Ginnie Mae guarantees the timely payment of principal and interest on  MBS. Ginnie Mae’s Market Share and MBS Volume Increased Substantially from 2007 to 2010

		In 2010, Ginnie Mae- Guaranteed MBS Represented 25 Percent of the Market

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. 2). 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. 3). 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. Ginnie Mae Has Been Taking Steps to Better Manage Risks

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. Moreover, its actual staff levels trailed its authorized staff levels. 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. Although Ginnie Mae has conducted risk assessments on its contracts, it  has not yet implemented the recommendations from these assessments. Ginnie Mae Has Taken Steps to Revise Some of its Counterparty Risk Management Processes

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. Although Ginnie Mae Continues to Fulfill Its Mission, Its Model for Estimating Costs and Revenues Could Be Improved

Ginnie Mae defines its mission as expanding affordable housing by  linking capital markets to the nation’s housing markets. As of September 30, 2010, excess revenues allowed  Ginnie Mae to accumulate a capital reserve of about $14.6 billion. Ginnie Mae’s Model Does Not Implement Certain Practices Identified in Federal Guidance for Cost Estimation of Credit Programs

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. 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. 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. 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. 2. Conduct and document sensitivity analyses to determine which cash  flow assumptions have the greatest impact on the model. 3. USDA did not have any comments. 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. 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. 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.
Why GAO Did This Study

The Government National Mortgage Association (Ginnie Mae) has increased its role in the secondary mortgage market significantly. Ginnie Mae is a wholly owned government corporation in the Department of Housing and Urban Development (HUD). It guarantees the timely payment of principal and interest of mortgage-backed securities (MBS) backed by pools of federally insured or guaranteed mortgage loans, such as Federal Housing Administration (FHA) loans. GAO was asked to (1) describe how Ginnie Mae's volume of MBS and market share have changed, (2) assess the risks Ginnie Mae faces and how it manages these risks, and (3) determine what effect recent changes in Ginnie Mae's market share and volume may have on financial exposure to the federal government, including mission. To address these objectives, GAO analyzed data on volume and market share and assessed their reliability. GAO also reviewed guidance and Ginnie Mae's credit subsidy calculations and estimation model, and interviewed agency officials and others.

What GAO Found

From 2007 to 2010, the volume of Ginnie Mae-guaranteed MBS and its share of the secondary mortgage market increased substantially. Ginnie Mae-guaranteed MBS outstanding grew from $412 billion to more than $1 trillion, and market share grew from 5 percent to more than 25 percent. As the demand for FHA and other federally insured or guaranteed mortgages grew during this time, financial institutions increased their issuance of Ginnie Mae-guaranteed MBS to finance these federally insured or guaranteed loans. Ginnie Mae has taken steps to better manage operational and counterparty risks, and has several initiatives planned or underway. The agency may face operational risk--the risk of loss resulting from inadequate or failed internal processes, people, or from external events--and counterparty risk--the risk that issuers fail to provide investors with monthly principal and interest payments. GAO and others, including HUD's Inspector General, have identified limited staff, substantial reliance on contractors, and the need for modernized information systems as operational risks that Ginnie Mae may face. For example, although Ginnie Mae's market share and volume of MBS have increased in recent years, its staffing levels were relatively constant and actual staff levels trailed authorized levels. In addition, between 2005 and 2010, the agency increasingly relied on contractors. Ginnie Mae has identified gaps in resources and conducted risk assessments on its contracts but has not yet fully implemented changes based on these analyses. To manage its counterparty risk, Ginnie Mae has processes in place to oversee MBS issuers that include approval, monitoring, and enforcement. In response to changing market conditions and increased market share, Ginnie Mae revised its approval and monitoring procedures. Ginnie Mae also has several planned initiatives to enhance its risk-management processes for issuers, including its tracking and reporting systems, but these plans have not been fully implemented. It will be important for Ginnie Mae to complete these initiatives as soon as practicable to enhance its operations. The growth in outstanding Ginnie Mae-guaranteed MBS resulted in an increased financial exposure for the federal government as Ginnie Mae fulfills its mission of expanding affordable housing by linking capital markets to the nation's housing markets. Nonetheless, Ginnie Mae's revenues have exceeded its costs and it has accumulated a capital reserve of about $14.6 billion. However, GAO found that in developing inputs and procedures for the model used to forecast costs and revenues, the agency did not consider certain practices identified in Federal Accounting Standards Advisory Board (FASAB) guidance for preparing cost estimates of federal credit programs. Ginnie Mae has not developed estimates based on the best available data, performed sensitivity analyses to determine which assumptions have the greatest impact on the model, or documented why it used management assumptions rather than available data. By not fully implementing certain practices identified in FASAB guidance that GAO believes represent sound internal controls for models, Ginnie Mae's model may not use critical data which could affect the agency's ability to provide well-informed budgetary cost estimates and financial statements. This may limit Ginnie Mae's ability to accurately report to the Congress the extent to which its programs represent a financial exposure to the government. 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.