oversight

Audit of Government National Mortgage Association's (Ginnie Mae) Financial Statements for Fiscal Years 2009 and 2008

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-11-06.

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

               A




                                                                         ls’.ue Date
                                                                                 November 6. 2009
                                                                          \udit Case \urnher
                                                                                 201 0—FO—000 I
 /audit\
/report \
 TO: Thomas R. \eakland. Acting Executix e Vice President. (io\ ernment National
       Mortgage Association. T

                    /1        /
 FROM:      fhomas R. McEnanlv’Director. Financial Audits I)ivision. CIAF


SUBJECT:       Audit of Goernment National Mortgage Associations (Ginnie Mae) Financial
                 Statements for Fiscal Years 2009 and 2008

In accordance itli the Goernmcnt 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. Tuell and Company. P. C. (CBTC) to audit the fiscal ear 2009 and 2008
financial statements of Ginnie Mae. The contract required that the audit he performed according
to generally accepted government auditing standards (GAGAS).

CBTC is responsible for the attached auditors report dated Noember 3. 2009 and the
conclusions expressed in the report. Accordingly, we do not express an opinion on Ginnic Maes
financial statements or conclusions on Ginnie Ma&s internal controls or compliance v. ith laws.
regulations and government-wide policies. Within 60 days of this report, CBTC expects to issue
a separate letter to management dated November 3, 2009 regarding other less significant matters
that came to its attention during the audit.

This report includes both the Independent Auditors’ Report and Ginnie Maes 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 Managemenfs Discussion and Analysis (MD&A), The MD&A is not
included in this report. Ginnie Mae plans to separately publish an annual report for fiscal year
2009 that conforms to FASAB standards.

The report contains one significant deficiency in Ginnie Maes internal controls which ‘Aas a
repeat finding from last year and one reportable instance of noncompliance v. ith la s and
regulations and goernmcnt- ide policies. The report contains one recommendation vhich as
carried over from the preious ears audit report, As part of the audit resolution process.
correcthe action erification \ill he performed in fIscalyear 2010 to ‘erif implementation of
Ginnie Mae’s action plan hich \as approed in fiscal sear 2009.

   e appreciate the courtesies and cooperation extended to the CBTC and OIG 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 Recommendation ......................... 11

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

                          Management’s Response to Recommendation ................................... 13

             Appendix D – Status of Prior Year Findings and Recommendations ............. 15

    Principal Financial Statements ...................................................................................... 17

             Balance Sheets .................................................................................................... 17

             Statements of Revenues and Expenses and Changes

                 in Investment of U. S. Government .............................................................. 18

             Statements of Cash Flows .................................................................................. 19

             Notes to the Financial Statements ...................................................................... 20




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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 Acting Executive Vice 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, 2009 and
 2008, 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, 2009 and 2008; 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, as applicable, 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 reported in the previous fiscal
 year to continue to be a significant deficiency in internal control.

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

    •   Continue to assure more effective follow up of the automated matching process with insurer loan data

 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 in 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 will be communicated to the
 management of Ginnie Mae and those charged with governance in a separate letter, dated
 November 3, 2009.

 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, 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 and we did not
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 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-
            (6) 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.
            (8) plans and procedures to ensure continuity of operations for information systems that
            support the operations and assets of the agency.”

        Ginnie Mae did not perform systems reaccreditation on the Integrated Portfolio Management
        System (IPMS) and initial certification and accreditation on Single Family Mastersubservicer
        Servicing System (SFMSS) as required by FISMA before these systems were allowed to operate.

 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.

