oversight

Audit of Government National Mortgage Association's (Ginnie Mae) Financial Statements for Fiscal Years 2008 and 2007

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                                           Issue Date
                                                                                  No ember 7, 2008
                                                                           udit Case \umher
                                                                                  2009-FO-000 I
  audit
/report                       \
 TO: Joseph J. Murin, President, Government National Mortgage Association, T

                         X4
FROM:       Thothas R. McEnanly. Dir tor. Financial Audits Division. GAF


SUBJECT:        Audit of Government National Mortgage Association’s (Ginnie Mae) Financial
                  Statements for Fiscal Years 2008 and 2007

In accordance with the Government Corporation Control Act as amended (31 U.S.C. 9105), the
Office of Inspector General engaged the independent certified public accounting firm of
Carmichael, Brasher, Tuvell and Company, P. C. (CBTC) to audit the fiscal year 2008 and 2007
financial statements of Ginnie Mae. The contract required that the audit be performed according
to generally accepted government auditing standards (GAGAS).

CBTC is responsible for the attached auditors’ report dated November 4, 2008 and the
conclusions expressed in the report. Accordingly, we do not express an opinion on Ginnie Mae’s
financial statements or conclusions on Ginnie Mae’s internal controls or compliance with laws,
regulations and government-wide policies. Within 60 days of this report, CBTC expects to issue
a separate letter to management dated November 4, 2008 regarding other matters that came to its
attention during the audit.

This report includes both the Independent Auditors’ Report and Ginnie Mae’s principal financial
statements. Under Federal Accounting Standards Advisory Board (FASAB) standards, a general-
purpose federal financial report should include, as required supplementary information (RSI), a
section devoted to Management’s Discussion and Analysis (MD&A). The MD&A is not
included with this report. Ginnie Mae plans to separately publish an annual report for fiscal year
2008 that conforms to FASAB standards.

The report contains one significant deficiency in Ginnie Mae’s internal controls and one
reportable instance of noncompliance with laws and regulations. The significant deficiency was
carried over from previous year’s audit. The report contains one new recommendation. Within
 120 days of the report issue date, Ginnie Mae is required to provide its final management decision
which included a corrective action plan for each recommendation. As part of the audit resolution
process, we will record new recommendation(s) in the Department’s Audit Resolution and
Corrective Action Tracking System (ARCATS). We will also endeavor to work with Ginnie Mae
to reach a mutually acceptable management decision prior to the mandated deadline. The
proposed management decision and corrective action plan will be reviewed and evaluated by
CB1 C with concurrence from the 01G.

We appreciate the courtesies and cooperation extended to the CBTC and OJG audit staffs during
the conduct of the audit.
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                                          Table of Contents

    OIG Transmittal Memorandum........................................................................................1

    Independent Auditors’ Report ..........................................................................................5

             Appendix A – Significant Deficiency ...................................................................9

             Appendix B – Management’s Response to Recommendations ....................... 10

             Appendix C – Carmichael, Brasher, Tuvell & Company’s Assessment of

                          Management’s Response to Recommendations ................................. 11

             Appendix D – Status of Prior Year Findings and Recommendations ............. 12

    Principal Financial Statements ...................................................................................... 13

             Balance Sheets .................................................................................................... 13

             Statements of Revenues and Expenses and Changes

                 In Investment of U. S. Government.............................................................. 14

             Statements of Cash Flows .................................................................................. 15

             Notes to the Financial Statements ...................................................................... 16




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C E R T I F I E D     P U B L I C     A C C O U N T A N T S



INDEPENDENT AUDITORS’ REPORT


To the President
Government National Mortgage Association

The Government National Mortgage Association (Ginnie Mae’s) financial statements are subject
to the annual reporting requirements of the Chief Financial Officers Act of 1990 which requires
an annual report to Congress on their financial status and any other information needed to fairly
present the financial position and results of operations. Ginnie Mae is a wholly owned
government corporation within the U.S. Department of Housing and Urban Development
(HUD). In accordance with the Government Corporations Control Act, as amended (31 U.S.C.
9105), we audited Ginnie Mae’s financial statements.

The objectives of the audit are to express an opinion on the fair presentation of Ginnie Mae’s
financial statements, obtain an understanding of Ginnie Mae’s internal control, and test
compliance with laws and regulations that could have a direct and material effect on the financial
statements.

We have audited the accompanying balance sheets of Ginnie Mae as of September 30, 2008 and
2007, and the related statements of revenues and expenses, investments of the U. S. Government
and statements of cash flows for the years then ended. These financial statements are the
responsibility of Ginnie Mae’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.

OPINION ON FINANCIAL STATEMENTS

In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Ginnie Mae as of September 30, 2008 and 2007; and the results of its
operations and the cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

The information in the Management’s Discussion and Analysis of Results of Operations and
Financial Position is not a required part of the financial statements, but is supplementary
information required by accounting principles generally accepted in the United States of America
or Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting
Requirements. We have applied certain limited procedures, which consisted principally of
inquiries of management regarding the methods of measurement and presentation of this
information. However, we did not audit this information and, accordingly, we express no
opinion on it.

REPORT ON INTERNAL CONTROL

In planning and performing our audit, we considered Ginnie Mae’s internal control over financial
reporting by obtaining an understanding of the design effectiveness of its internal controls,
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determined whether internal controls had been placed in operation, assessed control risk, and
performed tests of controls as a basis for designing our auditing procedures for the purpose of
expressing our opinion on the financial statements. We limited our internal control testing to
those controls necessary to achieve the objectives described in OMB Bulletin No. 07-04, Audit
Requirements for Federal Financial Statements, but not for the purpose of expressing an opinion
on the effectiveness of Ginnie Mae’s internal control. Accordingly, we do not express an
opinion on the effectiveness of Ginnie Mae’s internal control.

