oversight

Audit of Government National Mortgage Association's (Ginnie Mae) Financial Statement for Fiscal Years 2011 and 2010

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-11-07.

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

                                                                                   Issue Date
                                                                                         November 7, 2011

                                                                                   Audit Case Number
                                                                                         2012-FO-0001




TO:            Theodore Tozer, President, Government National Mortgage Association, T


FROM:          Thomas R. McEnanly, Director, Financial Audits Division, GAF

SUBJECT:       Audit of Government National Mortgage Association’s (Ginnie Mae) Financial Statement for Fiscal
                  Years 2011 and 2010


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 Clifton Gunderson LLP (CG) to audit the fiscal
years 2011 financial statements of the Government National Mortgage Association (Ginnie Mae). The contract
required that the audit be performed according to Generally Accepted Government Auditing Standards (GAGAS).
Ginnie Mae fiscal year 2010 financial statements were audited by other auditors; whose report dated November 5,
2010 expressed an unqualified opinion on those financial statements.

CG is responsible for the attached auditors’ report dated November 2, 2011 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 and regulations and government-wide policies.

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) of the financial statements and related information. The MD&A is not included with this report. Ginnie
Mae plans to separately publish an annual report for fiscal year 2011 that conforms to FASAB standards.

CG report on internal control identified certain deficiencies in internal control over financial reporting that they
consider to be significant deficiencies. In addition, within 60 days of this report, CG expects to issue a separate letter
to management dated November 2, 2011 regarding other matters that came to its attention during the audit.

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


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

Independent Auditor’s Report………..…………………………………………………….......5

     Appendix A – Significant Deficiencies……………………………..……….……..….9

     Appendix B – Management’s Response to Findings….…….…………...….….…12

     Appendix C – CG’s Assessment of Management’s Response...……………..….16

Financial Statements…..……………………………………………….…………………..….17

      Balance Sheets……………………………………………………………..………...18

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

          Government…………………………………………………….………..……...19

      Statements of Cash Flows…..………………...……………...…………..……......20

Notes to the Financial Statements….…………………………………………...............…..21




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a1
                                    INDEPENDENT AUDITOR’S REPORT


Inspector General
United States Department of Housing and Urban Development

President
Government National Mortgage Association

In our audit of the Government National Mortgage Association (Ginnie Mae), a wholly owned
government corporation within the United States Department of Housing and Urban
Development (HUD), for fiscal year (FY) 2011, we found:

    •    The balance sheet of Ginnie Mae as of September 30, 2011, and the related statements
         of revenues and expenses, changes in investment of U.S. Government and cash flows
         for the year then ended (hereinafter referred to as “financial statements”) are presented
         fairly, in all material respects, in accordance with accounting principles generally
         accepted in the United States of America.
    •    No material weakness in internal control over financial reporting (including safeguarding
         of assets) and compliance with laws and regulations
    •    Two significant deficiencies related to a) the need to improve compliance control to
         ensure safety, completeness, and validity of collateral loan files, and b) strengthening
         internal control over risk-based issuer and document custodian reviews to improve the
         effectiveness of counterparty monitoring and oversight.
    •    No instance of noncompliance with selected provisions of laws and regulations tested.

The following sections (including Appendices A through C) discuss in more detail: (1) these
conclusions, (2) our conclusions relating to the Management’s Discussion and Analysis (MD&A)
and other supplementary information, (3) management’s responsibilities, (4) our audit
objectives, scope and methodology, and (5) management’s response and our evaluation of their
response.

Opinion on Financial Statements

The financial statements including the accompanying notes, present fairly, in all material
respects, in conformity with accounting principles generally accepted in the United States of
America, Ginnie Mae’s assets, liabilities, and investment of U.S. Government as of September
30, 2011, and revenues and expenses, changes in investment of U.S. Government, and cash
flows for the year then ended. Ginnie Mae’s financial statements as of and for the year ended
September 30, 2010, were audited by other auditors; whose report dated November 5, 2010,
expressed an unqualified opinion on those financial statements.



4250 N. Fairfax Drive, Suite 1020
Fairfax, VA 22203
tel: 571-227-9500
fax: 571-227-9552
www.cliftoncpa.com                               5                             h
                                                                                   2012-FO-0001

                       INDEPENDENT AUDITOR’S REPORT, Continued

As discussed in Note H, Reserve for Losses on Mortgage-Backed Security (MBS) Program
Guaranty, Ginnie Mae utilizes a statistically-based model that evaluate numerous factors,
including, but not limited to, general and economic conditions, mortgage characteristics, and
actual and expected future default and loan loss experience in establishing the reserve for
losses. Deviations from these factors could have a material impact on the reserve.