 MANAGEMENTS’ RESPONSIBLITIES

 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 2009 and 2008 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 3, 2009




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 APPENDIX A - SIGNIFICANT DEFICIENCY


 Ginnie Mae Should Strengthen Monitoring and Management Controls in Regard to MBS Program

 In fiscal year 2008, we reported control deficiencies in Ginnie Mae’s Mortgage-Backed
 Securities (MBS) Program for not adequately monitoring unmatched loans. Additionally, we
 reported segregation of duty issue because at that time one senior Ginnie Mae management
 official was charged with a role of a Chief Risk Officer as well as MBS Division Director which
 created potential conflict of interest. In fiscal year 2009, we performed audit follow-up and
 reviewed documentation related to the implementation of the corrective action plan. We found
 that while Ginnie Mae made significant improvements in their operating procedures in 2009, we
 believe the issues had not been fully remediated as of September 30, 2009. The evidence
 necessary to verify the operating effectiveness of the new procedures will have to be tested in
 fiscal year 2010. Accordingly, we report repeat audit findings from prior year as required by the
 AICPA and GAO audit standards. Below is our understanding of the current status of this issue
 as of the end of our fieldwork.

    •   Loan Matching Process – In 2007, we noted that the MBS Division was not following up
        the mortgage insurance status of unmatched loans completely and in a timely manner. In
        2008, several new loan matching procedures were proposed but were not approved by the
        Ginnie Mae Risk Committee until October 2008. Additionally, the new “Insurance
        Matching Procedures” was not finalized until March 2009. Consequently, a number of
        other important improvements for identifying high risk, including timely and complete
        follow-up of unmatched exception loans did not take effect until the middle of fiscal year
        2009 thereby leaving insufficient time to verify effective implementation of the new
        procedures. Furthermore, Ginnie Mae agreed to modify the protocol on the loan
        matching procedures again in October 2009 as a result of 2009 HUD-OIG audit follow-
        up related to unmatched loan issue.

    •   Segregation of Duty - During 2007, our audit identified a potential conflict of interest
        issue between issuer approval and issuer monitoring functions within Ginnie Mae’s
        Office of MBS. 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 establishment of a CRO in 2009 should resolve the
        conflict of interest issue but the same issue reoccurred when the CRO became the MBS
        Division Director for the majority of fiscal year 2009. Ginnie Mae hired the new CRO in
        October 2009.

 Recommendation to Ginnie Mae that address the significant deficiency described above
 includes:

    Continue improving monitoring controls over Ginnie Mae’s automated pool collateral loan
    matching process to ensure issues regarding unmatched loans are followed-up completely
    and resolved timely (repeat from previous two years).




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 APPENDIX B – MANAGEMENT’S RESPONSE TO RECOMMENDATION




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 APPENDIX C - CBTC’S ASSESSMENT OF MANAGEMENT’S RESPONSE TO
 RECOMMENDATION
 ______________________________________________________________________________

 CBTC has reviewed Ginnie Mae management’s response to the reported significant deficiency
 made in connection with our audit of Ginnie Mae’s 2009 Financial Statements, which is included
 in Appendix B. Our assessment of management’s response is discussed below.


        We believe management’s proposed actions are responsive to our
        recommendations. However, the matching process significant deficiency will
        remain open until after CBTC has reviewed the continued effectiveness of Ginnie
        Mae’s new monitoring matching process in regard to MBS programs. The
        Significant deficiency for segregation of duties has been resolved assuming the
        continued elimination of independence issues within the MBS division.




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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 2009 Status
 Matching Process                   Significant deficiency       Partially 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
                                                                 has continued during fiscal
                                                                 year 2009. This deficiency
                                                                 continues to be reported as a
                                                                 significant deficiency during
                                                                 2009.
 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 hiring of the
                                                                 CRO during late FY 2008
                                                                 resolved the conflict of
                                                                 interest issue.