A control deficiency exists when the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination
of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record,
process, or report financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement of Ginnie Mae’s
financial statements that is more than inconsequential will not be prevented or detected by the
entity’s internal control. We consider the following deficiency to be a significant deficiency in
internal control.

    Ginnie Mae should strengthen monitoring and management controls in regard to the Mortgage-
    based Security (MBS) program

    •   Continue to assure more effective follow up of the automated matching process with insurer loan data
    •   Eliminate independence issues within the MBS to ensure transparency within Ginnie Mae

Additional detail and the related recommendations for this significant deficiency are provided in
Appendix A of this report. The full text of management’s response is included in Appendix B
with our assessment of management’s response included at Appendix C. The current status of
prior year findings and recommendations is included in Appendix D.

A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the financial statements
will not be prevented or detected by Ginnie Mae’s internal control.

Our consideration of internal control was for the limited purpose described above and would not
necessarily identify all deficiencies in internal control that might be significant deficiencies or
material weaknesses. We did not identify any deficiencies in internal control that we consider to
be material weaknesses, as defined above. However, we did identify other matters in internal
control that came to our attention during our audit which we will be communicated in writing to
management and those charged with governance.

REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

The management of Ginnie Mae is responsible for complying with laws and regulations
applicable to government corporations. As part of obtaining reasonable assurance about whether
Ginnie Mae’s financial statements are free of material misstatement, we performed tests of its
compliance with certain provisions of laws and regulations, noncompliance with which could
have a direct and material effect on the determination of financial statement amounts, and certain
other laws, regulations and government-wide policies specified in OMB Bulletin No. 07-04, as
applicable to government corporations. We limited our tests of compliance to these provisions
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and we did not test compliance with all laws and regulations applicable to Ginnie Mae. We
caution that noncompliance may occur and not be detected by these tests and that such testing
may not be sufficient for other purposes.

Our tests of compliance with certain provisions of laws, regulations and government-wide
policies discussed in the preceding paragraph disclosed the following instance of noncompliance
required to be reported under U.S. generally accepted government auditing standards and OMB
audit guidance.

        The Federal Information Security Management Act (FISMA),
        Subchapter III, Paragraph 3544(b), states “Each agency shall develop, document, and implement
        an agency-wide information security program…to provide information security for the
        information and information systems that support the operations and assets of the agency,
        including those provided or managed by another agency, contractor, or other source, that includes
        establishing a process for planning, implementing, evaluating, and documenting remedial action
        to address any deficiencies in the information security policies, procedures, and practices of the
        agency.”

        Our review of Ginnie Mae’s information system security controls over the Integrated Portfolio
        Management System (IPMS), which is managed and controlled by a Ginnie Mae contractor,
        disclosed that Ginnie Mae lacks assurance with IPMS that critical Information Technology
        general control elements are operating effectively to reduce agency information system risk .

Except as noted above, our tests of compliance with the laws and regulations discussed in the
preceding paragraph disclosed no other instances of noncompliance with laws and regulations
that are required to be reported under Government Auditing Standards or OMB Bulletin No. 07-
04, as applicable to government corporations.

Providing an opinion on compliance with laws and regulations was not an objective of our audit
and, accordingly, we do not express such an opinion.

RESPONSIBILITIES

Management’s Responsibilities

The Government Management Reform Act of 1994 (GMRA) requires each federal agency to
report annually to Congress on its financial status and any other information needed to fairly
present its financial position and results of operations. To meet the GMRA reporting
requirements, Ginnie Mae prepares annual financial statements. Ginnie Mae is a wholly owned
government corporation within the U. S. Department of Housing and Urban Development
(HUD).

Management is responsible for the financial statements, including:

    •   Preparing the financial statements in conformity with accounting principles generally accepted in the
        United States of America;
    •   Establishing and maintaining internal controls over financial reporting, and preparation of the
        Management’s Discussion and Analysis; and
    •   Complying with laws and regulations.


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In fulfilling this responsibility, estimates and judgments by management are required to assess
the expected benefits and related costs of internal control policies. Because of inherent
limitations in internal control, misstatements, due to error or fraud may nevertheless occur and
not be detected.

Auditors’ Responsibilities

Our responsibility is to express an opinion on the fiscal year 2008 and 2007 financial statements
of Ginnie Mae based on our audit. We conducted our audit in accordance with auditing
standards generally accepted in the United States of America, the standards applicable to audits
contained in Government Auditing Standards and OMB Bulletin No. 07-04, as applicable to
government corporations. Those standards and OMB Bulletin No. 07-04 require that we plan
and perform audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement.

Our audit was not designed to test the requirements of OMB Bulletin No. 07-04 relating to the
Federal Financial Management Improvement Act of 1996 (FFMIA). Compliance with FFMIA
will be evaluated and reported on by the HUD Office of Inspector General (OIG) in connection
with their audit of the consolidated financial statements of HUD. Our audit was also not
designed to test the requirements of the Federal Credit Reform Act of 1990, because Statement
of Federal Financial Accounting Standards No. 2, Accounting for Direct Loans and Loan
Guarantees, has not been considered in preparing these financial statements.