Also, as discussed in Note N, Subsequent Events, Ginnie Mae defaulted two single family
Mortgage-Backed Security (MBS) issuers with total mortgage loans’ remaining principal balance
of $901.9 million.

Consideration of Internal Control over Financial Reporting and Compliance

In planning and performing our audit, we considered Ginnie Mae’s internal control over financial
reporting and compliance (internal control) as a basis for designing our auditing procedures and
to comply with Office of Management and Budget (OMB) audit guidance for the purpose of
expressing our opinion on the financial statements, but not for the purpose of expressing an
opinion on the effectiveness of Ginnie Mae’s internal control over financial reporting and
compliance or on management’s assertion on internal control included in Management’s
Discussion and Analysis (MD&A). Accordingly, we do not express an opinion on the
effectiveness of Ginnie Mae’s internal control over financial reporting and compliance nor on
management’s assertion on internal control included in the MD&A.

Our consideration of internal control over financial reporting and compliance was for the limited
purpose described in the preceding paragraph and would not necessarily identify all deficiencies
in internal control over financial reporting and compliance that might be significant deficiencies
or material weaknesses.

A deficiency in internal control 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 and correct misstatements on a timely basis. A material weakness is a
deficiency or a combination of deficiencies in internal control, such that there is a reasonable
possibility that a material misstatement of the entity’s financial statements will not be prevented,
or detected and corrected on a timely basis. A significant deficiency is a control deficiency or a
combination of deficiencies in internal control that is less severe than a material weakness, yet
important enough to merit attention by those charged with governance. We consider the
deficiencies identified in Appendix A to be significant deficiencies in internal control over
financial reporting and compliance.

We noted other nonreportable matter involving Ginnie Mae’s internal control and its operation
that we communicated in a separate letter to Ginnie Mae’s management dated November 2,
2011.

Our consideration of internal control was for the limited purpose described in the first paragraph
above and would not necessarily identify all significant deficiencies in internal control that are
also considered to be material weaknesses. However, we do not believe the significant
deficiencies listed below and described in Appendix A are material weaknesses.

   1. Need to Improve Compliance Control to Ensure the Safety, Completeness, and Validity
      of Collateral Loan Files



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                       INDEPENDENT AUDITOR’S REPORT, Continued

   2. Strengthen Internal Control over Risk-Based Issuer and Document Custodian Reviews
      to Improve the Effectiveness of Counterparty Monitoring and Oversight

Compliance with Laws and Regulations

Our tests of Ginnie Mae’s compliance with selected provisions of laws and regulations for FY
2011 disclosed no instance of noncompliance that are reportable under United States generally
accepted government auditing standards or OMB audit guidance. However, the objective of our
audit was not to express an opinion on overall compliance with laws and regulations or on
management’s assertion of compliance with laws and regulations included in the MD&A.
Accordingly, we do not express such an opinion.

Consistency of Other Information

Ginnie Mae’s MD&A contains a wide range of information, some of which is not directly related
to the financial statements. We reviewed this information for consistency with the financial
statements and discussed the methods of measurement and presentation with Ginnie Mae’s
officials. Based on this limited work, we found no material inconsistencies with the financial
statements; accounting principles generally accepted in the United States, or OMB guidance.
However, we do not express an opinion on this information.

Management’s Responsibilities

Ginnie Mae’s management is responsible for (1) preparing the financial statements in conformity
with accounting principles generally accepted in the United States, (2) establishing, maintaining
and assessing internal control to provide reasonable assurance that the broad control objectives
of the Federal Managers Financial Integrity Act of 1982 (FMFIA) are met, and (3) complying with
applicable laws and regulations.

Audit Objectives, Scope and Methodology

We are responsible for obtaining reasonable assurance about whether the financial statements
are presented fairly in all material respects, in conformity with accounting principles generally
accepted in the United States of America. We are also responsible for: (1) obtaining a sufficient
understanding of internal control over financial reporting and compliance to plan the audit, (2)
testing compliance with selected provisions of laws and regulations that have a direct and
material effect on the financial statements and laws for which OMB audit guidance requires
testing, and (3) performing limited work with respect to other information appearing in the
MD&A.

