Ginnie Mae:

Risk Management and Cost Modeling Require Continuing Attention

GAO-12-49: Published: Nov 14, 2011. Publicly Released: Dec 1, 2011.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to this recommendation, as of December 2015, Ginnie Mae took the following actions: (1) Assessed available data from the Federal Housing Administration (FHA), Veterans Administration (VA) and United States Department of Agriculture's Rural Housing Service. Specifically, Ginnie Mae officials stated they reviewed loan performance models used by FHA and VA. In addition, Ginnie Mae selected a new contractor in May 2015 to assist Ginnie Mae with developing its own models. The contractor assessed the best available data for these models. With this assessment, Ginnie Mae determined that using its own loan level data in its models allowed for incorporating 10 years of historical data and alleviated timing issues in receiving data from other agencies. Moreover, Ginnie Mae used data from other agencies in its models to test data quality of loan level data received from its own issuers. (2) Procured private U.S. Stock and Treasury data to supplement data used in its models (3) Developed and documented an additional suite of econometric models, with the assistance of a contractor, to enhance its modeling capability. Within the documentation, Ginnie Mae discusses the benefits and costs related to the methodology used for modeling, which was not available at the time of our report. By taking these actions, Ginnie Mae has helped ensure that its econometric model more closely follows certain practices identified in Financial Accounting Standards Advisory Board guidance.

    Recommendation: To help ensure that Ginnie Mae is developing the most accurate model for estimating costs and revenues, 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 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, Department of Veterans Affaris (VA), Rural Housing Service (RHS), or Public and Indian Housing (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.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: In response to this recommendation, Ginnie Mae awarded a new contract in May 2015 for the development of a suite of models, which includes models related to guarantee fee income, issuer default, and issuer buyout. As part of this contract, the contractor is required to conduct and document sensitivity analyses. By taking these actions, Ginnie Mae has helped ensure that its econometric model more closely follows certain practices identified in Financial Accounting Standards Advisory Board guidance.

    Recommendation: To help ensure that Ginnie Mae is developing the most accurate model for estimating costs and revenues, 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 conduct and document sensitivity analyses to determine which cash flow assumptions have the greatest impact on the model.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: In response to this recommendation, in December 2015, Ginnie Mae presented management assumptions used in its FY 2017 Credit Subsidy Estimate Result Review. Information was presented explaining the changes in assumptions for interest rates and foreclosure and maintenance costs, among others. In addition, methodology documents developed by Ginnie Mae and its contractor detailed how the management assumptions were determined. Moreover, Ginnie Mae and its contractor have been developing two models--issuer default and issuer buyout. Officials stated the purpose of these models is to minimize the use of management assumptions where data are available in order to conform with Federal Accounting Standards Advisory Board (FASAB) guidance. By taking these actions, Ginnie Mae has helped to enhance the transparency of its econometric model and ensure that its model more closely follows certain practices identified in FASAB guidance.

    Recommendation: To help ensure that Ginnie Mae is developing the most accurate model for estimating costs and revenues, 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 document how management assumptions are determined, such as those for issuer defaults and mortgage buyout rates.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: In response to this recommendation, Ginnie Mae's Economic Modeling Division and its contractor have been working to complete two models--issuer default and issuer buyout. Officials stated that the purpose of these models is to minimize the use of management assumptions where data is available in order to conform with Federal Accounting Standards Advisory Board (FASAB) guidance. By taking these actions, Ginnie Mae has helped ensure that its econometric model more closely follows certain practices identified in FASAB guidance.

    Recommendation: To help ensure that Ginnie Mae is developing the most accurate model for estimating costs and revenues, 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 assess the extent to which management assumptions, such as those for issuer defaults and mortgage buyout rates, can be replaced with quantitative estimates.

    Agency Affected: Department of Housing and Urban Development

 

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