on the function of the  contract or Ginnie Mae identified the activities as key business functions  that could result in operational risk if problems occurred with the contract.  In addition, we reviewed documentation related to Ginnie Mae’s initiative  to improve its information technology. For counterparty risk, we assessed  Ginnie Mae’s MBS policies and guidance, including Ginnie Mae  processes for issuer approval, issuer monitoring, and enforcement. We  interviewed Ginnie Mae officials and contractors on how issuers are  approved and monitored and the changes made to these processes in  recent years.
To determine how recent changes in Ginnie Mae’s market share and  volume might affect financial exposure to the federal government and the  agency’s ability to meet its mission, we reviewed Ginnie Mae’s guidance  and financial statements and reviewed Ginnie Mae’s credit subsidy  calculations and policy and financial model to determine what information  was included and if the model followed sound internal control practices for  cost estimation of federal credit programs. We reviewed Ginnie Mae’s  statutes, Office of Management and Budget (OMB) budget documents,  and the Federal Credit Reform Act of 1990 (FCRA). Finally, we  interviewed officials from Ginnie Mae and its contractor that conducts  modeling, OMB, and FHA. For a detailed description of our scope and  methodology, see appendix I.
We conducted this performance audit from September 2010 to November  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Ginnie Mae operates as a unit of HUD and its administrative, staffing, and  budgetary decisions are coordinated with HUD. Ginnie Mae is organized  into five offices and relies on contractors for many aspects of its work.  Contracted functions include certifying new MBS, administering payments  to investors, data collection from issuers and risk analysis, Ginnie Mae  servicing of defaulted loans, internal control reviews, issuer compliance  reviews, and information systems management. Ginnie Mae staff  responsibilities include policy and management functions and oversight of  contractors. We discuss Ginnie Mae’s organization, staffing, and budget  in greater detail later in this report.
Ginnie Mae guarantees the performance of MBS, which are obligations of  the issuers that are backed by mortgages insured or guaranteed by  federal agencies, such as FHA, PIH, VA, or RHS. Ginnie Mae provides  an explicit federal guarantee (full faith and credit of the United States) on  these MBS, but it does not issue the MBS or originate the underlying  mortgages. Rather, it relies on approved financial institutions (issuers) to  pool or securitize the eligible mortgages and issue Ginnie Mae- guaranteed MBS. The issuers can service the MBS themselves or hire a  third party to transmit the monthly principal and interest payments to  investors. Ginnie Mae’s explicit guarantee can lower the cost of borrowing  for issuers, which allows them to offer lower interest rates to mortgage  borrowers. Issuers can obtain these mortgages by originating the loans or  purchasing the loans from another institution. See figure 1 for an overview  of Ginnie Mae securitization.
Ginnie Mae’s guarantee is limited to the risk that issuers cannot make the  required monthly principal and interest payments to investors. While other  federal agencies already insure or guarantee the mortgages that back  Ginnie Mae-guaranteed MBS, the private-sector issuers of these MBS are  responsible for ensuring that investors that purchase these MBS receive  monthly payments on time and in full, even if the borrower makes a late  payment or defaults. Ginnie Mae issuers are responsible for making these  advance payments to investors using their own funds and for recovering  any losses from the federal agencies that insured or guaranteed the  mortgages. If an issuer cannot ensure the timely payment of principal and  interest to investors, Ginnie Mae defaults the issuer, acquires the servicing  of the loans, and uses its own funds to manage the portfolio and make any  necessary advances to investors. Ginnie Mae charges issuers a monthly  guarantee fee, which varies depending on the product, for guaranteeing  timely payment. Issuers also pay a commitment fee to Ginnie Mae each  time they request authority (commitment authority) to pool mortgages into  Ginnie Mae-guaranteed MBS.
Investors in Ginnie Mae-guaranteed MBS face the risk that a mortgage  will be removed from the MBS pool prematurely—either due to borrower  default or prepayment of a loan—which reduces the amount of interest  earned on the security. However, investors do not face credit risk—the  possibility of loss from unpaid mortgages—because Ginnie Mae  guarantees timely payment of principal and interest.
Ginnie Mae has several different products. Its original MBS program,  Ginnie Mae I, requires that all pools contain similar types of mortgages  (such as single-family or multifamily) with similar maturities and the same  interest rates. The Ginnie Mae II MBS program, which was introduced in  1983, permits pools to contain loans with differing characteristics. For  example, the underlying mortgages can have varying interest rates and a  pool can be created using adjustable-rate mortgages. Ginnie Mae’s  Multiclass Securities Program, introduced in 1994, offers different types of  structured products, including Real Estate Mortgage Investment Conduits  (REMIC) and Ginnie Mae Platinum Securities. REMICs tailor the  prepayment and interest rate risks associated with MBS to investors with  varying investment goals. These products direct principal and interest  payments from underlying MBS to classes, or tranches, with different  principal balances, terms of maturity, interest rates, and other  characteristics. Platinum Securities allow investors to aggregate MBS  with relatively small remaining principal balances and similar  characteristics into new, more liquid securities. The MBS aggregated into  these structured products retain Ginnie Mae’s full faith and credit  guarantee. In addition, Ginnie Mae guarantees the timely payment of  principal and interest on the structured products and charges an  additional fee to the financial institutions that create them. Ginnie Mae  also requires that these institutions contractually agree to reimburse any  costs Ginnie Mae may incur to guarantee these products.
Ginnie Mae defines its mission as expanding affordable housing by  linking capital markets to the nation’s housing markets. Ginnie Mae does  this by serving as the dominant secondary market vehicle for  government-insured or -guaranteed mortgage loan programs. Ginnie  Mae’s guarantee benefits lenders, borrowers, and investors in a number  of ways. First, the guarantee benefits lenders by increasing the liquidity of  mortgage loans, which may lower the cost of raising funds and allow  lenders to transfer the interest-rate risk of a mortgage to investors.  Second, the guarantee benefits borrowers by lowering the cost of raising  funds for lenders, which helps lower interest rates on mortgage loans.  Finally, Ginnie Mae’s guarantee provides investors with a fixed-income  security that has the same credit quality as a U.S. Treasury bond.
Ginnie Mae relies on its fee revenues rather than appropriations from the  general fund to pay for its operations and cover costs related to issuer  defaults. However, the amount of MBS Ginnie Mae can guarantee each  year is capped by its commitment authority level in HUD’s appropriation.  For 2010 and 2011, Ginnie Mae was authorized each year to guarantee  up to $500 billion in MBS.
Ginnie Mae guarantees the timely payment of principal and interest on  MBS. For budgetary purposes, Ginnie Mae and other federal agencies  estimate the net lifetime costs (credit subsidy costs) of their guarantee  program and include the costs to the federal government in their annual  budgets. For Ginnie Mae, credit subsidy costs represent the net present  value of expected cash flows over the life of the securities it guarantees,  excluding administrative costs. Cash inflows consist primarily of  guarantee fees charged to MBS issuers and cash outflows includes  advance payments of principal and interest on delinquent mortgages  underlying MBS from defaulted issuers. When estimated cash inflows  exceed expected cash outflows, a program is said to have a negative  credit subsidy rate. When the opposite happens, a program is said to  have a positive credit subsidy rate, and therefore require appropriations to  cover the estimated subsidy cost of new business. Historically, Ginnie  Mae has estimated that its guarantee program would have a negative  credit subsidy rate and, as a result, generate budgetary receipts for the  federal government. These receipts have resulted in substantial balances  in a reserve account, which is used to help cover unanticipated increases  in those costs—for example, increases due to higher-than-expected  issuer defaults or fraud.
section_title: Ginnie Mae’s Market Share and MBS Volume Increased Substantially from 2007 to 2010
subsections: section_title: In 2010, Ginnie Mae- Guaranteed MBS Represented 25 Percent of the Market
paragraphs: According to Inside Mortgage Finance data, from calendar year 2007 to  2010 Ginnie Mae’s share of the MBS market increased from nearly 5  percent to 25 percent as the total size of the secondary mortgage market  declined and the role of private-label MBS issuers declined substantially.  The size of the MBS market decreased from $2.16 trillion in new MBS in  calendar year 2005 to $1.57 trillion in calendar year 2010, a decline of  nearly one-third (see fig. 2). The overall market decline was driven by  the housing downturn and increased defaults and foreclosures. This led  to mortgage lenders tightening their underwriting standards and making  fewer loans. Also, private-label MBS issuers faced a sharp decline in  eligible loans and investor demand. As the demand for FHA and other  federally insured or guaranteed mortgages grew during this time, financial  institutions increased their issuance of Ginnie Mae-guaranteed MBS to  finance these federally insured or guaranteed loans.
As Ginnie Mae’s market share increased, the number of Ginnie Mae  issuers generally stayed the same although their numbers declined from  2007 to 2008 and increased in 2009 and 2010 (see fig. 3). Moreover, for  the three quarters of 2011, 371 financial institutions participated in the  Ginnie Mae-guaranteed MBS program. While most were mortgage banks,  the issuers with the largest Ginnie Mae-guaranteed MBS portfolios were  commercial banks. As of June 30, 2011, three commercial banks  accounted for nearly two-thirds of the dollar amount of outstanding Ginnie  Mae-guaranteed MBS. According to Ginnie Mae data, concentration  among issuers generally has remained the same. More specifically, in  2005, 20 issuers accounted for 92 percent of Ginnie Mae single-family  MBS issuance; in 2010, 26 issuers accounted for 94 percent of single- family MBS.