In order to fulfill these responsibilities, we (1) examined, on a test basis, evidence supporting the
amounts and disclosures in the financial statements; (2) assessed the accounting principles
used and significant estimates made by management; (3) evaluated the overall presentation of
the financial statements; (4) obtained an understanding of Ginnie Mae and its operations,
including its internal control over financial reporting (including safeguarding of assets) and
compliance with laws and regulations; (5) tested relevant internal controls over financial
reporting and compliance; (6) considered the design of the process for evaluating and reporting




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                       INDEPENDENT AUDITOR’S REPORT, Continued

on internal control and financial management systems; and (7) tested compliance with selected
provisions of certain laws and regulations.

We did not evaluate all internal controls relevant to operating objectives as broadly defined by
FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to controls over financial reporting and
compliance. Because of inherent limitations in internal control, misstatements due to error,
fraud, losses or noncompliance may nevertheless occur and not be detected. We also caution
that projecting our evaluation to future periods is subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with controls
may deteriorate. In addition, we caution that our internal control testing may not be sufficient for
other purposes.

We did not test compliance with all laws and regulations applicable to Ginnie Mae. We limited
our tests of compliance to selected provisions of those laws and regulations that have a direct
and material effect on the financial statements and those required by OMB audit guidance that
we deemed applicable to Ginnie Mae’s financial statements for the fiscal year ended September
30, 2011. We caution that noncompliance with laws and regulations may occur and not be
detected by these tests and that such testing may not be sufficient for other purposes.

We performed our audit in accordance with auditing standards generally accepted in the United
States; the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States; and OMB audit guidance as
applicable to government corporations. We believe that our audit provide a reasonable basis for
our opinion.

Ginnie Mae Comments and Our Evaluation

Ginnie Mae’s management agreed with our recommendations but disagreed with certain
conditions identified in our findings. We disagreed with Ginnie Mae’s categorization of the
findings’ conditions and stand by the conclusions reached in our report. The full text of Ginnie
Mae management’s response is included as Appendix B. We did not perform audit procedures
on Ginnie Mae management’s written response. Accordingly, we express no opinion on it. Our
assessment of Ginnie Mae management’s response is included as Appendix C.

Distribution

This report is intended solely for the information and use of the management of Ginnie Mae and
HUD, the HUD Office of Inspector General, OMB, the Government Accountability Office, and
the United States Congress, and is not intended to be, and should not be, used by anyone other
than these specified parties.



a2
Arlington, Virginia
November 2, 2011



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                                          Ginnie Mae
                                 Independent Auditor’s Report
                                     Significant Deficiency
                                          Appendix A

1. Need to Improve Compliance Control to Ensure the Safety, Completeness and Validity
   of Collateral Loan Files
In August 2009, Ginnie Mae defaulted one of its largest Mortgage-Backed Security (MBS)
issuers. Ginnie Mae extinguished the issuer’s interests and rights in the pooled mortgages and
contracted with a financial institution to be its master sub-servicer for the defaulted issuer’s MBS
pools. The master sub-servicer began servicing to fulfill Ginnie Mae’s guarantee to MBS
investors in August 2009. Loans that are non-performing (loans with overdue mortgage
payments for 120 days or more) are repurchased by Ginnie Mae from the defaulted MBS pools
and hold them as Mortgages Held for Investments (MHFI). The MHFI from this defaulted issuer
is approximately $6 billion out of the $6.6 billion MHFI at September 30, 2011. The mortgage
loans from the same defaulted issuer being serviced are approximately $13.7 billion at
September 30, 2011.
Ginnie Mae’s master sub-servicer contracts with an independent document custodian to ensure
the safety and completeness of the mortgage collateral documentation. The current custodian
has not been able to provide a final certification within 12 months from transfer of the portfolio
from the predecessor custodian as required by the Ginnie Mae MBS Guide (Guide). A
significant portion (exceeding the required 20 percent pool threshold of the mortgage pools)
could not be final certified due to the poor condition of the collateral loan files (for example,
missing some or all documentation).
Under the Guide, the document custodian is required to certify to Ginnie Mae that loans
constituting the pools of mortgages (as collaterals for Ginnie Mae securities) are supported by
documents placed in the document custodian’s control for the life cycle of the loans. The
document custodian performs this function through safekeeping, a process of pool certification,
and recertification and tracking controls. The Guide requires document custodian to final
certify/recertify MBS pool within 12 months from the date of transfer. The transfer of the
mortgage loan pool documentation from the former custodial bank to Ginnie Mae’s master sub-
servicer was in September 2009.
We understand that the default of one of the largest Ginnie Mae MBS issuers in August 2009
was unprecedented. Moreover, as published in various news media, Ginnie Mae’s master sub-
servicer is having significant problems with its mortgage servicing arm. We are also aware that
Ginnie Mae is committed to correcting this issue and is working with the master sub-servicer to
accelerate the review of the loan collateral files and documents with exceptions that are
preventing the document custodian from issuing final certification. However, as of September
30, 2011, Ginnie Mae had not reached a final agreement for a timeline as to when the review of
loan files/final certification of all loans will be completed. The delays in the review process
caused by the poor condition of the loan files and the master sub-servicers problems will delay
the processing of the loan modifications, prepayments, initiating foreclosures, and filing claims
with the federal insuring agencies. As Ginnie Mae continues to purchase non-performing loans
from the MBS pools, these delays result in additional costs to carry these non-performing loans.
Moreover, in some cases where certain exceptions in the loan documents that could prevent
filing claims with or obtaining payments from the federal insuring agency, Ginnie Mae’s MHFI
may be potentially overstated, and the reserve for losses potentially understated. Once loan
files reviews/final certifications are completed, Ginnie Mae will be able to better assess the
extent of any added costs to cure defective loans and/or losses incurred.