An audit includes:

    •   Examining on a test basis, evidence supporting the amounts and disclosures in the financial statements;
    •   Assessing the accounting principles used and significant estimates made by management; and
    •   Evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion.

DISTRIBUTION

This communication is intended solely for the information and use of HUD-OIG, the
management of U. S. Department of Housing and Urban Development, Ginnie Mae, and others
within the organization, the OMB, the Government Accountability Office and the U. S.
Congress, and is not intended to be and should not be used by anyone other than these specified
parties.

CARMICHAEL, BRASHER, TUVELL & COMPANY, P.C.



Atlanta, Georgia
November 4, 2008




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APPENDIX A - SIGNIFICANT DEFICIENCY
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Ginnie Mae should strengthen monitoring and management controls in regard to MBS program

Due to conditions in the current economic mortgage and credit environment, improvements
and/or changes should be considered by Ginnie Mae’s Senior Management to strengthen
monitoring and management in regard to the Mortgage-Backed Securities (MBS) program.

•    Assure more effective follow up of the automated matching process with insurer loan data (significant
     deficiency in prior year continuing during current year)
•    Eliminate any independence issues whether real or perceived to ensure transparency (new)

MBS has improved its matching process during the current year and has begun a more effective
follow up of issuers with unmatched loans within existing pools.

Ginnie Mae implemented a monthly match to terminated loan process to improve and put into
production what had previously been a yearly, ad hoc process. However, a number of other
important improvements for identifying high risk, including timely and complete follow-up of
unmatched exception loans are not predicted to be in place until fiscal year 2009. Furthermore,
the HUD-OIG issued several findings during the current fiscal year that disclosed numerous
control issues within Ginnie Mae’s matching process.

In 2007, our audit identified a potential conflict of interest issue between issuer approval and
issuer monitoring functions within Ginnie Mae’s Office of MBS. This issue was reported as a
significant deficiency in last year’s Independent Auditors’ report. In fiscal year 2008, Ginnie
Mae created a Risk Committee and a Chief Risk Officer (CRO) to enhance oversight and to
provide independent management control of the MBS program. The creation of the CRO during
FY 2008 resolved the conflict of interest issue identified during FY 2007. However, in fiscal
year 2008, the former SVP-MBS left the agency and the new CRO became the acting SVP-MBS
which causes an appearance of conflict to re-occur.

•    OMB Circular No. A-123 Management’s Responsibility for Internal Control, (A-123) as revised December 21,
     2004, “…specifically addresses internal control over financial reporting; operational program controls and
     financial reporting often overlap.” Additionally, Section I states that “Management is responsible for
     developing and maintaining effective internal control. Effective internal control provides assurance that
     significant weaknesses in the design or operation of internal control, that could adversely affect the agency’s
     ability to meet its objectives, would be prevented or detected in a timely manner.” Also, within the circular’s
     attachment, Section IV, Assessing Internal Control, it states, “Agency managers should continuously monitor
     and improve the effectiveness of internal controls associated with their programs.”
•    Federal as well as private sector internal control guidance requires a separation of performance monitoring and
     revenue producing business duties. GAO’s Standards for Internal Control in Federal Government published in
     November 1999, Subsection “Segregation of Duties,” states: “Key duties and responsibilities need to be
     divided or segregated among different people to reduce the risk of error or fraud.”

Recommendations to Ginnie Mae’s President that address the significant deficiency described
above include:
1.   Continue strengthening the completeness, timeliness, and controls of the automated pool collateral matching
     process as well as follow-up on unmatched loans with issuers data (repeat from prior year ).

2.   Eliminate any independence issues whether real or perceived to ensure management transparency (new).

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APPENDIX C - CBTC’S ASSESSMENT OF MANAGEMENT’S RESPONSE TO
RECOMMENDATIONS
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CBTC has reviewed Ginnie Mae management’s response to the reported significant deficiency
made in connection with our audit of Ginnie Mae’s 2008 Financial Statements, which is included
as Appendix B. Our assessment of management’s response is discussed below.


       We believe management’s proposed actions are responsive to our
       recommendations. However, this significant deficiency will remain open until
       after CBTC has reviewed the effectiveness of Ginnie Mae’s new monitoring
       matching process in regard to MBS programs, the timeliness of action taken by
       management in regard to noncompliant issuers and the elimination of
       independence issues within the MBS.




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APPENDIX D – STATUS OF PRIOR YEAR FINDINGS AND RECOMMENDATIONS
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Our assessment of the current status of significant deficiency identified in prior year audit is
presented below.

Prior Year Finding/Recommendation                   Type                 Fiscal Year 2007 Status
1.a Communication                            Significant deficiency   Resolved.       Ginnie Mae
Ginnie Mae’s Acting Vice-President                                    corrected        by       the
should institute timely and regular                                   implementation of a risk
communications among Senior Officials of                              committee which includes
an Issuer Risk Assessment Committee                                   senior management from
regarding issuer performance and issuer
review to recognize the current risk and the
                                                                      differing    Ginnie      Mae
possibility of a potential misstatement in                            departments.
Ginnie Mae’s overall financial statements.
1.b. Matching Process                        Significant deficiencyPartially resolved.     Ginnie
Ginnie Mae’s Acting Vice-President                                 Mae has implemented a
should review and strengthen the                                   monthly match to terminated
completeness and timeliness of the                                 process to improve and put
automated pool collateral matching                                 into production what had
process as well as follow-up on                                    previously been a yearly, ad
unmatched loans with issuers.                                      hoc process.      However, a
                                                                   number of other important
                                                                   improvements for identifying
                                                                   high risk, including timely
                                                                   and complete follow-up of
                                                                   unmatched exception loans
                                                                   are not predicted to be in
                                                                   place until fiscal year 2009.
                                                                   This deficiency continues to
                                                                   be reported as a significant
                                                                   deficiency during 2008.
1.c. Segregation of Duties                  Significant deficiency Resolved.        Ginnie Mae
Ginnie Mae’s Acting Vice-President                                 created a Risk Committee and
should segregate issuer monitoring                                 a Chief Risk Officer (CRO) to
duties from MBS program functions to                               enhance       oversight    and
enhance independent management                                     independent        management
control over issuers.                                              control. The creation of the
                                                                   CRO during FY 2008
                                                                   resolved the conflict of
                                                                   interest issue.