According to Ginnie Mae data, as Ginnie Mae’s share of the secondary  mortgage market increased, the volume of Ginnie Mae-guaranteed MBS  outstanding increased from $412 billion in 2005 to more than $1 trillion in  2010 (see fig. 4). Concurrently, new guarantees of Ginnie Mae- guaranteed MBS increased from about $89.3 billion to nearly $413  billion. To accommodate the securitization of an increasing volume of  federally insured and guaranteed mortgages, Congress increased the  statutory cap on Ginnie Mae’s commitment authority from $200 billion to  $500 billion over the same period.
The increases in annual volume were due to increases in the volume of  mortgages insured by FHA or guaranteed by VA, PIH, or RHS that were  pooled into Ginnie Mae-guaranteed MBS (see fig. 5). Of the agencies,  FHA accounted for most of the increases in annual volume. FHA-insured  loans pooled into Ginnie Mae-guaranteed MBS increased from $63.8  billion in 2005 to $330.2 billion in 2010—and more recently, to $182 billion  during the first three quarters of 2011. Furthermore, in 2010, nearly all  single-family mortgages insured by FHA or guaranteed by VA were  pooled into Ginnie Mae-guaranteed MBS.
In addition to issuing guaranteed MBS from loans for single-family homes,  Ginnie Mae issuers increasingly produced MBS backed by other  mortgage products, such as multifamily loans and reverse mortgages on  single-family homes (see fig. 6). More specifically, the volume of reverse  mortgages backing Ginnie Mae-guaranteed MBS increased significantly  starting in 2009 when Ginnie Mae instituted its reverse mortgage  securities program, which was the main securitization program available  for FHA reverse mortgage loans during this time. During the first three  quarters of 2011, financial institutions issued more than $8 billion in  Ginnie Mae-guaranteed MBS backed by reverse mortgages.
The volume of structured products backed by Ginnie Mae-guaranteed  MBS increased as the total volume of MBS has increased since 2005. For  instance, the volume of REMICs issued by financial institutions approved  to issue Ginnie Mae structured products increased in 2009 and 2010 (see  fig. 7). During the first three quarters of 2011, financial institutions  issued $102 billion in REMICs, $27 billion in Platinum Securities, and  $670 million in Callable Trusts. Ginnie Mae’s fee revenues also increased  from these products, from $20.7 million in 2005 to $63.4 million in 2010.  As of June 30, 2011, Ginnie Mae had received $45.2 million in fee  revenues from structured products for 2011. Fees from these products  represent a small but growing share of annual revenue for Ginnie Mae  (from 2.6 percent in 2005 to 6.3 percent in 2010).
section_title: Ginnie Mae Has Been Taking Steps to Better Manage Risks
paragraphs: Operational risk is the risk of loss resulting from inadequate or failed  internal processes, people, and systems or from external events. We and  others, including HUD’s OIG, have identified limited staff, substantial  reliance on contractors, and the need for modernized information systems  as operational risks that Ginnie Mae may face. Ginnie Mae also faces  counterparty risk when an issuer fails or defaults, which would require the  agency to service the underlying loans and ensure that investors receive  monthly principal and interest payments. Ginnie Mae has taken a number  of steps to address both types of risks. A complete listing of Ginnie Mae’s  planned changes to address operational and counterparty risk can be  found in appendix II.
subsections: section_title: Ginnie Mae Has Taken Steps to Address Operational Risks
paragraphs: To help mitigate operational risk, Ginnie Mae has developed strategies to  address staffing gaps, realigned its organizational structure, conducted  risk assessments on its contracting, and started to improve outdated  information systems.
Although Ginnie Mae’s market share and volume of MBS has increased  in recent years, its (noncontractor) staff levels have been relatively  constant during this time despite requests for increased staffing  authority. For example, in 2004, when Ginnie Mae’s MBS market share  was 7 percent, HUD conducted a Resource Estimation and Allocation  Process (REAP) study, which suggested that Ginnie Mae’s staff be  increased from 70 to 76 full-time equivalent (FTE) positions. However,  Ginnie Mae officials told us that its authorized staff levels were not  increased to the levels suggested in the REAP study until 2010 when the  agency was given authority for 78 FTEs. Between 2005 and 2009,  Ginnie Mae’s authorized staff level fluctuated between 67 and 72.2  FTEs. Moreover, its actual staff levels trailed its authorized staff levels.  Table 1 illustrates the number of requested, authorized, and actual FTEs  from 2005 to 2010.
Most recently, Ginnie Mae’s internal control reviews for 2009 and 2010  identified a control deficiency due to employee vacancies. In 2009, the  report found multiple vacancies in certain positions relevant to internal  controls, such as an internal control manager and monitoring analysts.  The report also found that the vacancies caused employee workloads to  increase, which could lead to negative performance. In 2010, the report  stated that while key senior-level positions had been filled, vacancies had  brought actual FTE levels below the level recommended in the 2004  REAP study, mainly in the Office of Mortgage-Backed Securities. In 2011,  the reviews had no findings related to employee vacancies.
As part of a broad effort to address and mitigate its operational risks  related to staffing levels, Ginnie Mae has incorporated some principles  consistent with our internal control and management tool. Internal  control and human capital guidance states that agencies should develop  strategies that are tailored to address gaps in the number and  deployment of staff, evaluate their organizational structure, and make  changes based on changing conditions. Consistent with this guidance,  Ginnie Mae has identified skill gaps in staff resources, developed a plan  to hire additional staff, and made changes to its organizational structure.
In 2010, Ginnie Mae officials presented HUD senior management with a  staffing justification that identified skill gaps in its current staffing. Ginnie  Mae officials reported needing 160 staff to develop or enhance policies,  procedures, and related systems to properly manage risks and bring  some contracted services in-house, such as project management. The  staffing justification stated that Ginnie Mae did not have sufficient or  dedicated staff to mitigate certain risks internally. To identify these gaps in  staffing, Ginnie Mae created a matrix that identified certain roles that were  not fully staffed. For example, the matrix identified that Ginnie Mae  needed:    dedicated staff to design, develop, and leverage risk-related analytic  tools to reduce dependency on recommendations of contractors to  manage Ginnie Mae’s risk;    dedicated staff to develop exit and replacement strategies for critical,    dedicated staff to manage and oversee operational risks;    dedicated staff to establish and manage loss reserves and portfolio  sufficient staff to develop and maintain systems manuals used by  employees and Ginnie Mae issuers and servicers.
In 2011, Ginnie Mae received approval to support a staffing level of 108  FTEs. Ginnie Mae had developed a plan to hire additional staff in two  phases. For the first phase, Ginnie Mae focused on staffing 25 priority  positions, of which 9 were in the Office of Mortgage-Backed Securities, 5  in the Office of Finance, 4 to assist the Chief Risk Officer, 2 in the Office  of Capital Markets, 3 in the Office of Management Operations, 1 in the  Office of Program operations, and 1 in the Office of the President and  Executive Vice President.
The President’s 2012 budget request included $30 million for additional  administrative expenses, including hiring up to 249 FTEs. According to  Ginnie Mae officials, the increase would allow the agency to implement its  second phase of hiring and increase its staffing levels. However, Ginnie  Mae officials explained that in July 2011 they reassessed and revised the  budget request after determining that the requested $30 million would be  sufficient to hire only 137 FTEs. According to Ginnie Mae officials,  additional flexibility provided in the budget request will enable Ginnie Mae  to strengthen risk management and oversight, move in-house some  functions performed by contractors, and provide flexibility for future  needs. More specifically, if Ginnie Mae does not receive the authority  requested in its revised 2012 request, officials told us the agency would  be forced to use its limited resources across its many-risk management  efforts and would have little capacity to conduct preventative analysis,  therefore leaving Ginnie Mae to rely on a more reactive approach.
Ginnie Mae initially proposed realigning its organizational structure to  support increased staffing levels in November 2010, and amended its  proposal in March 2011 based on comments received by HUD senior  management. Ginnie Mae proposed the revisions to create a new office  and add divisions under an existing office so that new staff could be more  effectively integrated into the agency. For example:    The proposed structure created an Office of Enterprise Risk to be  headed by the Chief Risk Officer. The Chief Risk Officer position and  a Risk Committee were created in 2008 in response to a 2007 HUD  OIG report identifying a potential conflict of interest between Ginnie  Mae’s issuer approval and issuer monitoring functions.    The proposed structure added two divisions in the Office of Program  Operations, which manages day-to-day functions for Ginnie Mae’s  MBS and structured product programs. The Project and Data  Management Division will oversee and direct initiatives across Ginnie  Mae, such as the implementation of new disclosure information. The  Operations Division will focus on managing operations, such as  pooling loans and creating securities, and will direct Ginnie Mae’s  contractors who maintain and operate a large part of Ginnie Mae’s  securitization process.
Figure 8 illustrates the proposed reorganization. As of August 2011,  officials had received HUD approval to implement the new structure and  have notified Congress and HUD’s union and await their responses to  begin implementation.
Between 2005 and 2010, as Ginnie Mae’s volume and issuer activity  increased and staff levels remained largely the same, the agency  increasingly relied on contractors. In 2005, we reported that in 2004  approximately 81 percent of Ginnie Mae’s activities were contracted out  and concluded that ensuring the agency had sufficient staff capabilities to  plan, monitor, and manage its contracts was essential. According to  Federal Procurement Data System-Next Generation data, from 2005  through 2010, Ginnie Mae obligated approximately $599 million on  contracts. As shown is figure 9, while the amount of obligations had  been increasing since 2005, they increased significantly in 2009 and  2010. Contract obligations in 2010 were more than 14 times the  obligations in 2005 due, in part, to increases in volume and market share,  expenses related to servicing nonperforming loans in defaulted issuers’  portfolios, and the need to use contracts to implement planned  improvements to technology systems. Further, the number of active  contracts and orders increased from 18 in 2005 to 37 in 2010.