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                                         Ginnie Mae
                                Independent Auditor’s Report
                                    Significant Deficiency
                                         Appendix A

Recommendation

   1. We recommend that Ginnie Mae’s Acting Vice-President for MBS hold the master sub-
      servicer accountable for delays by requiring an acceptable written timeline for
      completing the final review/certification of the loan documentation/pools.

2. Strengthen Internal Control over Risk-Based Issuer and Document Custodian
   Reviews to Improve the Effectiveness of Counterparty Monitoring and Oversight

Ginnie Mae, due to its personnel funding structure resulting in limited personnel resources,
outsourced many of its operational, monitoring, and administrative functions and placed
significant reliance on the performance and the reports of the outside consultants. One of the
outsourced functions is the field reviews monitoring of issuers and document custodians’
(contractors) compliance with the MBS guide and their implementation of internal control to
minimize certain financial risks and potential losses to Ginnie Mae. We reviewed three
completed field reviews conducted by the consultants in fiscal year 2011. We found that the
workpapers for the completed reviews were incomplete in terms of documentation, meeting
tests objectives, and performing applicable procedures that are outlined in Ginnie Mae’s Issuer
and Document Custodian Risk Based Review Procedures Manual (RBM). Ginnie Mae’s
contractor assessment reviews (CAR) conducted in fiscal year 2011 also identified similar
deficiencies in the field reviews. Consequently, these reviews may be insufficient for Ginnie Mae
to rely upon.
In addition, we noted that the last comprehensive update to the RBM was made on December
1, 2005. Ginnie Mae has changed and implemented numerous policies and procedures in
response to the current financial crisis which started in 2008. These changes and
enhancements such as new review procedures necessary to address the current environment
are not incorporated in the RBM. A continuing failure to update the manual would increase the
risk that deficiencies in the reviews could occur. Ginnie Mae self-identified this deficiency in
fiscal year 2011 in its testing of internal control in accordance with OMB Circular A-123,
Management’s Responsibility for Internal Control.
The field reviews must be contractually performed according to the Ginnie Mae Issuer and
Document Custodian Risk Based Review Procedures Manual and must conform to the overall
Ginnie Mae monitoring standards for internal control sets forth in OMB Circular No. A-123,
Management’s Responsibility for Internal Control.
Recommendations
   2a. Ginnie Mae’s Acting Vice-President for MBS should increase its oversight and
       monitoring of the field reviews performed on issuers and document custodians to ensure
       the reviews meet management’s objectives and are adequately and completely
       performed and properly documented.




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                                   Ginnie Mae
                           Independent Auditor’s Report
                            Response to Auditor Report
                                   Appendix A

2b. Ginnie Mae Executive Vice-President should allocate resources within MBS and Risk
    Management Division to accelerate the update to the Issuer and Document Custodian
    Risk Based Review Procedures Manual within the second fiscal quarter of 2012 if
    possible, so that new updated reviews are performed in second half of 2012 to eliminate
    this deficiency.