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    Ginnie Mae’s FY 2009 Financial Statements

                                                     Balance Sheets


        September 30                                                  2009                 2008
        (Dollars in thousands)


        Assets:
        Funds with U.S. Treasury                              $          5,253,800     $      4,836,300
        U.S. Government securities--Note B                               9,235,800            9,254,000
        Mortgages held for sale, net--Note C                                  32,000               21,400
        Properties held for sale, net--Note D                                  4,500                4,700
        Accrued interest on U.S. Government securities                        41,300               36,400
        Accrued fees and other receivables                                    44,600               25,900
        Advances against defaulted Mortgage-Backed
        Security pools, net-Note E                                           120,100                2,700
        Fixed assets--software, net of accumulated
        amortization--Note A                                                  39,800               26,800
        Other assets--Note A                                                 902,500              680,200
        Total Assets                                          $         15,674,400     $     14,888,400
        Liabilities and Investment of U.S. Government:
        Liabilities:
        Reserve for loss on Mortgage-Backed Securities
        Program--Note F                                       $              559,900   $          550,000
        Deferred revenue                                                     114,400               90,000
        Deferred liabilities and deposits                                      2,600                2,400
        Accounts payable and accrued liabilities                              58,700               39,100
        Other liabilities--Note A                                            902,500              680,200
        Total Liabilities                                     $          1,638,100     $      1,361,700
        Commitments and Contingencies--Notes G, H,
        and I
        Investment of U.S. Government                                   14,036,300           13,526,700
        Total Liabilities and Investment of U.S.
        Government                                            $         15,674,400     $     14,888,400

    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                                 2009                 2008
     (Dollars in thousands)
     Revenues:
     Mortgage-Backed Securities Program income                    $          547,800   $          373,100

     Interest income                                                         109,500              633,500

     Other revenue source                                                          -                8,800
     Total Revenues                                               $          657,300   $     1,015,400
     Expenses:
     Mortgage-Backed Securities Program expenses                  $           55,400   $           49,000

     Administrative expenses                                                   8,600                8,800

     Fixed asset amortization                                                  5,100                1,200
     Total Expenses                                               $           69,100   $           59,000
     Provision for loss on Mortgage-Backed Securities Program--
     Note F                                                                   78,600               50,200
     Excess of Revenues over Expenses                             $          509,600   $          906,200

     Investment of U.S. Government at Beginning of Year                13,526,700           12,620,500

     Excess of revenues over expenses                                        509,600              906,200
     Returned to U.S. Treasury
     Investment of U.S. Government at End of Year                 $    14,036,300      $    13,526,700

 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                                       2009                  2008
   (Dollars in thousands)
   Cash Flow from Operating Activities
   Net Excess of revenues over expenses                               $          509,600    $          906,200

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

   Depreciation & amortization                                                     5,100                 1,200

   Increase / decrease in accrued interest Federal investments                    (4,900)               16,800

   Increase / decrease in advances against defaulted MBS pools               (117,400)                  (1,700)

   Increase / decrease in deferred liabilities and deposits                          200                (8,700)

   Increase / decrease in accounts payable and accrued liabilities                19,600                (2,600)

   Increase / decrease in deferred revenue                                        24,400                14,400
   Decrease / increase in MBS Reserve, net of other assets relating
   to operating activities                                                       (19,200)                7,700

     Total Adjustments                                                           (92,200)               27,100
   Net Cash from (used for) Operating Activities                      $          417,400    $          933,300
   Cash Flow from Investing Activities

   Purchase of U.S. Treasury Securities, net                                      18,200           (518,100)

   Purchase of software                                                          (18,100)              (11,500)
   Net Cash from (used for) Investing Activities                      $              100    $      (529,600)
   Cash Flow from Financing Activities

   Financing activities                                                                 -                     -

   Net Cash from (used for) Financing Activities                                        -                     -

   Net increase in cash & cash equivalents                                       417,500               403,700

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

   Cash & cash equivalents - end of period                            $     5,253,800       $     4,836,300

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




      
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     Notes to the Financial Statements
     September 30, 2009 and 2008

     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 $5.3
     billion in Funds with U.S. Treasury, $4.4 billion is in the Reserve Receipt Account, which
     is a noninterest-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




  
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        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.