According to Ginnie Mae officials, they have contracted out many  functions because the agency has flexibility to use agency revenues to  procure contractors. That is, statutorily Ginnie Mae has more flexibility to  spend funds for contracting expenses because they can be funded from  agency revenues without annual appropriations. To pay for staff, Ginnie  Mae has to seek annual appropriations that have to be approved by HUD,  OMB, and Congress. As a result, Ginnie Mae has relied on contractors to  develop and operate information technology systems, manage and  dispose of acquired mortgage portfolios, and conduct monitoring reviews  of issuers. According to Ginnie Mae officials, throughout its history the  agency has operated with a business model that includes a small staff  that is largely supported by contractors because of the difficulty in  securing annual appropriations and not being able to use agency  revenues to pay for staff. Officials explained they have not conducted a  formal benefit-cost assessment of using contractors but believe such a  heavy reliance on contractors may not be cost-effective.
Ginnie Mae depends on contractors to provide a variety of services,  including those related to guaranteeing MBS, such as collecting data from  issuers and processing monthly principal and interest payments to  investors. In addition, Ginnie Mae relies on several contractors to take  over the servicing responsibilities on pooled loans when issuers default.  Table 2 illustrates some core functions at Ginnie Mae performed by  contractors and the total amounts obligated from 2005 to 2010.
Ginnie Mae has used its own staff and third-party assessments of  contracts to oversee its contractors but plans to provide additional staff  resources to supplement the third-party assessments. According to  HUD’s contractor monitoring guide and handbook on procurement  policies and procedures, a Government Technical Representative (GTR)  should be assigned to oversee and monitor the contractor’s performance.
For example, the guidance requires that GTRs monitor the contract for  timeliness and review invoices for accuracy. Since 1993, Ginnie Mae  has relied on third-party contractors to conduct Contract Assessment  Reviews (CAR) in accordance with procedures developed by Ginnie Mae.  In general, the CARs guidance outlines that the third-party contractor  should focus on determining whether the contractors complied with the  terms of their contracts, conducted appropriate billing, and maintained  adequate internal controls to minimize risk to Ginnie Mae. The CAR  reports also provide information on any potential risks to Ginnie Mae  based on other completed audits and reviews. These reviews are to be  conducted on contracts that have expended more than $1 million.
Ginnie Mae officials explained they had plans to supplement these  reviews in 2011 with the hiring of additional Ginnie Mae staff to conduct  on-site reviews and oversight concurrent with, and independently of, the  third-party contractors. However, due to changes to its budget,  implementation of this plan has been put on hold until 2012 or 2013.  Officials explained that in previous years staffing limitations required  waiting until the following review to address issues identified in the  previous review. In some instances, there might be a significant time lag  between reviews. One review might cover a 15-month period while  another would cover a 9-month time frame. Ginnie Mae officials explained  the timing of the reviews often depended on the time needed to procure  the contractors rather than on a set schedule.
Based on our nonprobability sample of 33 CAR reports from 2005 to  2010, the reports produced some findings. These findings included  questionable costs, information technology controls, and accounting  controls. For instance, one contractor did not have proper procedures to  review timesheets and improperly billed Ginnie Mae for $2,621. The  contractor agreed to develop formalized procedures and reimburse  Ginnie Mae for the improper payment. Additionally, in a few instances the  third party conducting the review had difficulty accessing necessary files  to complete contractually required procedures. Ginnie Mae officials  explained that they now work to address any access issues with  contractors at the beginning of the contractor’s reviews.
While our review of a sample of CARs identified some findings, the 2010  HUD OIG management letter discussed problems relating to one  contractor and recommended associated improvements in internal  controls, including assessing the effectiveness of CAR procedures. More  specifically, in October 2009 Ginnie Mae identified accounting  irregularities at its servicer of manufactured home loans. Agency officials  subsequently asked the contractor that performs internal control reviews  to do a more in-depth review of the servicer, including a file review. The  internal control review confirmed the servicer had not completely or  accurately processed manufactured home loan transactions for Ginnie  Mae. As a result, Ginnie Mae officials explained they developed a  corrective action plan and decreased the size of the portfolio managed by  the servicer from $26 million in August 2010 to about $4.7 million in  August 2011. The HUD OIG management letter suggested that internal  control over Ginnie Mae’s manufactured housing servicer needed  improvement and stated one of the causes for the finding was that the  prior year CAR did not include procedures to review specific loan-level  details. The HUD OIG made four recommendations—the one specific to  CAR procedures stated Ginnie Mae should assess the effectiveness of  and update CAR procedures if needed. Ginnie Mae officials told us that  they have addressed the HUD OIG recommendations and have updated  review procedures for this servicer and its other servicers of single-family  and multifamily properties.
Subsequent to these reviews, Ginnie Mae began to take other steps to  address operational risks related to contracting that are consistent with  the principle identified in our internal control and management tool to  consider risks associated with major suppliers and contractors. More  specifically, Ginnie Mae has conducted risk assessments of its contracts  and potential operational risks, and plans to review the proposed  recommendations and determine how to implement them. However, as  of October 2011, none of the recommendations have been implemented.  In December 2010, the Chief Risk Officer staff analyzed Ginnie Mae  contracts and identified approximately 12 contracts that could pose  operational risk to Ginnie Mae. The purpose of the risk assessment was  to assess the inherent risks associated with activities its top contractors  executed and to determine what controls the agency had in place or  should have in place to mitigate risks. The potential risks to Ginnie Mae  included (1) lack of a contingency plan if the contractor ceased work with  Ginnie Mae, (2) poor internal controls, (3) nonperformance under contract  terms, and (4) failure of operations. The analysis included short-term  recommendations related to better management of internal controls—for  example, increasing training requirements for GTR staff on areas of the  greatest risk exposure to Ginnie Mae such as cost overruns and  inadequate recordkeeping. Long-term recommendations included  increasing the number of Ginnie Mae staff to reduce the dependency on a  few key staff. Targeted recommendations included developing    a transition plan to automate manual processes that might lead to  operational errors to help address the risk of failure of operations and  formal contract reporting on projects with performance metrics to help  avoid nonperformance under contracts.
Ginnie Mae also contracted with a firm to provide recommendations for  enhancing its risk-management capabilities. In June 2011, the contractor’s  study recommended that Ginnie Mae systematically assess staff  overseeing its contracts to identify any gaps in expertise—for example, by  annually using a checklist or other mechanism to identify expertise. In  addition, the study suggested that Ginnie Mae develop a system to track  any contract-related incidents so that any issues would be handled  promptly. The study noted that as Ginnie Mae continues to grow,  establishing formalized processes for contract-related incidents would be  important.
Although Ginnie Mae has conducted risk assessments on its contracts, it  has not yet implemented the recommendations from these assessments.  According to Ginnie Mae officials, they have deferred implementing the  recommendations from the December 2010 risk assessment because  staff working for the Chief Risk Officer also have been conducting another  assessment on ways to improve contract management and procurement  processes. Officials explained that once this review was complete, they  would review recommendations from all three assessments and develop  a plan to implement them collectively. Ginnie Mae officials also explained  that during 2012, the Chief Risk Officer plans to work with senior  management to assess the recommendations in the June 2011 study and  prioritize their implementation relative to other competing projects  currently underway at the agency, such as technology improvements and  updates to its statistical model used to forecast cash flows to and from the  program. We discuss technology improvements in the following  paragraphs and the statistical model in the next section of this report.
Concurrent with its other risk assessments, Ginnie Mae began to change  its procurement practices in an effort to reduce its reliance on contractors  for critical functions. More specifically, as part of senior management  performance plans for the 2011 calendar year, managers have been  directed to develop and put in place a contracting environment that  leverages contractors and Ginnie Mae staff more effectively. For instance,  some senior management performance plans include a directive to  conduct a needs assessment for every contract that is new, has the  option to extend, or has ended. These assessments consider whether the  contract should be recompeted to bring targeted services or work  products in-house, thereby reducing contractor expenses and reliance.  Officials explained they also plan to include this directive in 2012 calendar  year performance plans. Officials also told us that these needs  assessments are required for all contract actions. As of August 2011, of  the nine contracts for which needs assessments might be conducted, four  have been completed. According to Ginnie Mae officials, the results of the  assessments for two contracts identified possible ways to bring certain  functions in-house, such as one contract for project management, which  may save $600,000. In 2012, Ginnie Mae officials expect to complete 17  needs assessments.
Senior managers also told us they have been reviewing current contract  provisions to make sure Ginnie Mae staff understood all the elements of a  contract. For example, management reviewed one contract with a large  technology component and found that the system documentation and  user manuals had not been consistently updated. According to officials,  Ginnie Mae recognizes the need for updated documentation and is in the  process of modernizing the data system used by the contractor, which  includes new system documentation and user manuals.
Ginnie Mae has been working on an ongoing initiative to improve its  information technology systems. According to officials, Ginnie Mae has  been working on the first phase of its business process improvement  initiative for the last few years based on a plan developed in conjunction  with OMB. The main goal of the initiative is to modernize the agency’s  technology by consolidating processes and eliminating redundant  systems. Some of the weaknesses included outdated data systems, a  reliance on paper-based processes, and a lack of integrated data  systems. According to our internal control management and evaluation  tool, management should derive critical operating data from its  information management function and support efforts to make  improvements in the systems as technology advances.