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                  Ginnie Mae
    Management’s Response to Findings
Contained in the Independent Auditor’s Report
                  Appendix B




                       12
                                                2012-FO-0001
                  Ginnie Mae
    Management’s Response to Findings
Contained in the Independent Auditor’s Report
                  Appendix B




                    13
                                                2012-FO-0001
                  Ginnie Mae
    Management’s Response to Findings
Contained in the Independent Auditor’s Report
                  Appendix B




                      14
                                                2012-FO-0001
                  Ginnie Mae
    Management’s Response to Findings
Contained in the Independent Auditor’s Report
                  Appendix B




                     15
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                                         Ginnie Mae
                       CG’s Assessment of Management’s Response
                       Contained in the Independent Auditor’s Report
                                         Appendix C

We obtained and reviewed Ginnie Mae’s management response to the findings and
recommendations, included as Appendix B, made in connection with our audit of Ginnie Mae’s
FY 2011 Financial Statements. We did not perform audit procedures on Ginnie Mae’s written
response to the findings and recommendations and, accordingly, we express no opinion on
them. Our assessment of management’s response is discussed below.

Assessment of management’s response to significant deficiencies:

As indicated in Appendix B, Ginnie Mae’s management agreed with our recommendations to
the two significant deficiencies and has outlined their corrective actions that have started or
soon to start with the implementation.

Ginnie Mae’s management disagreed with certain conditions identified in the findings. Ginnie
Mae also stated that they do not believe the findings rise to the level of significant deficiencies.
We disagreed with Ginnie Mae’s assessment and the categorizations provided in their response
in support of their position. We stand by the findings and conclusions reached in our report.




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Audit Report of Ginnie Mae’s Fiscal Year 2011 Financial Statements




                              17
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Ginnie Mae’s Fiscal Year 2011 Financial Statements

                                                      Balance Sheets

September 30                                                                 2011                    2010
(Dollars in thousands)

Assets:
Funds with U.S. Treasury                                               $        7,210,300       $       6,650,500
U.S. Government securities                                                      2,126,800               3,551,200
Accrued interest on U.S. Government securities                                       11,800                  20,400
Accrued fees and other receivables, net                                              62,500                  54,900
Fixed assets--software, net of accumulated amortization                              31,100                  35,800
Mortgage loans held for investment, net                                         6,350,300               4,443,300
Accrued Interest on mortgage loans held for investment                               83,400                 181,300

Advances against defaulted Mortgage-Backed security pools                           873,700             1,054,300
   Less: Allowance for uncollectible advances                                       (220,500)               (212,200)
Advances against defaulted Mortgage-Backed security pools, net                      653,200                 842,100

Short sale claims receivables                                                        38,600                        -
   Less: Allowance for uncollectible short sale claims receivables                    (6,300)                      -
Short sale claims receivables, net                                                   32,300                        -

Properties held for sale                                                               7,400                 49,200
    Less: Allowance for losses on properties held for sale                            (4,000)                 (6,900)
Properties held for sale, net                                                          3,400                 42,300

Mortgage servicing rights                                                           110,900                 137,700
Guaranty Asset                                                                  2,175,100               1,103,800
Total Assets                                                           $       18,851,100       $      17,063,300
Liabilities and Investment of U.S. Government:
Liabilities:
Reserve for loss on Mortgage-Backed Securities Program Guaranty                     395,800     $       1,004,900
Deferred revenue                                                                    117,400                 113,900
Deferred liabilities and deposits                                                    35,700                    1,200
Accounts payable and accrued liabilities                                            365,300                 261,700
Guaranty Liability                                                              2,175,100               1,103,800
Total Liabilities                                                      $        3,089,300       $       2,485,500
Commitments and Contingencies
Investment of U.S. Government                                                  15,761,800              14,577,800
Total Liabilities and Investment of U.S. Government                    $       18,851,100       $      17,063,300



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                                                       2011                   2010

(Dollars in thousands)

 Revenues:
 Mortgage-Backed Securities Program income                                         $           856,500    $      742,900
 Interest income                                                                               208,100           269,000

 Total Revenues                                                                    $          1,064,600   $     1,011,900

 Expenses:
 Mortgage-Backed Securities Program expenses                                                    72,800               72,700
 Administrative expenses                                                                        11,000               10,300
 Fixed asset amortization                                                                        9,900                9,500

 Total Expenses                                                                    $            93,700    $          92,500
 Recapture of Provision for Loss on properties held for sale                                     2,900                    -

 Recapture of Provision for Loss on Mortgage-Backed Securities Program Guarantee               407,000
      Less: Provision for Loss on Mortagage-Backed Securities Program                                            730,000
      Less: Provision for Loss on Uncollectible Advances                                         8,500                    -
      Less: Provision for Loss on Short Sale Claims and Other Receivables                        6,800                    -

 Total Recapture of Provision / (Provision for Losses)                             $           394,600    $     (730,000)
 Gain on disposition of investment                                                              24,000           214,400