        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, 2009, and September 30, 2008, Ginnie Mae’s Fixed
        Assets – Software balance was $58.8 million, with accumulated amortization of $19.0
        million, and $40.8 million, with accumulated amortization of $14.0 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




     
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     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,
     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 guaranty,
     the guarantor must recognize a liability for the fair value of the obligation it assumes
     under the guaranty. Ginnie Mae has computed the fair value of its guaranty based on the
     life of the mortgage-backed securities and their underlying loans. Based on this
     evaluation, Ginnie Mae has disclosed an asset and liability of $902.5 million as of
     September 30, 2009, and $680.2 million as of September 30, 2008, categorized as other
     assets and other liabilities. 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.




  
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          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, 2009, range from 0.63 percent to 3.63
          percent. As of September 30, 2008, they ranged from 0.63 percent to 4.5 percent.

          The amortized cost and fair values as of September 30, 2009, were as follows:

                                                                              Gross            Gross
                                                         Amortized
                                                                            Unrealized       Unrealized        Fair Value
                                                           Cost
        (Dollars in thousands)                                                Gains           Losses

        U.S. Treasury Overnight Certificates         $     1,825,700    $                -   $             -   $ 1,825,700
        U.S. Treasury Notes                                 1,489,600             5,200            (1,300)       1,493,500
        U.S. Treasury Inflation-Indexed Securities          5,920,500           248,900                          6,169,400
        Total                                        $     9,235,800    $       254,100      $     (1,300)     $ 9,488,600




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

                                                                              Gross            Gross
                                                         Amortized
                                                                            Unrealized       Unrealized        Fair Value
                                                           Cost
        (Dollars in thousands)                                                Gains           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, fair value, and annual weighted average interest rates of U.S.
       Government securities at September 30, 2009, by contractual maturity date, were as
       follows:
                                                                                      Weighted
                                                  Amortized
                                                                    Fair Value     Average Interest
                                                    Cost
     (Dollars in thousands)                                                             Rate
     Due within one year                      $     2,893,200   $      2,899,700              0.21%
     Due after one year through five years          5,771,800          5,995,100              1.03%
     Due after five years through ten years           570,800            593,800              1.15%
     Total                                    $     9,235,800   $      9,488,600              0.79%




       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
                                                  Amortized
                                                                    Fair Value     Average Interest
                                                    Cost
     (Dollars in thousands)                                                             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%




  
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        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
                                                            2009                    2008
                        Unpaid principal balance        $       48,600        $         37,900
                        Allowance for losses                    (16,600)                (16,500)
                        Mortgages held for sale, net    $       32,000        $         21,400




        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
                                                                   2009                    2008
               Cost of properties, beginning of year        $             16,400    $              13,900
                  Additions                                                9,300                    8,200
                  Dispositions and Losses                                 (9,100)                  (5,700)
               Cost of properties, end of year              $             16,600    $              16,400
               Allowance for losses and costs to sell                 (12,100)                   (11,700)
               Properties held for sale, net                $              4,500    $               4,700




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

     Under its MBS guaranty, Ginnie Mae advanced $305.4 million in FY 2009 and $58.8
     million in FY 2008 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 $115.3 million in FY 2009 and $37.8 million in FY 2008.
     There were $1.6 million advances written off in FY 2009 and $18.5 million FY 2008.




                 (Dollars in thousands)                        September 30
                                                        2009                  2008
                 Advances against defaulted pools   $     210,100     $          18,400
                 Allowance for losses                     (90,000)              (15,700)
                 Advances against defaulted
                 pools                              $     120,100     $              2,700



     During FY 2009, Ginnie Mae defaulted two single family issuers with portfolios of $26.3
     billion and $18.8 million, respectively. The increase in advances is directly related to the
     larger defaulted portfolio. Ginnie Mae believes the allowance for losses for advances is
     adequate to cover any potential losses related to advances against defaulted pools.