According to Ginnie Mae, the first phase of the initiative resulted in the  creation of nine new information technology system initiatives. Seven of  these initiatives have been in place since October 2009. For instance, one  system allows Ginnie Mae to receive enhanced reporting and provide  status information to issuers. Another allows Ginnie Mae issuers to provide  pool information electronically. According to Ginnie Mae, these systems let  Ginnie Mae modernize its technology by merging legacy systems into a  centralized database. Ginnie Mae officials further explained that they have  been modernizing the pooling information system so that it can be  integrated with the enterprise-wide data system. In addition, Ginnie Mae  has been drafting a strategy document for its ongoing initiative to look for  additional business improvement opportunities in its information technology  systems.
section_title: Ginnie Mae Has Taken Steps to Revise Some of its Counterparty Risk Management Processes
paragraphs: To manage its counterparty risk, Ginnie Mae has processes in place to  oversee issuers that include approval, monitoring, and enforcement. In  response to changing market conditions and increased market share,  Ginnie Mae revised its approval and monitoring procedures. In addition,  Ginnie Mae has several planned initiatives to enhance its management of  counterparty risk; however, many have not yet been fully implemented.
Issuers are subject to the requirements outlined in the Ginnie Mae MBS  guide and all participant memorandums, some of which have been made  more stringent in recent years due to changes in industry and market  conditions. In September 2008, Ginnie Mae issued a notice to  participants that it was raising the issuer approval standards and  requirements due to industry and market conditions. For example, newly  approved issuers became subject to a 1-year probationary period, which  begins after their first issuance or acquisition of a servicing portfolio.  Before this time, new issuers had no probationary period. In addition, for  newly approved and already existing issuers, the Office of Mortgage- Backed Securities monitors required risk thresholds, such as delinquency  levels and loan matching statistics.
New and existing single-family issuers also must meet increased net  worth and liquid asset thresholds. Initially, new issuers in the single- family and reverse mortgage program had to have a minimum net worth  of $250,000. In 2008, the minimum increased to $1 million. In October  2010, the minimum net worth requirement was raised to $2.5 million. At  the same time, Ginnie Mae announced a new liquid asset requirement,  which requires single-family issuers to maintain liquid assets that are 20  percent of the issuer’s Ginnie Mae required net worth requirement.  According to the policy memorandum Ginnie Mae issued, the increased  liquid asset requirement is intended to help ensure funds would be  available when cash was needed for mortgage buyouts or to pay for  potential indemnification requests from federal guarantee programs.  Existing single-family issuers had until October 2011 to meet the  increased net worth and liquid asset thresholds.
Corresponding to changes in Ginnie Mae’s market share, the number of  new issuer applications and approvals increased from 2008 to 2010 (see  fig. 10). For the first three quarters in 2011, the agency received 73 new  applications, approved 32 new issuers, and 85 applications were denied  or withdrawn. Ginnie Mae’s process for screening applications includes a  review of the applicant’s net worth and its performance as an FHA lender.  In addition, the applicant may be required to undergo a special servicer  review if the applicant is not an approved Fannie Mae or Freddie Mac  seller or servicer, or Ginnie Mae believes the applicant warrants a more  in-depth review. According to Ginnie Mae officials, the special servicer  review (conducted by Ginnie Mae staff and its contractors) began in 2008  as an on-site review of the financial, management, and operational  capacity of selected new applicants and existing issuers. As of June 30,  2011, the agency had conducted 32 special servicer reviews on new  applicants since 2008, for which 27 were approved and 5 rejected.  Officials explained one of Ginnie Mae’s goals is to decrease the approval  time for issuers from approximately 1 year to 6–8 months. They plan to  hire additional staff to review applications and have one of their  contractors help obtain the necessary documentation from issuers.  However, the creation of these new positions has been on hold due to  decreases in the FTE levels for 2011 and potential budget decreases for  2012. Ginnie Mae also has been considering raising its application fee to  deter issuers that might have little intention of issuing MBS but think  approval from a federal entity would reflect well on their business.
Ginnie Mae officials also told us they planned to expand the number of  issuers by marketing Ginnie Mae and its products to smaller financial  institutions, such as credit unions and state housing finance agencies  because the concentration of the MBS portfolio among a few issuers  represents some level of risk to Ginnie Mae. For instance, if one large  issuer were to fail, Ginnie Mae would be responsible for servicing more  mortgages than if a small issuer failed. Officials said that the risk posed  by concentration may be mitigated because these issuers generally were  regulated at the federal level.
Monitoring processes for issuers include the approval process for  commitment authority, reviews of quarterly and monthly summary reports,  and on-site reviews of issuers. Ginnie Mae has modified some of these  processes in recent years by requiring issuers to request commitment  authority more frequently and developing additional quarterly and monthly  summary reports. The agency also plans to add other monitoring tools.
According to Ginnie Mae officials, the agency uses its ability to limit or  modify commitment authority requests as a primary risk-management tool  (by limiting commitment authority, the agency reduces the flow of funds to  the issuer). To deal with increased demand, in 2005, Ginnie Mae created  two processes for granting commitment authority—streamlined and  nonstreamlined requests. Issuers that meet required risk thresholds set  by Ginnie Mae go through the streamlined process, which limits the  number of approvals needed for the request. Issuers that do not meet  these thresholds or are on Ginnie Mae’s watch list would be considered  under the nonstreamlined process, which requires additional scrutiny by  Ginnie Mae staff and additional approvals by Ginnie Mae management.  Before 2005, the agency used the same process for those that did and  did not meet required risk thresholds. Officials explained the change was  made to increase the efficiency of the process for issuers who met  required thresholds.
Whether streamlined or not, officials explained requests for commitment  authority now require more frequent approvals. Before 2008, issuers  generally would request commitment authority annually. However, Ginnie  Mae issuers currently apply for commitment authority in an amount equal  to the securities they plan to issue during the next 4 months. Therefore,  issuers generally must request the authority every 2 to 3 months, which  allows Ginnie Mae to take an in-depth look at the issuer’s performance  and compare it against its required risk thresholds. In 2010, Ginnie Mae  also revised its guidance to require that streamlined requests receive  management-level review rather than just a staff-level review in the Office  of Mortgage-Backed Securities.
The commitment authority process has been subject to internal reviews  from 2006 through 2011, but these reviews found no material  weaknesses. Specifically, Ginnie Mae’s annual internal control review  generally examines the commitment authority process. Although control  deficiencies—that is, less serious findings that identify an internal control  that might not be designed to prevent or detect and correct issues—were  identified from 2008 through 2011, officials explained the deficiencies did  not result in any issuer being granted commitment authority that should  not have received it. For instance, in 2008, Ginnie Mae was unable to  locate the files for the sample of 25 files selected by the internal auditor to  conduct its review. In 2009–2011, the required commitment authority  checklist was not always completed according to guidance. To address  the 2008 finding, Ginnie Mae officials explained that management was  directed to enforce the guidance and the filing system was changed. For  the 2009–2011 findings, Ginnie Mae updated procedures in its manual  and amended the checklist twice.
Since 2007, according to Ginnie Mae, one of the two contractors that  manage the administration of the MBS program has created 30 new  monthly and quarterly monitoring reports, which staff from the Office of  Mortgage-Backed Securities review. Ginnie Mae officials explained that  these reports were generally created because new programs, such as the  reverse mortgage program, were developed that required new monitoring  requirements, or enhancements were identified to existing monitoring  processes, which required additional reporting. Among other new reports,  in 2008 the contractor created a monthly summary report addressing  active issuers. The report summarizes issuer risks (in areas such as  default and financial condition) and results of issuer compliance reviews.  However, Ginnie Mae has not updated its guidance to reflect this new  report.
Officials explained that Ginnie Mae staff rely on the summary information  prepared by the contractor that combine information on all issuers rather  than creating individualized reports. In fact, our analysis of 10 issuer files  revealed that Ginnie Mae staff had not prepared monthly management  worksheets for any of these issuers as Ginnie Mae’s guidance requires.  Ginnie Mae officials said they plan to revise guidance in 2012 to reflect  the move from staff preparing reports for individual issuers to reliance on  contractor-prepared summary reports.
In addition, Ginnie Mae officials explained that they have been enhancing  data systems to assess counterparty risk. More specifically, according to  the Chief Risk Officer, the agency’s highest priority is to develop a  counterparty risk-management system by March 2012. The new system  aims to help Ginnie Mae identify its total counterparty risk exposure with  all entities, such as issuers and contractors. The system would include  information on issuers, such as rating data and risk calculations, and an  algorithm to predict issuer default. In addition, the system would  incorporate a scorecard to help Ginnie Mae have a comprehensive view  of issuers, including information on issuer required risk thresholds.
Ginnie Mae also monitors issuers through on-site reviews conducted by a  contractor. Ginnie Mae has implemented two new types of reviews since  2008 to provide additional monitoring of new and existing issuers and  increased the frequency of reviews on new issuers. Previously, there  were two types of issuer reviews—basic and special. In 2010, Ginnie  Mae added a findings resolution field review, which differs from the other  reviews because the issuer is not given prior notice of the review. The  purpose of this review is to test whether corrective actions for prior  findings have been implemented. According to Ginnie Mae officials,  seven finding resolution field reviews have been conducted since the  review was implemented.