 Gain on acquisition mortgage servicing rights                                                                   137,700
      Less: Loss on mortgage servicing rights                                                   26,800
      Less: Loss on credit impairment of mortgage loans HFI, net                               178,700                    -

 Total Gains / (Losses)                                                            $          (181,500) $        352,100

 Excess of Revenues over Expenses                                                             1,184,000          541,500

 Investment of U.S. Government at Beginning of Year                                       14,577,800          14,036,300
 Returned to U.S. Treasury                                                                            -                   -

 Investment of U.S. Government at End of Year                                      $      15,761,800      $   14,577,800




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                                                                2011                     2010
(Dollars in thousands)
Cash Flow from Operating Activities
Net Excess of Revenues over Expenses                                                        $     1,184,000       $             541,500
Adjustments to reconcile Net Excess of Revenues Over Expenses to Net Cash from
Operating Activities:
 Amortization                                                                                            9,900                    9,500
 Decrease / increase in accrued interest on U.S. Government securities                                   8,600                   20,900
 Decrease / increase in accrued interest on mortgage loans held for investment                          97,900              (181,300)
 Decrease / increase in advances against defaulted MBS pools, net                                      188,900              (722,000)
 Decrease / increase in mortgage servicing rights                                                       26,800              (137,700)
 Increase / decrease in deferred revenue                                                                 3,500                     (500)
 Increase / decrease in deferred liabilities and deposits                                               34,500                   (1,400)
 Increase / decrease in accounts payable and accrued liabilities                                       103,600                  203,000
 Increase / decrease in accrued fees and other receivables                                              (7,600)                 (10,300)
 Increase / decrease in short sale claims receivables, net                                             (32,300)                       -
 Decrease / increase in properties held for sale, net                                                   38,900                  (37,800)
 Decrease / increase in reserve for loss on MBS program guaranty                                   (609,100)                    445,000
 Decrease / increase in MBS Reserve, net of other assets relating to operating activities          (610,100)                    396,900
 Total Adjustments                                                                                 (136,400)                (412,600)
Net Cash from Operating Activities                                                          $     1,047,600       $             128,900

Cash Flow from Investing Activities

Increase / decrease in mortgage loans held for investment, net                                    (1,907,000)              (4,411,300)
Sale / purchase of U.S. Government securities, net                                                1,424,400                5,684,600
Purchase / sale of software                                                                             (5,200)                  (5,500)
Net Cash (used for) from Investing Activities                                               $      (487,800) $             1,267,800

Cash Flow from Financing Activities
Financing activities                                                                                         -                        -
Net Cash from (used for) Financing Activities                                               $                -    $                   -
Net increase in cash & cash equivalents                                                                559,800             1,396,700
Cash & cash equivalents - beginning of period                                                     6,650,500                5,253,800
Cash & cash equivalents - end of period                                                     $     7,210,300       $        6,650,500

                                           Supplemental Schedule of Non-Cash Activities

For the Years Ended September 30                                                                2011                     2010
(Dollars in thousands)

Transfer of Advances against Defaulted MBS pools to
   Mortgage Loans Held for Investment                                                       $     2,175,500       $        4,467,000

Transfer from Mortgage Loans Held for Investment to                                         $          148,900    $             118,700
   Properties Held for Sale



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




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                                                                                  2012-FO-0001


Notes to the Financial Statements

September 30, 2011 and 2010



Note A: Organization and Summary of Significant Accounting Policies

The Government National Mortgage Association (Ginnie Mae) was created in 1968, through an
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 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.

To ensure that adequate capital continues to flow, Ginnie Mae offers reliable solutions that meet
the needs of a broad constituent base and provide sufficient flexibility to respond to market
changes. At the core of its business model and its product offering menu is the simple pass-
through security, which comes in the form of two product structures—Ginnie Mae I MBS and
Ginnie Mae II MBS. Each of these Ginnie Mae product structures has specific characteristics
regarding pool types, note rates, collateral, payment dates and geographical locations.

The underlying source of loans for the Ginnie Mae I MBS and Ginnie Mae II MBS comes from
Ginnie Mae’s following four main programs, which serve a variety of loan financing needs and
different issuer origination capabilities:
•   Single Family Program – The majority of Ginnie Mae securities are backed by single family
    mortgages predominantly originated through FHA and VA loan insurance programs.
•   Multifamily Program – Safe and affordable rental housing is essential for millions of
    individuals and families. Ginnie Mae’s mission of supporting affordable housing and
    promoting stable communities extends to ensuring that decent rental units remain within
    reach of those who need them. By guaranteeing pools of multifamily loans that are sold to
    investors in the global capital markets, Ginnie Mae enables lenders to reduce mortgage
    interest rates paid by property owners and developers of apartment buildings, hospitals,
    nursing homes, assisted-living facilities, and other housing options.