     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




  
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        performing portion of the portfolios and the sale of servicing rights. As Ginnie Mae’s
        defaulted issuer portfolio changes, original estimates are compared with actual results over
        time and the reserve’s adequacy is assessed. If necessary, the reserve is adjusted. In FY
        2009, an adjustment of $78.6 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, 2009, and
        2008 were as follows:

                                                                            Manufactured
                                      Single Family       Multifamily                           Total
             (Dollars in thousands)                                           Housing
             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
                Recoveries                  20,000                  50             8,200          28,250
                Realized Losses            (90,500)              (150)            (6,300)        (96,950)
                Provision                   78,600                      -                         78,600
             September 30, 2009
             Reserve for Loss         $    445,300    $        58,700       $     55,900    $    559,900




        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.

        During FY 2009, Ginnie Mae defaulted two single family issuers with portfolios of $26.3
        billion and $18.8 million, respectively. Ginnie Mae believes that the reserve for loss
        estimate is adequate to cover any noninsured losses sustained for these issuers and from
        unknown future losses from the occurrence of periodic defaults.




     
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     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 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, 2009, the amount of
     securities outstanding, which is guaranteed by Ginnie Mae, was $826.0 billion, including
     $26.8 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)               2009                  2008
                 Outstanding MBS                $           826.0   $             576.8
                 Outstanding MBS Commitments    $            98.5   $              71.2




  
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          Note H: Concentrations of Credit Risk

          Concentrations of credit risk exist when a significant number of counterparties (for
          example, 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, 2009:




                                                                                                            Home Equity
                                                                                    Manufactured
                                   Single Family            Multifamily                                      Conversion
                                                                                      Housing
                                                                                                           (HECM/HMBS)

                                Number    Remaining    Number    Remaining       Number    Remaining     Number    Remaining
                                   of      Principal      of      Principal         of      Principal       of      Principal
        (Dollars in billions)   Issuers    Balance     Issuers    Balance        Issuers    Balance      Issuers    Balance

        Largest
        performing issuers          20    $   717.5        10    $        32.7        1    $       0.2        9    $     6.1

        Other performing
        issuers                    112    $    35.4        45    $         9.0        2    $        -         0    $       -


        Defaulted issuers           16    $    26.2         3     $          -        7    $        -         0    $       -




          As of September 30, 2009, Ginnie Mae’s single family, multifamily, and manufactured
          housing defaulted portfolio had remaining principal balances of $26.2 billion, $19.0
          million, and $6.7 million, respectively.

          In FY 2009, Ginnie Mae issued a total of $168.6 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, 2009, was $350.4 billion. These
          guaranteed securities do not subject Ginnie Mae to additional credit risk beyond that
          assumed under the MBS program.




     
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     Note I: Commitments and Contingencies

     As of September 30, 2009, 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 authorized by Congress to use $10.0 million in FY 2009 for payroll and
     payroll-related costs only. In FY 2009, Ginnie Mae incurred $8.6 million for Salaries and
     Expenses (travel, furniture, and supplies, and so forth.), including payroll and payroll-
     related costs. This 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 the 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, 2009, and 2008:

                                              September 30, 2009                  September 30, 2008

  (Dollars in thousands)                     Cost            Fair Value          Cost            Fair Value
  Funds with U.S. Treasury               $   5,253,800   $     5,253,800     $   4,836,300   $     4,836,300
  U.S. Government Securities                 9,235,800         9,488,600         9,254,000         8,374,000

  Advances against Defaulted MBS Pools         120,100           120,100             2,700              2,700
  Other assets                           $     122,400   $       122,400     $      88,400   $         88,400
  Unrecognized financial instruments                 -         4,139,000                 -         2,412,000
  Other liabilities                      $     175,700   $       175,700     $     131,500   $       131,500




          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




       
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     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 2008 to FY 2009 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 the sale of its financial instruments could differ, perhaps
     materially, from the amounts shown above.

     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, 2009, Ginnie Mae had reserves of $14.0 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.

     Note M: Subsequent Events

     On October 29, 2009, Ginnie Mae defaulted a multifamily issuer with a portfolio of $7.2
     billion. Estimated losses on this default are not readily determinable and management
     believes that the reserve for loss estimate of $559.9 million (Note F) is adequate to cover
     any losses incurred by Ginnie Mae due to this default.




  
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