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   Ginnie Mae’s FY 2008 Financial Statements
                                               Balance Sheets


 September 30                                                          2008               2007

 (Dollars in thousands)


 Assets:
 Funds with U.S. Treasury                                          $    4,836,300     $    4,432,600
 U.S. Government securities--Note B                                     9,254,000          8,735,900

 Mortgages held for sale, net--Note C                                     21,400              19,000

 Properties held for sale, net--Note D                                        4,700              3,200

 Accrued interest on U.S. Government securities                           36,400              53,200

 Accrued fees and other receivables                                       25,900              23,300

 Advances against defaulted Mortgage-Backed Security pools, net-
                                                                              2,700              1,000
 Note E

 Fixed assets--software, net of accumulated amortization--Note A          26,800              16,500

 Other assets--Note A                                                    680,200            426,000

 Total Assets                                                      $   14,888,400     $   13,710,700

 Liabilities and Investment of U.S. Government:

 Liabilities:
 Reserve for loss on Mortgage-Backed Securities Program--Note F    $     550,000      $      535,800
 Deferred revenue                                                         90,000              75,600

 Deferred liabilities and deposits                                            2,400           11,100

 Accounts payable and accrued liabilities                                 39,100              41,700

 Other liabilities--Note A                                               680,200            426,000

 Total Liabilities                                                 $    1,361,700     $    1,090,200

 Commitments and Contingencies--Notes G, H, and I
 Investment of U.S. Government                                         13,526,700         12,620,500

 Total Liabilities and Investment of U.S. Government               $   14,888,400     $   13,710,700


The accompanying notes are an integral part of these financial statements.




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     Statements of Revenues and Expenses and Changes in Investment of U.S. Government


 For the Years Ended September 30                                       2008               2007
 (Dollars in thousands)

 Revenues:
 Mortgage-Backed Securities Program income                          $     373,100      $     308,500
 Interest income                                                          633,500            482,800

 Other revenue source                                                          8,800
                                                                                                    -
 Total Revenues                                                          1,015,400     $     791,300
 Expenses:
 Mortgage-Backed Securities Program expenses                        $      49,000      $      41,900
 Administrative expenses                                                       8,800          10,600
 Fixed asset amortization                                                      1,200              500
 Total Expenses                                                     $      59,000      $      53,000
 Provision for loss on Mortgage-Backed Securities Program--Note F          50,200                   -
 Excess of Revenues over Expenses                                   $     906,200      $     738,300
 Investment of U.S. Government at Beginning of Year                     12,620,500         11,882,200
 Excess of revenues over expenses                                         906,200            738,300
 Returned to U.S. Treasury                                                                          -
 Investment of U.S. Government at End of Year                       $ 13,526,700       $   12,620,500


   The accompanying notes are an integral part of these financial statements.




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                                       Statements of Cash Flows

 For the Years Ended September 30                                      2008               2007

 (Dollars in thousands)

 Cash Flow from Operating Activities

 Net Excess of revenues over expenses                              $     906,200      $     738,300

 Adjustments to Reconcile Net Excess of Revenues Over
 Expenses to Net Cash from (used for) Operating Activities

 Depreciation & amortization                                                  1,200               500

 Decrease / increase in accrued interest Federal investments              16,800                 3,000

 Increase / decrease in advances against defaulted MBS pools              (1,700)                 800

 Decrease / increase in deferred liabilities and deposits                 (8,700)                8,900

 Decrease / increase in accounts payable and accrued liabilities          (2,600)                4,400

 Increase / decrease in deferred revenue                                  14,400                 2,800

 Increase / decrease in MBS Reserve, net of other assets
                                                                              7,700              5,700
 relating to operating activities

   Total Adjustments                                                      27,100             26,100

 Net Cash from (used for) Operating Activities                     $     933,300      $     764,400

 Cash Flow from Investing Activities

 Purchase of U.S. Treasury Securities, net                              (518,100)          (377,700)

 Purchase of software                                                    (11,500)           (10,600)

 Net Cash from (used for) Investing Activities                     $    (529,600)     $    (388,300)

 Cash Flow from Financing Activities

 Financing activities                                                             -                  -

 Net Cash from (used for) Financing Activities                                    -                  -

 Net increase in cash & cash equivalents                                 403,700            376,100

 Cash & cash equivalents - beginning of period                          4,432,600          4,056,500

 Cash & cash equivalents - end of period                           $    4,836,300     $    4,432,600


   The accompanying notes are an integral part of these financial statements.