                                               21
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•   HMBS Program – In addition to traditional mortgages, Ginnie Mae’s expanding Home
    Equity Conversion Mortgage (HECM) securities program provides capital and liquidity for
    FHA-insured reverse mortgages, an essential financial solution for a growing number of
    seniors. HECM loans can be pooled into HECM Mortgage Backed Securities (HMBS) within
    the Ginnie Mae II MBS program. Because Ginnie Mae enables a broad secondary market for
    HECM loans, the availability of HECM lending from multiple lenders has been deepened
    and broadened and related borrowing costs have been reduced.
•   Manufactured Housing (MH) Program – Ginnie Mae’s Manufactured Housing program
    allows the issuance of pools of loans insured by FHA’s Title I Manufactured Home Loan
    Program.

Basis of Presentation: The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).

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 $7.2 billion in
Funds with U.S. Treasury, $5.5 billion is in the Reserve Receipt Account, which is a noninterest-
bearing account at the U.S. Treasury. For purposes of the Statements of Cash Flow, Funds with
U.S. Treasury are considered cash.

U.S. Government Securities: U.S. Government Securities are classified as held for investment
as Ginnie Mae has both the ability and the intent to hold until maturity, and are carried at
amortized cost. Interest income on such securities is included in Interest Income on the
Statements of Revenues and Expenses. Discounts and premiums are amortized, on a level yield
basis, over the life of the related security.

Fixed Assets: Ginnie Mae’s fixed assets represent systems (software) that are used to
accomplish its mission. Ginnie Mae capitalizes significant software development project costs
per guidance in ASC Subtopic 350-40 Intangibles—Goodwill and Other – Internal-Use Software
(ASC 350-40) and amortizes them over a three- to five-year period beginning with the project’s
completion. As of September 30, 2011, and September 30, 2010, Ginnie Mae’s Fixed Assets –
Software balance was $69.5 million, with accumulated amortization of $38.4 million, and $64.3
million, with accumulated amortization of $28.5 million, respectively.




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Mortgage Loans Held for Investment: When a Ginnie Mae issuer defaults, Ginnie Mae is
required to step into the role of the issuer and make the timely pass-through payments to
investors and, subsequently, acquires the servicing rights and obligations of the entire Ginnie
Mae guaranteed, pooled loan portfolio of the defaulted issuer. As the servicer Ginnie Mae
assesses loans to determine whether the loan should be purchased out of the pool. Ginnie Mae
will purchase mortgage loans out of the pool when:
a.      Mortgage loans are uninsured by the FHA, USDA, VA or PIH, or
b.      Mortgage loans were previously insured but insurance is currently denied (collectively
        with (a.), referred to as uninsured mortgage loans),
c.      And may purchase mortgage loans that are insured but are delinquent for more than 120
        days based on management discretion. This buyout policy was implemented in FY2010
        and was a business decision since it prevents Ginnie Mae from continuing to pass through
        interest to investors at the note rate of the security when it is probable that Ginnie Mae
        will be reimbursed at the debenture rate in the case of FHA insured loans and not at all
        for VA and uninsured loans. Ginnie Mae’s Guide states that loans can be repurchased at
        90 day delinquency, however Ginnie Mae has decided to repurchase loans at 120 days
        delinquency as it is unlikely that these delinquencies will cure.

Ginnie Mae assesses the collectability of mortgage loans bought out of the pools of defaulted
portfolios. During FY 2011, the majority of mortgage loans were bought out due to borrower
delinquency of more than 120 days. Ginnie Mae evaluates the collectability of all loans and
considers a loan as credit impaired at acquisition when there is evidence of credit deterioration
subsequent to the loan’s origination and it is probable, at acquisition, that Ginnie Mae will be
unable to collect all contractually required payments receivable. Ginnie Mae considers
guarantees and insurance from FHA, USDA, VA and PIH in determining whether it is probable
that Ginnie Mae will collect all amounts due according to the contractual terms.