According to Ginnie Mae’s January 2011 revisions to its MBS guide, new  issuers are subject to on-site basic or special reviews by contractors after  6 months of the start of their Ginnie Mae issuance activity, and then  annually for 2 years from the start of activity. Before this revision,  contractors reviewed new issuers 6 months after their issuance activity  started but did not conduct the annual reviews. Our review of information  on the frequency of new issuer reviews indicated that of the five new  issuers whose issuance activity began between December 2010 and  March 2011, none had been reviewed after 6 months of program  participation as required. According to Ginnie Mae officials, two reviews  were completed in September 2011 (3 months late) and the other three  were delayed due to scheduling issues and competing priorities.
Existing issuers are subject to on-site basic or special reviews by  contractors no less than once every 3 years, but may be reviewed more  frequently based on their ability to meet performance thresholds and  other factors. For example, an issuer review may be prompted by an  issuer’s portfolio size, monthly reporting portfolio statistics, a sudden  increase in issuance activity, monitoring of delinquency reporting,  previous review results and findings, a request from the Risk Committee,  or other information received by Ginnie Mae indicating potential risk to the  agency. We reviewed a March 2011 schedule for reviews of 196 issuers  and found that 174 reviews were conducted within the 3-year time frame.  According to Ginnie Mae officials, the 22 issuers not reviewed were not  active issuers during the 3-year time frame. Ginnie Mae officials  explained that each year its contractor develops a schedule of the issuer  reviews to be conducted in each quarter based on the factors identified  earlier in this report. Currently, officials explained they work with the  contractor that maintains the database on issuer reviews to develop the  schedule with which issuers will be reviewed during the next time frame.  However, they plan to enhance the development process by creating an  additional factor for consideration—a scoring system that summarizes the  results of prior issuer reviews—and coordinating with the Chief Risk  Officer. Officials were unclear on the timeline for implementing this plan  due to competing priorities with technology improvements.
From 2005 to 2010, Ginnie Mae issued 3,971 findings from the basic and  special issuer reviews. As of June 2011, 3,699 were cleared (93 percent),  and 268 were referred (7 percent) to Ginnie Mae by the contractor for  final resolution because they had not been cleared within the required  time frame (see fig. 11). Findings from the issuer reviews fall into three  risk categories (high, medium, and low). High-risk findings must be  addressed within 21 days of the review, medium-risk findings within 45  days, and low-risk findings within 120 days. Findings are reflected as  “cleared” if an issuer submits a resolution plan that includes evidence that  the original cause of the finding has been corrected and a policy,  procedure, or action was implemented to prevent the recurrence of the  finding. Findings are considered “open” if they are not addressed in these  time frames. Ginnie Mae can take a variety of enforcement actions  against issuers, which we discuss in detail in the following paragraphs.
According to Ginnie Mae officials, they do not have a database in place  for tracking the resolution or timing of individual findings. However, they  have been developing this capability through their information technology  systems and expect it to be completed by June 2012, unless delayed by  other priorities. To monitor the resolution or timing of findings, officials  stated they received a weekly report from the contractor that lists all  reviews completed over a certain period. The report includes the number  of findings from each review and actions pending from issuers to close  out any findings. If a finding has been referred to Ginnie Mae, the issuer  is flagged in the system used to monitor issuers.
Ginnie Mae’s internal control reviews from 2008 to 2011 repeatedly  identified that the guidance used to conduct the issuer reviews should be  updated to mitigate the risk of the current field review process not  incorporating tests that address changing risks in the MBS market. Ginnie  Mae officials told us that they have not updated the guidance because the  internal control review was not specific about what risks were not being  identified by the issuer reviews. However, they said that they have made  changes to their issuer reviews and monitoring procedures—such as the  unannounced on-site reviews and remote monitoring procedures on the  movement of funds—during this time that were not reflected in updates to  their guidance. Officials expected to update their guidance by the end of  2012. They explained the delay in updating the guidance in 2009 was due  to the increase in the number of new issuers in 2008 and 2009, the need  to conduct more issuer reviews on both new and existing issuers, and a  delay in adding more funds to the contract to update the guidance.
As mentioned previously, issuers found to not be in compliance are  placed on Ginnie Mae’s watch list or are subject to more scrutiny during  the commitment authority approval process. In addition, Ginnie Mae may  declare the issuer in default and terminate the issuer. As of June 2011, 27  single-family active issuers (of 165) were on the watch list. These 27  single-family issuers had an average portfolio size of about $4.8 billion.  Issuers on the watch list generally receive a quarterly monitoring letter  detailing the reason for being on the watch list and are given 30 days to  respond and take action. According to Ginnie Mae officials, they do not  track how long issuers stay on the watch list.
Ginnie Mae’s desk manual on operational procedures and its MBS guide  list the types of enforcement actions it can take against noncomplying  issuers. However, Ginnie Mae officials explained they plan to update this  guidance by December 2011 because the violations listed may warrant a  wide range of responses based on the severity of the violations. For  example, if an issuer is defaulted by one of the government-sponsored  enterprises, this action would warrant a more severe response than  missing a deadline to post a letter of credit. However, the guidance  currently does not distinguish among types of violations based on  severity. Based on its monitoring of issuers, Ginnie Mae may issue a  notice of intent to default if an issuer has violated the guidelines identified  in the MBS guide, such as a missed pass-through of monthly principal  and interest payment to an investor. Officials explained the most common  enforcement actions used against issuers were the notice of intent to  default an issuer. From 2005 to 2010, Ginnie Mae issued 46 notices of  intent to default (see fig. 12). Officials told us that they issued most of the  notices because issuers committed an operational error, such as a  missed payment, and that issuers rectified the errors in a timely manner.  Once an issuer receives a notice of intent to default, the issuer has 30  days to respond. If the issuer does not respond in 30 days, Ginnie Mae  takes action on the violation based on the information available. In the  first three quarters of 2011, Ginnie Mae issued seven notices of intent to  default.
During 2005–2010, Ginnie Mae defaulted 21 issuers. Officials said the  reasons for defaults have included suspensions by FHA, terminations by  Fannie Mae, bankruptcy, or failure to submit audited financial statements.  When an issuer is defaulted, Ginnie Mae takes over responsibility for  servicing that issuer’s portfolio. Currently, Ginnie Mae has a large  portfolio of single-family loans it is responsible for servicing due in part to  the default of Taylor, Bean & Whitaker Mortgage Corporation in 2009.
section_title: Although Ginnie Mae Continues to Fulfill Its Mission, Its Model for Estimating Costs and Revenues Could Be Improved
paragraphs: Ginnie Mae defines its mission as expanding affordable housing by  linking capital markets to the nation’s housing markets. Ginnie Mae has  been fulfilling its mission by securitizing the growing volume of federally  insured and guaranteed mortgage loans. Changes in the housing market  and the economic downturn have increased the volume and market share  of Ginnie Mae-guaranteed MBS significantly in the last 5 years. Although  Ginnie Mae’s portfolio of guaranteed MBS outstanding has grown,  increasing the financial exposure to the federal government, it has  mechanisms in place to help offset this financial exposure. As mentioned  previously, Ginnie Mae charges issuers a guarantee fee and has  accumulated reserves over the years. In addition, the mortgages that  back Ginnie Mae-guaranteed MBS are fully or partially insured against  default by another federal agency, such as FHA, VA, RHS, or PIH.  Finally, Ginnie Mae has a number of practices in place to mitigate its  operational and counterparty risks and has enhanced or plans to enhance  these practices. Nevertheless, the methods by which Ginnie Mae  measures the expected costs and revenues stemming from its growing  commitments may not take full advantage of available data and  techniques for accurately assessing program costs.
subsections: section_title: Ginnie Mae’s Revenues Have Covered Losses from Issuer Defaults
paragraphs: According to Ginnie Mae’s financial statements, income to Ginnie Mae,  mainly in the form of a guarantee fee paid by issuers, exceeded Ginnie  Mae’s costs by an average of about $700 million each year from 2006  through 2010. As of September 30, 2010, excess revenues allowed  Ginnie Mae to accumulate a capital reserve of about $14.6 billion.  Ginnie Mae has not required appropriations from the general fund to  cover any losses.
Ginnie Mae uses fee revenue to cover the cost of issuer defaults by  making timely payment of principal and interest to investors in Ginnie  Mae-guaranteed MBS when an issuer is unable to do so. Although Ginnie  Mae forecasts the severity of defaults, a higher-than-expected  delinquency and default rate on those mortgages could require Ginnie  Mae to make payments to investors using its accumulated reserves.  Additionally, while mortgages backing Ginnie Mae-guaranteed MBS  generally must be insured or guaranteed by another federal agency, such  as FHA, borrower defaults may result in lower fee and claim payments to  Ginnie Mae in some instances.    For instance, if the number of borrowers who prepaid or stopped  paying their mortgages was greater than Ginnie Mae expected,  guarantee fees paid by issuers would be less than expected.    For delinquent loans it acquires from defaulted issuers, Ginnie Mae  makes advances of principal and interest to cover any late payments  on those mortgages in the MBS pools. If the borrower made late  payments and eventually defaulted, Ginnie Mae might not recover the  entire value of the loss, although the mortgage was insured. For  example, for FHA-insured mortgages, Ginnie Mae has to incur the  cost to foreclose on a defaulted borrower but receives only a  percentage of the associated costs.