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Notes to the Financial Statements
September 30, 2008 and 2007

Note A: Organization and Summary of Significant Accounting Policies

The Government National Mortgage Association (Ginnie Mae) was created in 1968 through
amendment of Title III of the National Housing Act as a government corporation within the
Department of Housing and Urban Development (HUD). The Mortgage-Backed Securities
(MBS) program is Ginnie Mae’s primary ongoing activity. Its purpose is to increase liquidity in
the secondary mortgage market and attract new sources of capital for residential mortgage loans.
Through the program, Ginnie Mae guarantees the timely payment of principal and interest on
securities backed by pools of mortgages issued by private mortgage institutions. This guaranty is
backed by the full faith and credit of the U.S. Government. Ginnie Mae requires that the
mortgages be insured or guaranteed by the Federal Housing Administration (FHA), the U.S.
Department of Agriculture (USDA), the Department of Veterans Affairs (VA), or the HUD
Office of Public and Indian Housing (PIH). These MBS are not assets of Ginnie Mae, nor are the
related outstanding securities liabilities; accordingly, neither is reflected on the accompanying
balance sheets.

Funds with U.S. Treasury: All of Ginnie Mae’s receipts and disbursements are processed by
the U.S. Treasury, which in effect maintains Ginnie Mae’s bank accounts. Of the $4.8 billion in
Funds with U.S. Treasury, $3.5 billion is in the Reserve Receipt Account, which is a non-
interest-bearing account at the U.S. Treasury. For purposes of the Statement of Cash Flow, Funds
with U.S. Treasury are considered cash.

U.S. Government Securities: Ginnie Mae classifies its investments in U.S. Government
Securities based on its ability and intent to hold them to maturity. Therefore, Ginnie
Mae’s investment in U.S. Government Securities is recorded at amortized cost. Discounts and
premiums are amortized, on a level yield basis, over the life of the related security.

Mortgages Held for Sale: Mortgages held for sale, which are purchased out of MBS pools, are
carried at the lower of cost or fair value, and with any unrealized losses included in current
period earnings. The related allowance for loss is established to reduce the carrying value of
mortgages held for sale to their estimated fair value, which is based on the amount Ginnie Mae
expects to realize in cash upon sale of the mortgages.

Properties Held for Sale: Foreclosed assets are recorded at the lower of cost or fair value, less
estimated costs to sell. The related allowance for loss is established to reduce the property
carrying value to fair value, less cost to sell. Property related expenses incurred during the
holding period are included in MBS program expenses.
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Advances against Defaulted MBS Pools: Advances against defaulted MBS pools represent
payments made to fulfill Ginnie Mae’s guarantee of timely principal and interest payments to
MBS security holders. Such advances are reported net of an allowance for doubtful recoveries to
the extent management believes they will not be recovered. The allowance for doubtful
recoveries is estimated based on actual and expected recovery experience, and is adjusted for
FHA, VA, and USDA claims that have been filed.

Fixed Assets: Ginnie Mae’s fixed assets represent systems (software) that are used to
accomplish its mission. Ginnie Mae defers significant software development project costs, and
amortizes them over a three- to five-year period beginning with the project’s completion. As of
September 30, 2008 and September 30, 2007, Ginnie Mae’s Fixed Assets – Software balance
was $40.8 million, with accumulated amortization of $14.0 million, and $29.3 million, with
accumulated amortization of $12.8 million, respectively.

Reserve for Loss on MBS Program: In the operation of its MBS programs, Ginnie Mae
estimates the cost of liquidating its existing portfolio of mortgage servicing rights acquired from
defaulted issuers and expected issuer defaults. Reserves are established to the extent
management believes issuer defaults are probable and FHA, VA, and USDA insurance or
guarantee are insufficient to recoup Ginnie Mae expenditures. The reserves are increased by
provisions charged as an expense in the Statements of Revenues and Expenses, and reduced by
charge-offs, net of recoveries.

Recognition of Revenues and Expenses: Ginnie Mae receives monthly guaranty fees for each
MBS mortgage pool, based on a percentage of the pool’s outstanding balance. Fees received for
Ginnie Mae’s guarantee of MBS are recognized as earned. Ginnie Mae receives commitment
fees as issuers request Commitment Authority, and recognizes the commitment fees as income as
issuers use their Commitment Authority, with the balance deferred until earned or expired,
whichever occurs first. Fees from expired Commitment Authority are not returned to issuers.
Ginnie Mae recognizes as income the major portion of fees related to the issuance of multiclass
securities in the period the fees are received, with the balance deferred and amortized over the
weighted average life of the underlying mortgages to match the recognition of related
administrative expenses. Losses on assets acquired through liquidation and claims against FHA,
VA, and USDA are recognized when they occur.

Statements of Cash Flows: Ginnie Mae prepares the Statements of Cash Flows on an indirect
basis. For purposes of the Statements of Cash Flows, Funds with U.S. Treasury are considered
cash.

FIN 45: The Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees,

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Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107, and Rescission of FASB Interpretation No. 34, in November 2002. FIN 45
clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies, relating to
the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN
45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under the guarantee. We have computed the fair value of our
guarantee based on the life of the mortgage-backed securities and their underlying loans. Based
on this evaluation we have disclosed an asset and liability of $680.2 million as of September 30,
2008 and $425.9 million as of September 30, 2007 categorized as other assets and other
liabilities, see Note A. There is no impact on the net financial position of Ginnie Mae due to FIN
45.

Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets, liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.