During 2005–2010, Ginnie Mae defaulted 21 issuers and took over the  portfolio for approximately $28.8 billion in mortgages (see fig. 13). While  the number of issuers defaulting has varied from two to five in recent  years, the number of loans involved increased during this period. In 2009,  Ginnie Mae defaulted a large issuer—Taylor, Bean & Whitaker Mortgage  Corporation—and took over the portfolio for approximately $26.2 billion in  mortgages. In general, the actual cost of a defaulted portfolio for Ginnie  Mae cannot be determined until insurance or guarantee claims are  processed and the number of fraudulent or delinquent mortgages  determined. As of June 2011, Ginnie Mae’s disbursed $7.4 billion as a  result of the 21 defaults. However, according to its 2010 financial  statements after considering forecasted receipts from claims and  recoveries, Ginnie Mae estimated that its defaulted issuer portfolio at that  time of about $4.5 billion would result in net costs of approximately $53  million.
For budgetary purposes, Ginnie Mae annually estimates the expected  subsidy costs to the federal government of its guarantee activity. Ginnie  Mae’s subsidy cost estimates to date have indicated that the program  would generate net revenues, meaning that the fees Ginnie Mae collects  were expected to exceed its losses on a present value basis. These  estimates take into account forecasted fees and expected losses in the  event of an issuer default. Once an issuer defaults, Ginnie Mae would take  over the issuer’s portfolio as its own loan portfolio. As a result, the initial  subsidy cost estimates take into account potential losses on the  guaranteed portfolio as well as potential losses on its loan portfolio from the  defaulted issuers. Agencies typically update or re-estimate the subsidy cost  estimates annually to reflect actual program performance and changes in  expected future performance.
Ginnie Mae performed a re-estimate for the first time at the end of 2010  and officials told us that they plan on performing annual re-estimates  going forward. The 2010 re-estimate lowered expected net revenues by  $720 million from the previous estimate. Ginnie Mae officials explained  that they performed the re-estimate of their portfolio in 2010 because for  the first time the agency and OMB had developed a methodology upon  which both parties could agree. Ginnie Mae officials noted that they faced  challenges in developing a re-estimate methodology. Officials explained  the nature of their business posed a challenge because Ginnie Mae does  not have a yearly cohort of loans like other federal guarantee programs.  Ginnie Mae officials also stated the re-estimate was performed due to the  default of the Taylor, Bean & Whitaker Mortgage Corporation in 2009.
section_title: Ginnie Mae’s Model Does Not Implement Certain Practices Identified in Federal Guidance for Cost Estimation of Credit Programs
paragraphs: Although Ginnie Mae has made some changes to the model it uses to  forecast cash flows for the program, it has not implemented certain  practices identified in Federal Accounting Standards Advisory Board  (FASAB) guidance. While Ginnie Mae, as a government corporation,  follows private sector accounting standards rather than FASAB  accounting standards, we believe FASAB guidance on preparing cost  estimates for federal credit programs represent sound internal control  practices for evaluating Ginnie Mae’s model. Ginnie Mae uses a statistical  model to forecast cash flows, including guarantee fee income and costs  related to issuer defaults, to develop a credit subsidy cost for the federal  budget and to calculate a reserve for loss for its financial statements.  Ginnie Mae’s model uses historical trends on the default and prepayment  characteristics of loans in its guaranteed MBS and estimates of future  events, such as issuer defaults, to forecast 30 years of costs and  revenues to the program.
Ginnie Mae officials explained they recognized improvements could be  made to their model. In 2009, Ginnie Mae hired a contractor to redesign  its model over a 2-year period. Ginnie Mae hired additional staff to assist  with the development of the model in March 2011. The contractor  completed the new version of Ginnie Mae’s revised model in August  2011. Examples of changes made to the model since 2009 include the  following:    Changing the data used in the model from FHA loan-level data to  Ginnie Mae data, which includes data on other loans in Ginnie Mae- guaranteed MBS, such as PIH, VA, and RHS loans.
Incorporating econometric methods similar to those used in FHA’s  model.    Changing the types of scenarios used for stress testing. Previously,  Ginnie Mae relied on vendor-provided scenarios rather than using  customized scenarios tailored to Ginnie Mae.
Ginnie Mae staff recently obtained FHA’s estimates of borrower default  and prepayment and are intending to use these for future credit subsidy  estimates, credit subsidy re-estimates, and financial statements.
However, the current model still does not implement certain practices  identified in FASAB guidance and risk-budgeting guidance. According to  FASAB guidance, managers of federal credit programs should develop  cost estimate models that include the following characteristics:    Estimates should be based on the best available data of the  performance of the loans or loan guarantees, including data from  related federal agencies. Furthermore, agency documentation  supporting the estimates should include evidence of consultation with  relevant agencies.    Estimates also should include a sensitivity analysis to identify which  cash flow assumptions have the greatest impact on the performance  of the model. In addition, according to academic risk-budgeting  guidance, it is important that stress testing, which is a form of  sensitivity analysis, use realistic scenarios to provide accurate  indications of the effect of variability in economic and market factors.    Estimates can rely on informed opinion (i.e., management  assumptions), but these assumptions only should be used in lieu of  available data and on an interim basis. Moreover, agency  documentation supporting the assumptions should demonstrate how  the assumptions were determined.
Although FASAB suggests that estimates be based on the best available  data, Ginnie Mae did not fully evaluate the benefits and costs of using  data to develop borrower default and prepayment estimates from relevant  agencies, including FHA. More specifically, it did not consider or assess  the benefits of using FHA’s default and prepayment model, rather than  spending resources on developing its own model. According to Ginnie  Mae officials, they took steps intended to improve the revised model by  using their own loan-level data as a basis for developing estimates of  borrower default and prepayment. However, Ginnie Mae did not perform  or document any analyses to determine what other data from FHA—or  VA, RHS, and PIH—could improve its model or help assess its cost- effectiveness. Ginnie Mae officials explained that they used their own  loan-level data in the revised model because they could incorporate data  on mortgages from all of the guaranteeing agencies, without obtaining  data from each of the agencies that insure or guarantee mortgages in  Ginnie Mae-guaranteed MBS. However, since approximately 80 percent  of loans pooled into Ginnie Mae-guaranteed MBS are FHA-insured  mortgages, there may be some benefits of incorporating elements of  FHA’s data or model. These benefits include its cost-effectiveness and  the potential for more detailed loan-level data than Ginnie Mae collects on  FHA mortgages. Similarly, there may be benefits to incorporating VA data  on loans it guarantees, which represented 16 percent of loans pooled in  Ginnie Mae-guaranteed MBS in 2010.
More specifically, FHA’s models include certain data elements that Ginnie  Mae’s model does not, such as identifying which loans are FHA  streamlined refinancing products and reverse mortgages. An FHA  official with whom we spoke explained that these types of mortgages  have different borrower default and prepayment characteristics. In  addition, the official explained that including information identifying these  types of mortgages would improve the predictive quality of any model of  default and prepayment. For example, according to 2009 FHA data,  borrowers who refinanced their mortgage under the streamlined refinance  program had higher early payment delinquency rates than those with  other refinanced mortgages. Our review of Ginnie Mae’s August 2011  revised model showed that it did not identify reverse or streamlined- refinanced mortgages.
However, since our review of the model, Ginnie Mae officials said they  have received data from FHA on estimates of borrower default and  prepayment and are intending to use this information for preparing future  credit subsidy estimates, credit subsidy re-estimates, and financial  statements. FHA’s estimates of borrower default and prepayment does  include data on streamlined-refinance mortgages. Ginnie Mae officials  have not yet incorporated data on reverse mortgages, which are modeled  separately by FHA, or explored and documented VA estimates of defaults  and prepayments in their model. According to Ginnie Mae officials, they  are using FHA data to approximate the experience expected of VA loans  rather than using VA data directly (by adjusting these data for expected  differences for prepayment and default experience). However, the  analysis underlying these adjustments have not been documented.
According to FASAB, sensitivity analysis should be performed to improve  the accuracy of a model. A stress test provides an analysis of the  sensitivity of a model’s forecasted cash flows in response to extreme  changes in economic conditions. According to academic risk budgeting  guidance, using realistic stress test scenarios is important to accurately  indicate the effect of variability in economic and market factors. More  specifically, stress test scenarios should consider the impact of  movements of individual market factors and interrelationships or  correlations among these factors.
Although Ginnie Mae recently has developed more customized stress test  scenarios in its revised model, some of these scenarios may not be realistic  because they do not reflect the interrelationships between economic and  capital markets factors. For example, Ginnie Mae’s revised model includes  customized scenarios that focus on mortgage rate movements. More  specifically, mortgage rates in one scenario were lowered by 300 basis  points, or 3 percent, but no other economic variables, such as housing  prices and unemployment rates, were changed. Ginnie Mae’s revised  model stated that this scenario consistently produced the lowest cumulative  defaults across its FHA and VA portfolio. However, as we previously  reported, an economic scenario involving a mortgage rate decrease, which  included rising unemployment and falling house prices, could produce  more realistic model results. This is an example of a scenario that could  create a different—yet plausible—scenario for defaults under various  economically stressful conditions. If the scenarios Ginnie Mae used were  unrealistic, it could affect the accuracy of its model.