Note B: U.S. Government Securities

The U.S. Government Securities portfolio is held in special market-based U.S. Treasury
securities that are bought and sold at composite prices received from the Federal Reserve Bank
of New York. These securities are maintained in book-entry form at the Bureau of Public Debt,
and are made up of overnight certificates, U.S. Treasury notes, and U.S. Treasury inflation-
indexed securities (reflecting inflation compensation). The coupon rates of Ginnie Mae’s
holdings as of September 30, 2008, range from 0.63 percent to 4.5 percent. As of September 30,
2007, they ranged from 0.88 percent to 4.625 percent.

The amortized cost and fair values as of September 30, 2008, were as follows:

                                                                                       Gross
                                                                Gross Unrealized
                                              Amortized Cost                         Unrealized         Fair Value
                                                                     Gains
 (Dollars in thousands)                                                               Losses
 U.S. Treasury Overnight Certificates         $     2,313,500   $              -   $         -      $     2,313,500
 U.S. Treasury Notes                                 898,800             17,400             -               916,200
 U.S. Treasury Inflation-Indexed Securities         6,041,700              -            (897,400)         5,144,300
 Total                                        $     9,254,000   $        17,400    $    (897,400) $       8,374,000




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The amortized cost and fair values as of September 30, 2007, were as follows:

                                                                                                      Gross
                                                                           Gross Unrealized
                                                         Amortized Cost                             Unrealized           Fair Value
                                                                                Gains
 (Dollars in thousands)                                                                              Losses
 U.S. Treasury Overnight Certificates                $         1,214,100   $              -       $          -       $     1,214,100
 U.S. Treasury Notes                                           2,294,900              8,600                (2,900)         2,300,600
 U.S. Treasury Inflation-Indexed Securities                    5,226,900                      -          (589,800)         4,637,100
 Total                                               $         8,735,900   $          8,600       $      (592,700) $       8,151,800


The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2008, by contractual maturity date, were as follows:

                                                                                                           Weighted Average
   (Dollars in thousands)
                                                           Amortized Cost           Fair Value
                                                                                                             Interest Rate
   Due within one year                                     $       2,713,000    $         2,718,200                     0.48%
   Due after one year through five years                           5,244,600              4,559,100                          1.91%
   Due after five years through ten years                          1,296,400              1,096,700                          2.05%
   Total                                                   $       9,254,000    $         8,374,000                          1.47%


The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2007, by contractual maturity date, were as follows:

                                                                                                           Weighted Average
   (Dollars in thousands)
                                                           Amortized Cost           Fair Value
                                                                                                             Interest Rate
   Due within one year                                     $       2,612,100    $         2,616,100                     3.12%
   Due after one year through five years                           3,768,800              3,468,100                          2.62%
   Due after five years through ten years                          2,355,000              2,067,600                          2.20%
   Total                                                   $       8,735,900    $         8,151,800                          2.98%



Note C: Mortgages Held for Sale, Net

Ginnie Mae acquires certain mortgages from defaulted issuers’ portfolios to bring the pools into
conformity with MBS program requirements. Ginnie Mae acquires mortgages ineligible to
remain in pools when servicing rights are sold. Mortgages held for sale were as follows:

                      (Dollars in thousands)                                   September 30
                                                                      2008                        2007
                          Unpaid principal balance             $             37,900   $                  23,600
                          Allowance for losses                             (16,500)                      (4,600)
                          Mortgages held for sale, net         $             21,400   $                  19,000




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 Note D: Properties Held for Sale, Net

 Ginnie Mae acquires residential properties by foreclosure out of the defaulted issuer portfolios to
 comply with MBS program requirements. Balances and activity in properties held for sale were
 as follows:

         (Dollars in thousands)                                        September 30
                                                               2008                         2007
         Cost of properties, beginning of year          $             13,900     $                 11,300
            Additions                                                  8,200                         7,200
            Dis positions and Losses                                   (5,700)                      (4,600)
         Cost of properties, end of year                $             16,400     $                 13,900
         Allowance for losses and c osts to sell                      (11,700)                     (10,700)
         Properties held for sale, net                  $              4,700     $                   3,200


 Note E: Advances against Defaulted Mortgage-Backed Security Pools, Net

 Under its MBS guaranty, Ginnie Mae advanced $58.8 million in FY 2008, and $30.4 million in
 FY 2007 against defaulted MBS pools to ensure timely pass-through payments. Recoveries of
 advances, either from late payment remittances or through FHA insurance or VA guarantee
 proceeds, were $37.8 million in FY 2008 and $31.1 million in FY 2007. There were
 $18.5 million advances written off in FY 2008 but no advances written off in FY 2007. There
 were no advances associated with USDA in FY 2008 or FY 2007.

               (Dollars in thousands)                              September 30
                                                            2008                     2007
               Advances against defaulted pools    $               18,400   $               15,900
               Allowance for losses                            (15,700)                 (14,900)
               Advances against defaulted pools    $               2,700    $                1,000




 Note F: Reserve for Losses on MBS Program

 Ginnie Mae establishes a reserve for losses through a provision charged to operations, when, in
 management’s judgment, defaults of MBS issuers become probable. The reserve for losses is
 based on an analysis of the MBS portfolio outstanding. In estimating losses, management utilizes
 a statistically based model that evaluates numerous factors, including, but not limited to, general
 and regional economic conditions, mortgage characteristics, and actual and expected future
 default and loan loss experience. Management also considers uncertainties related to estimates in
 the reserve setting process. The reserve is relieved as losses are realized from the disposal of the
 defaulted issuers’ portfolios. Ginnie Mae recovers part of its losses through servicing fees on the
 performing portion of the portfolios and the sale of servicing rights. As Ginnie Mae’s defaulted
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issuer portfolio decreases, original estimates are compared with actual results over time, and the
reserve’s adequacy is assessed, and if necessary, the reserve is adjusted. In FY 2008, an
adjustment of $50.2 million was made to the reserve. Management believes that its reserve is
adequate to cover probable losses from defaults by issuers of Ginnie Mae guaranteed MBS.
Changes in the reserve for the years ended September 30, 2008, and 2007 were as follows:

                                                                                  Manufactured
                                   Single Family           Multifamily                                    Total
      (Dollars in thousands)                                                        Housing
      September 30, 2006
      Reserve for Loss         $         237,900       $         58,850       $        237,700        $     534,450
      Reallocation between
      programs                 $         187,800       $           (100) $             (187,700)                  -
         Recoveries                        7,900                    100                   6,700              14,700
         Realized Losses                  (7,200)                    (50)                (6,100)            (13,350)
        Provision                                  -                      -                       -                   -
      September 30, 2007
      Reserve for Loss         $         426,400       $         58,800       $         50,600        $     535,800
         Recoveries                        4,100                          -               7,800              11,900
         Realized Losses                 (43,500)                         -              (4,400)            (47,900)
        Provision                         50,200                          -                       -          50,200
      September 30, 2008
      Reserve for Loss         $         437,200       $         58,800       $         54,000        $     550,000


Ginnie Mae incurs losses when principal FHA, VA, and USDA insurance and guaranty do not
cover expenses that result from issuer defaults. Such expenses include: (1) unrecoverable losses
on individual mortgage defaults because of coverage limitations on mortgage insurance or
guarantees; (2) ineligible mortgages included in defaulted Ginnie Mae pools; (3) improper use of
proceeds by an issuer; and (4) non-reimbursable administrative expenses and costs incurred to
service and liquidate portfolios of defaulted issuers.

Three single family issuers defaulted during FY 2008. Ginnie Mae believes that the reserve for
loss estimate is adequate to cover any noninsured loss sustained for these issuers and from
unknown future losses from the occurrence of periodic defaults.

Note G: Financial Instruments with Off-Balance Sheet Risk

Ginnie Mae is subject to credit risk for financial instruments not reflected in its balance sheet in
the normal course of operations. These financial instruments include guarantees of MBS and
commitments to guarantee MBS. The Ginnie Mae guaranteed security is a pass-through security,
whereby mortgage principal and interest payments, except for servicing and guaranty fees, are
passed through to the security holders monthly. Mortgage prepayments are also passed through
to security holders. As a result of the security’s structure, Ginnie Mae bears no interest rate or
liquidity risk. Ginnie Mae’s exposure to credit loss is contingent on the nonperformance by other
parties to the financial instruments. Other than those issuers considered in the reserve for loss on
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the MBS program (see Note F), Ginnie Mae does not anticipate nonperformance by the
counterparties.

Ginnie Mae guarantees the timely payment of principal and interest to MBS holders should the
issuers fail to do so. The securities are backed by pools of insured or guaranteed FHA, USDA, or
VA mortgage loans. On September 30, 2008, the amount of securities outstanding, which is
guaranteed by Ginnie Mae, was $576.8 billion, including $38.7 million of Ginnie Mae
guaranteed bonds. However, Ginnie Mae’s potential loss is considerably less because the
underlying mortgages serve as primary collateral, and FHA, VA, and USDA insurance or
guarantee indemnifies Ginnie Mae for most losses.

During the mortgage closing period and prior to granting its guarantee, Ginnie Mae enters into
commitments to guarantee MBS. The commitment ends when the securities are issued, or the
commitment period expires. Ginnie Mae’s risk related to outstanding commitments is much less
than for outstanding securities, due in part to Ginnie Mae’s ability to limit Commitment
Authority granted to individual MBS issuers.

Outstanding MBS and commitments were as follows:

                                                                                     September 30
                         (Dollars in billions)                              2008                      2007
                         Outstanding MBS                             $               576.8   $               427.6
                         Outstanding MBS Commitments                 $                71.2   $                35.8


Note H: Concentrations of Credit Risk

Concentrations of credit risk exist when a significant number of counterparties (e.g., issuers and
borrowers) engage in similar activities, or are susceptible to similar changes in economic
conditions that could affect their ability to meet contractual obligations. Generally, Ginnie Mae’s
MBS pools are diversified among issuers and geographic areas. No significant geographic
concentrations of credit risk exist; however, to a limited extent, securities are concentrated
among issuers as noted below, as of September 30, 2008:

                                                 Single Family                    Multifamily             Manufactured Housing
                                                        Remaining                       Remaining                   Remaining
                                           Number of                     Number of                      Number of
                                                         Principal                       Principal                   Principal
 (Dollars in billions)                      Issuers                       Issuers                        Issuers
                                                         Balance                         Balance                     Balance

 Largest performing issuers                       20 $        513.0             10    $          27.9           1    $      -
 Other performing issuers                         97 $         23.5             49    $          11.5           2    $      0.1
 Defaulted issuers                                14 $           0.4             3    $           -             7    $      -




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As of September 30, 2008, Ginnie Mae’s single family, multifamily, and manufactured housing
defaulted portfolio had remaining principal balances of $358.5 million, $25.6 million, and $9.6
million, respectively.

In FY 2008, Ginnie Mae issued a total of $86.4 billion in its multiclass securities program. The
estimated outstanding balance of multiclass securities included in the total MBS securities
balance in Note G as of September 30, 2008, was $253.1 billion. These guaranteed securities do
not subject Ginnie Mae to additional credit risk beyond that assumed under the MBS program.