Ginnie Mae relies on management assumptions rather than data to  forecast issuer defaults and mortgage buyout rates. For example,  Ginnie Mae’s management assumptions for the costs of future issuer  defaults were $300 million in 2011 and $25 million annually from 2012 to  2015. Ginnie Mae officials were not able to provide documentation on the  basis for these assumptions and have explained they have had difficulty  forecasting the risk that an issuer would default because defaults are  dependent on both economic and noneconomic factors. However, Ginnie  Mae officials acknowledged that issuers that have a higher concentration  of federally insured or guaranteed mortgages in their portfolio may face a  greater risk of default if these mortgages default at high rates, and they  could not continue making the required advances to investors. In addition,  Ginnie Mae’s model does not incorporate data on the mortgage buyout  rate but includes a management assumption that issuers will buy out all  mortgages after default. The mortgage buyout rate affects Ginnie Mae’s  cash flows because mortgage buyouts reduce the guarantee fee revenue  on the MBS backed by the loans. However, Ginnie Mae officials told us  changes in interest rates may influence an issuer’s decision to buy a  defaulted mortgage out of an MBS pool. More specifically, officials  explained that if an issuer’s borrowing rate (cost of capital) is higher than  the interest rate on a delinquent mortgage, the issuer is less likely to buy  the mortgage out of the pool and will choose to continue making  advances to investors. When the issuer’s borrowing rate is lower than the  interest rate on a delinquent mortgage, the issuer is more likely to buy the  mortgage out of the pool at an earlier opportunity. Officials said they plan  to include quantitative estimates on issuer defaults and interest rates in  determining mortgage buyout rates in future iterations of the model, but  the agency does not have a timeline for incorporating these data and the  analysis into the model.
Because Ginnie Mae’s revised model does not fully implement certain  practices identified in FASAB guidance, the model may lack critical data  needed to produce a reliable credit subsidy rate and reserve for loss  amount, which could affect Ginnie Mae’s ability to provide more informed  budgetary cost estimates and financial statements. Ginnie Mae also may  be forgoing opportunities to further enhance its model in the most cost- effective way possible by not regularly consulting with other agencies and  evaluating their data. In addition, economic scenarios used to conduct  stress tests on its revised model may not be sufficiency realistic, which  may impact the accuracy of the model. Further, Ginnie Mae’s reliance on  management assumptions rather than quantitative estimates for issuer  defaults and mortgage buyout rates also may impact the accuracy of the  model and a lack of documentation on how these assumptions were  developed limits the transparency of the model. Ultimately, because of  these limitations on its model, Ginnie Mae could be limited in its ability to  accurately portray the extent to which Ginnie Mae’s programs represent a  financial exposure to the government.
section_title: Conclusions
paragraphs: During the recent financial crisis and in response to continuing stresses in  housing markets, Ginnie Mae has assumed an increasingly prominent  position in the secondary mortgage market. However, risks have  accompanied its growth. The agency has faced an increased reliance on  contractors to perform many critical functions, while at the same time  coping with relatively flat staffing levels and outdated information  technology. Although Ginnie Mae has conducted risk assessments on its  contracts and enhanced some processes, technology, and staffing, or  planned to do so, a number of recommendations from these assessments  and initiatives remain in planning or under development—warranting  vigorous and continued commitment and follow through from senior  management.
In recent years, Ginnie Mae also received a salient demonstration of  counterparty risk when it defaulted a major issuer and had to assume and  service a $26 billion loan portfolio. This and other issuer defaults and  issuance volume surpassing a trillion dollars highlight the need for  comprehensive risk mitigation and monitoring. As with operational risks,  the agency has several planned initiatives to enhance its management of  counterparty risk, which have yet to be fully implemented. These actions  are critical to Ginnie Mae’s efforts to enhance its operations and we  encourage the agency to complete their implementation as soon as  practicable.
Finally, although Ginnie Mae revenues exceeded costs thus far (including  the costs of defaults) and the agency has a positive capital reserve, it has  had to lower net revenue projections in a recent re-estimate of program  costs. A combination of factors, including changed economic conditions,  increased Ginnie Mae market share and volume, and the results of the re- estimate suggest that now is an opportune time for the agency to  reexamine its data sources and methodologies, and identify opportunities  to improve inputs and analyses for the statistical model it uses to forecast  cash flows to and from the program. Ginnie Mae has acknowledged that it  could improve the model and has said they will use FHA’s estimates of  borrower default and prepayment for preparing future credit subsidy  estimates, credit subsidy re-estimates, and financial statements. For  example, Ginnie Mae officials explained they are using FHA data to  approximate the experience expected of VA loans rather than using VA  data directly. However, the analysis underlying these adjustments have  not been documented. Therefore, without fully documenting, it is not  possible to assess the rigor of this analysis. Given that VA was 16  percent of Ginnie Mae’s portfolio in 2010, evaluating and documenting the  accuracy of its assumptions going forward and assessing whether its  assumptions are sufficiently accurate for VA loans or if it should use data  directly from VA is important. We identified several areas in which the  agency could better implement certain practices identified in federal  guidance for estimating program costs, including using the best available  data, conducting sensitivity analyses, and assessing and documenting  reasons for using management assumptions (judgment) rather than data.  By consulting other agencies, assessing different modeling inputs and  approaches, and leveraging other agencies’ datasets, Ginnie Mae could  provide more informed budgetary cost estimates and financial  statements. In addition, Ginnie Mae could realize opportunities to further  enhance its model in a cost-effective way. Further, by developing  quantitative estimates for issuer defaults and mortgage buyout rates,  Ginnie Mae could better predict potential impacts on the costs and  revenues of its programs. With more informed budgetary cost estimates  and financial statements, Congress could more confidently use this  information to understand the extent to which Ginnie Mae’s credit  programs represent a financial exposure to the government.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that Ginnie Mae is developing the most accurate model  for estimating costs and revenues, we recommend that the Secretary of  Housing and Urban Development direct Ginnie Mae to take steps to  ensure its model more closely follows certain practices identified in  Federal Accounting Standards Advisory Board guidance for estimating  subsidy costs of credit programs. More specifically, Ginnie Mae should  take the following four actions:  1.  Assess and document that it is using the best available data in its  model and most appropriate modeling approach. For example, Ginnie  Mae should determine if other agencies’ datasets (such as FHA, VA,  RHS, or PIH) provide for more detail that could lead to better  predictability. Ginnie Mae should also determine whether using other  models for prepayment and defaults are sufficient for accurately  estimating future guarantee fee revenue.  2.  Conduct and document sensitivity analyses to determine which cash  flow assumptions have the greatest impact on the model.  3.  Document how management assumptions are determined, such as  those for issuer defaults and mortgage buyout rates.  4.  Assess the extent to which management assumptions, such as those  for issuer defaults and mortgage buyout rates, can be replaced with  quantitative estimates.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided copies of this draft report to HUD, VA, USDA, OMB, and the  Federal Housing Finance Agency for their review and comment. Ginnie  Mae (HUD) provided written comments that have been reprinted in  appendix III. Ginnie Mae, OMB, VA, and the Federal Housing Finance  Agency provided technical comments, which we incorporated as  appropriate. USDA did not have any comments. The President of Ginnie  Mae wrote that Ginnie Mae is working towards implementing our  recommendation for conducting sensitivity analyses relating to issuer risk  and behavior, but neither agreed nor disagreed with our other specific  recommendations that are also intended to better ensure that Ginnie Mae  is developing the most accurate model for estimating costs and revenues.   Rather, Ginnie Mae noted that limited funding and resources constrained  its ability to develop its model to forecast cash flows for the program  consistent with our recommendations.  However, as we also note, Ginnie  Mae devoted significant resources to designing its models, but did not  fully implement certain practices identified in FASAB guidance when  redesigning its model. More specifically, Ginnie Mae hired a contractor in  2009 to redesign its model over a 2-year period, which cost approximately  $1.8 million.  The expected additional cost for the subsequent 3-year  period of the contract is $193,000.
Ginnie Mae agreed with a number of our findings.  In particular, the  President of Ginnie Mae noted that he agreed with the report’s analysis  that limited staff, substantial reliance on contractors, and the need for  modernized information systems are operational risks that Ginnie Mae  can face.  In addition, Ginnie Mae agreed with our observation about the  importance of completing ongoing and planned initiatives for enhancing  its risk-management processes, as soon as practicable, to improve  operations.  Finally, while Ginnie Mae agreed that its model could be  further enhanced by incorporating some general FASAB guidance, the  President of Ginnie Mae stated some aspects of the guidance did not  provide a relevant framework for the nature of Ginnie Mae’s business. We  recognize these differences, and as discussed in the report, our analysis  focuses on particular aspects of FASAB guidance that are specific to  developing cost estimate models and we believe the guidance that we  cite provides a relevant framework for Ginnie Mae.
Ginnie Mae also discussed a number of other issues that were beyond  the scope of this review.  For example, Ginnie Mae stated that its  negative credit subsidy calculation is overstated because OMB currently  does not allow Ginnie Mae to reduce the negative subsidy to reflect  administrative costs. Additionally, Ginnie Mae noted that FCRA-type  accounting presented a challenge because the agency could not use  funds generated from previous fiscal years’ negative subsidy payments to  cover the cost of defaulted issuers.  For this study, we did not assess the  accounting that Ginnie Mae is required to perform.  To achieve the  objectives of this report, we reviewed Ginnie Mae’s financial statements  and their subsidy estimate and re-estimate to understand how Ginnie  Mae’s portfolio may affect financial exposure to the federal government  and how well Ginnie Mae has been managing this exposure.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. At that time, we will send copies of this report  to the Secretary of Housing and Urban Development, appropriate  congressional committees, and other interested parties. In addition, this  report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Mathew Scirè at sciremj@gao.gov or (202) 512-8678. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe changes in the Government National Mortgage Association’s  (Ginnie Mae) market share and volume, we collected and analyzed data  from Ginnie Mae and Inside Mortgage Finance, a firm that collects data  on the primary and secondary mortgage markets. The data from Ginnie  Mae covered fiscal years 2005–2010 and part of fiscal year 2011  (October 2010 through June 2011). We analyzed information on the  number and types of institutions that issue Ginnie Mae-guaranteed  mortgage-backed securities (MBS) and the share of outstanding MBS by  type of issuers. We included information on the amount of federally  insured and guaranteed mortgages pooled into new Ginnie Mae- guaranteed MBS; the amount of new guaranteed MBS backed by reverse  mortgages, multifamily loans; and the volume of Ginnie Mae structured  products. The data from Inside Mortgage Finance covered calendar years  2005–2010. We analyzed information on the volume of MBS issuance by  Ginnie Mae issuers, private-label issuers, and government-sponsored  enterprises, and cumulative outstanding guaranteed MBS. We assessed  the reliability of the data provided by Ginnie Mae by reviewing  documentation on the systems that produced the data, performing  electronic testing, and conducting interviews with relevant officials at  Ginnie Mae and its contractors. To assess the reliability of the data  provided by Inside Mortgage Finance, we interviewed an official at the  firm and reviewed documentation that describes how market information  is collected. We determined that the data were sufficiently reliable for the  purposes of this report. We also reviewed Ginnie Mae’s 2009 and 2010  reports to Congress.