Note I: Commitments and Contingencies

As of September 30, 2008, Ginnie Mae has no legal actions pending. However, Ginnie
Mae’s management recognizes the uncertainties that could occur in regard to potential default
issuers and other indirect guarantees. (See Note A, Note F, and Note M.)

Note J: Related Parties

Ginnie Mae is subject to controls established by government corporation control laws (31
U.S.C. Chapter 91), and management controls by the Secretary of HUD and the Director of the
Office of Management and Budget (OMB). These controls could affect Ginnie Mae’s financial
position or operating results in a manner that differs from those that might have been obtained if
Ginnie Mae were autonomous.

Ginnie Mae was appropriated $8.25 million in FY 2008 for payroll and payroll-related costs
only. In FY 2007, Ginnie Mae reimbursed HUD $10.6 million for Salaries and Expenses (travel,
furniture, and supplies, etc.), including payroll and payroll-related costs. The FY 2008
appropriation covered the payroll-related costs to HUD including the contributions to the Civil
Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS).
Ginnie Mae has no liability for future payments to employees under the retirement systems.
Ginnie Mae does not account for the assets of CSRS or FERS, nor does it have actuarial data
with respect to accumulated plan benefits, or the unfunded pension liability relative to its
employees. These amounts are reported by the Office of Personnel Management (OPM), and are
allocated to HUD. OPM also accounts for the health and life insurance programs for federal
employees and retirees, and funds the non-employee portion of these programs’ costs.

Cash receipts, disbursements, and investment activities are processed by the U.S. Treasury.
Funds with U.S. Treasury represent cash currently available to finance purchase commitments
and pay current liabilities. Ginnie Mae has authority to borrow from the U.S. Treasury to finance
operations in lieu of appropriations, if necessary.



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Note K: Fair Value of Financial Instruments

The following table shows the fair value of financial instruments to which Ginnie Mae has a
contractual obligation to deliver cash to, or a contractual right to receive cash from, another
entity as of September 30, 2008, and 2007:

                                             September 30, 2008                    September 30, 2007
 (Dollars in thousands)                     Cost               Fair Value         Cost                   Fair Value
 Funds with U.S. Treasury               $   4,836,300      $      4,836,300   $   4,432,600          $      4,432,600
 U.S. Government Securities                 9,254,000             8,374,000       8,735,900                 8,151,800

 Advances against Defaulted MBS Pools              2,700              2,700              1,000                  1,000
 Other assets                           $      88,400      $         88,400          98,700                    98,700
 Unrecognized financial instruments                    -          2,412,000                      -          1,643,000
 Other liabilities                      $     131,500      $        131,500         128,400                   128,400


The fair value of Ginnie Mae’s largest asset, U.S. Government securities, is estimated based on
quoted market prices for securities of similar maturity. The fair values of Funds with U.S.
Treasury, advances against MBS pools, other assets, and other liabilities are not materially
different from their carrying values.

Unrecognized financial instruments comprise the net fair value of the fee Ginnie Mae receives
for the guarantee of timely payment of principal and interest. The value was derived by
discounting the estimated future net cash flows relating to Ginnie Mae guaranteed MBS
outstanding. The assumptions and estimates used in calculating the fair values of unrecognized
financial instruments are based on management’s evaluation of economic conditions, and,
therefore, are not subject to precise quantification.

These discounted cash flows consist of estimated future guaranty fees, taking into account
estimated prepayments, in excess of: (1) projected losses relating to the MBS program, including
projected losses on defaulted pools of MBS; and (2) projected administrative expenses. The
discount rate approximates an interest rate for risk-free instruments of a type and duration similar
to the Ginnie Mae guaranty. The fair value of Ginnie Mae’s guaranty recognizes the present
value of future fees, which are not recognized under accounting principles generally accepted in
the U.S., since to do so would record revenue prior to realization. The fair value of unrecognized
financial instruments increased from FY 2007 to FY 2008, and is primarily attributable to the
impact of interest rate volatility.

Ginnie Mae’s standing as a federal government corporation whose guaranty carries the full faith
and credit of the U.S. Government makes it difficult to determine what the fair value of its
financial instruments would be in the private market. Accordingly, the amount Ginnie Mae
would realize upon sale of its financial instruments could differ, perhaps materially, from the
amounts shown above.
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Note L: Credit Reform

The Federal Credit Reform Act of 1990, which became effective on October 1, 1991, was
enacted to more accurately measure the cost of federal credit programs, and to place the cost of
these credit programs on a basis equivalent with other federal spending. Credit reform focuses on
credit programs that operate at a loss by providing for appropriated funding, within budgetary
limitations, to subsidize the loss element of the credit program. Negative subsidies, calculated for
credit programs operating at a profit, normally result in the return of funds to the U.S. Treasury.
OMB specifies the methodology an agency is to follow in accounting for the cash flows of its
credit programs.

Ginnie Mae’s credit activities have historically operated at a profit. Ginnie Mae has not incurred
borrowings or received appropriations to finance its credit operations. As of September 30, 2008,
Ginnie Mae had reserves of $13.5 billion held in the U.S. Treasury. Pursuant to the statutory
provisions under which Ginnie Mae operates, its net earnings are used to build sound reserves. In
the opinion of management, and HUD’s general counsel, Ginnie Mae is not subject to the
Federal Credit Reform Act.




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