To describe the reasons for changes in Ginnie Mae’s market share and  volume, we interviewed officials from the Department of Housing and  Urban Development (HUD)—more specifically, from Ginnie Mae, the  Federal Housing Administration (FHA), Office of the Inspector General,  Public and Indian Housing; the Department of Agriculture’s Rural Housing  Service; the Department of Veterans Affairs; Fannie Mae and Freddie  Mac (government-sponsored enterprises); the Federal Housing Finance  Agency and the Mortgage Bankers Association.
To assess the types of risks Ginnie Mae faces and how it manages these  risks, we conducted a literature review of risks that may be prevalent in  the MBS market for Ginnie Mae and government-sponsored enterprises.
We also interviewed officials from Ginnie Mae, Fannie Mae, and Freddie  Mac to determine what risk these agencies face and how they are  managed. From this review and discussion, we identified counterparty  and operational risk as the key risks facing Ginnie Mae. For both of these  risks, we reviewed and identified principles in our internal control and  management tool relevant to managing these risks. We also identified  human capital principles in our prior work on the topic. We compared  these principles to the steps that Ginnie Mae took to manage its risk. For  operational risk, we focused on risks present in the agency’s  management of human capital, contracting, and technology. We  assessed Ginnie Mae’s staffing and organizational realignment plans to  determine if Ginnie Mae developed strategies to address gaps in staffing  needs and evaluated its organizational structure and made changes  based on changing conditions. We collected information on the number of  full-time equivalent positions requested, authorized, and actual in 2005– 2010 and part of 2011 (October 2010 through June 2011). We assessed  the reliability of the information provided by reviewing documentation that  HUD’s budget office and Ginnie Mae’s administrative officer maintain and  conducting interviews with relevant officials. We determined that the data  were sufficiently reliable for the purposes of this report. We reviewed  HUD’s 2004 Resource Estimation and Allocation Process study. We also  reviewed proposed 2012 budget documents produced by the Office of  Management and Budget.
To assess how Ginnie Mae managed risks associated with contracting,  we reviewed Ginnie Mae’s guidance and other HUD and federal  contracting standards. We obtained and analyzed Federal Procurement  Data System-Next Generation data to determine the amount of Ginnie  Mae contract dollars awarded from 2005 to 2010. We assessed the  reliability of the data by reviewing documentation on the systems that  produced the data, conducting interviews with relevant officials at Ginnie  Mae and HUD’s Office of the Chief of Procurement, and reviewing the  internal controls on the data. We also reviewed the number of active  contracts and orders during that time period. We reviewed a  nonprobability sample of 14 contracts selected either because the  activities involved represented a core business function or Ginnie Mae  identified the activities as key business functions that could result in  operational risk if problems occurred with the contract. In addition, we  examined a nonprobability sample of 33 third-party Contract Assessment  Reviews conducted between 2005 and 2010. We also interviewed 7  contractors from our nonprobability sample of 14 contracts to gain an  understanding of the work performed and how they were monitored. The  interviews included four contractors that received some of the largest  obligation amounts from 2005–2010 and three third-party contractors who  conducted reviews on the majority of these contracts. We interviewed  Government Technical Representatives for five contracts to understand  their role and how they monitored contracts. We also reviewed risk  assessments conducted by Ginnie Mae and its review contractor in  December 2010 and June 2011 and determined if these studies followed  our principles (from our internal control and management tool) for  agencies to consider risks associated with major suppliers and contracts.  We reviewed the 2011 performance plans for senior management that  contained directives to assess contracts. In addition, we met with HUD  Inspector General officials and reviewed Ginnie Mae financial statements  from 2006 to 2010, management letters from 2008 to 2010, and program  audits on the MBS program and information technology. To assess how  Ginnie Mae managed risks associated with its information technology, we  reviewed Ginnie Mae’s information technology improvement initiative and  discussed the initiative and additional plans with Ginnie Mae officials.
For counterparty risk, we assessed Ginnie Mae’s MBS policies and  guidance, including processes for issuer approval, monitoring, and  enforcement. We interviewed Ginnie Mae officials and contractors about  how issuers are approved and monitored and the changes made to these  processes in recent years. We collected and reviewed data from Ginnie  Mae from 2005 to 2010 and part of 2011 (October 2010 through June  2011) and described the number of new issuer applications, approvals,  reviews, and findings. We assessed the reliability of these data and  determined they were reliable for our purposes. In addition, we met with  HUD Inspector General officials and reviewed 2008 and 2009 program  audits on the MBS program. We also reviewed A-123 internal control  reviews performed by a third-party contractor from 2006 to 2011 to  determine the types of findings and recommendations on Ginnie Mae’s  approval, monitoring, and enforcement processes. We reviewed Ginnie  Mae’s risk committee minutes from 2008 to 2010 to determine the role of  the committee and how risks were monitored. We reviewed  documentation on a nonprobability sample of 10 issuers to understand  the types of monitoring Ginnie Mae and its contractors conducted. To  select the issuers, we used a certainty sample to select the three largest  issuers based on overall portfolio size and also one newly approved  issuer approved after Ginnie Mae made changes to its process. The other  six issuers were selected at random and included three that were on  Ginnie Mae’s watch list and three that were not. We also selected 5 of the  10 issuers to interview based on size, institution type, and results from  monitoring reviews. Two of the issuers selected also were investors and  sponsors of structured products. We also looked at examples of monthly  and quarterly reports prepared by Ginnie Mae’s contractor that report  such information as issuer performance thresholds. We reviewed  documentation on risk-management ideas, planned initiatives, and risk  assessments performed by the agency’s contractor. We also reviewed  the performance plans of senior management in the office of the Chief  Risk Officer and the Office of Mortgage-Backed Securities to determine  what goals were in place for the year.
To determine how recent changes in Ginnie Mae’s market share and  volume might affect financial exposure to the federal government and the  agency’s ability to meet its mission, we interviewed officials from Ginnie  Mae and its contractor that conducts modeling, the Office of Management  and Budget, and FHA. We reviewed Ginnie Mae’s guidance and financial  statements. We obtained and analyzed data on the potential risks of  changes in Ginnie Mae’s market share and volume on its mission. More  specifically, we analyzed data on FHA and Department of Veterans  Affairs loan securitization rates from Inside Mortgage Finance for  calendar years 2005–2010. To gain an understanding of how Ginnie  Mae’s program might produce financial exposure to the federal  government, we obtained data from Ginnie Mae on issuer defaults,  including the number of pools, loans, and remaining balance of the assets  needed to be serviced from 2005 to 2010 and part of 2011 (October 2010  through June 2011). We also obtained data as of June 30, 2011, on the  associated costs Ginnie Mae incurred due to issuer defaults. We  analyzed Ginnie Mae’s revenue and expense data to identify the extent to  which its guarantee fee revenues covered its costs from 2005 through  2010 and part of 2011 (October 2010 through June 2011). We assessed  the reliability of the data provided by Inside Mortgage Finance and Ginnie  Mae by means such as interviewing relevant officials and reviewing  documentation on the systems that produced the data. We determined  that the data were sufficiently reliable for the purposes of this report.
In addition, to determine how Ginnie Mae forecasts costs and revenues,  we reviewed the Federal Credit Reform Act of 1990 and budget  documents produced by the Office of Management and Budget. We also  reviewed Ginnie Mae’s statutes and documentation related to the  development of the annual subsidy estimate, including the credit subsidy  re-estimate for 2010 and Ginnie Mae’s model used to forecast cash flows.  Furthermore, we reviewed Federal Accounting Standards Advisory Board  guidance for cost estimation of federal credit programs, academic  research on risk budgeting, and FHA’s 2010 actuarial review. We  compared this information with Ginnie Mae’s revised model.
We conducted this performance audit from September 2010 to November  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Ginnie Mae’s Planned and Proposed Changes to Address Operational and Counterparty Risk
paragraphs: As mentioned previously, Ginnie Mae has several planned and proposed  initiatives to address operational and counterparty risk. Table 3 provides a  listing of these plans.
section_title: Appendix III: Comments from Ginnie Mae
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named, Andy Pauline (Assistant Director),  Serena Atim Agoro-Menyang, Jennifer Alpha, Marcia Carlsen, Kathryn  Edelman, Carol Henn, Julia Kennon, John McGrail, Luann Moy, Marc  Molino, Nadine Garrick Raidbard, Paul G. Revesz, Barbara Roesmann,  and Heneng Yu made key contributions to this report.