For non-VA insured loans, Ginnie Mae expects to collect the full amount of the unpaid principal
balance and debenture rate interest (for months allowed in the insuring agency’s timeline), when
the insurer reimburses Ginnie Mae subsequent to filing a claim. As a result, these loans are
under ASC Subtopic 310-20, Nonrefundable Fees and Other Costs. In accordance with ASC
310-20-30-5, these loans are recorded at the unpaid principal balance which is the amount Ginnie
Mae pays to repurchase these loans. Accordingly, Ginnie Mae recognizes interest income on
these loans on an accrual basis at the debenture rate for the number of months allowed under the
insuring agency’s timeline. After the allowed timeline, Ginnie Mae considers these loans to be
non-performing as the collection of interest is no longer reasonably assured, and places these
loans on non-accrual status.

Ginnie Mae assesses the collectability of mortgage loans bought out of the defaulted portfolios
that are uninsured and defaulted loans that are VA insured for which Ginnie Mae only receives a



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portion of the original principal balance. Since the principal and interest payments are not fully
guaranteed from the insurer or there is a lack of insurance, if these loans are delinquent at
acquisition, it is probable that Ginnie Mae will be unable to collect all contractually required
payments receivable. Accordingly, these loans are considered to be credit impaired and are
accounted for under ASC Subtopic 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality. At the time of acquisition, these loans are recorded at the lower of
their acquisition cost or present value of expected amounts to be received. As non-performing
loans, these loans are placed on nonaccrual status.

Ginnie Mae has the ability and the intent to hold these acquired loans for the foreseeable future
or until maturity; therefore, Ginnie Mae classifies the loans as held for investment (HFI). These
mortgage loans HFI are reported net of allowance for loan losses. Mortgage loans HFI include
mortgage loans that are undergoing the foreclosure process. Upon completion of the foreclosure
process, when Ginnie Mae acquires the title of the underlying properties, these properties are
either conveyed to the insuring agency for claim and are reported as advances against defaulted
MBS pools or are classified as properties held for sale.

The allowance for loss on mortgage loans HFI represents management’s estimate of probable
credit losses inherent in Ginnie Mae’s mortgage loan portfolio. The allowance for loss on
mortgage loans HFI is a contra asset account which when aggregated with the mortgage loans
HFI, states the balance of loans that Ginnie Mae determines to be collectible. Ginnie Mae
performs periodic and systematic reviews of its loan portfolios to identify credit risks and to
assess the overall collectability of the portfolios. The allowance on certain homogeneous loan
portfolios is based on aggregated evaluations.

Accrued Interest Mortgage Loans Held for Investment: Ginnie Mae records accrued interest
on mortgage loans HFI for interest which Ginnie Mae determines that the ultimate collectability
is probable. For non-VA insured loans, Ginnie Mae recognizes interest income on an accrual
basis at the debenture rate for the number of months allowed under the insuring agency’s
timeline. After the allowed timeline, Ginnie Mae considers these loans to be non-performing as
the collection of interest is not reasonably assured, and places these loans on non-accrual status.
Ginnie Mae has assessed the collectability of VA and uninsured loans and determined that these
loans are non-performing and hence, are placed on nonaccrual status.

Advances against Defaulted MBS Pools: Advances against defaulted MBS pools represent
payments made to fulfill Ginnie Mae’s guaranty of timely principal and interest payments to
MBS security holders. Such advances are reported net of an allowance for uncollectible advances
to the extent management believes they will not be recovered. The allowance for uncollectible
advances is estimated based on actual and expected recovery experience including expected
recoveries from FHA, USDA, VA, and PIH. Principal and Interest receivable for foreclosed
properties that have been conveyed to the insuring agency are reported in the advance category


                                                24
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while Ginnie Mae is awaiting payment of the receivable; these claims are reported net of
allowance.
Short Sales Claims Receivable: As an alternative to foreclosure, a property may be sold for its
appraised value even if such a sale results in a short sale where the proceeds are not sufficient to
pay off the mortgage. These transactions are approved by Ginnie Mae’s master sub-servicers
and Ginnie Mae’s MBS program office. Typically, the short sale occurs after Ginnie Mae has
purchased the loan out of the pool and recorded the loan as Mortgage Loans HFI. However, in
some circumstances, the short sale occurs while the mortgage loan is still in the pool.

Except for VA insured loans, for insured loans for which the underlying property was sold in a
short sale, the insurer typically pays Ginnie Mae the difference between the proceeds received
from the sale and the total contractual amount of the mortgage loan and interest at the debenture
rate. Hence, Ginnie Mae does not incur any losses as a result of the short sale. Ginnie Mae
records a Short Sale Claims Receivable while it awaits repayment of this amount from the
insurer. For short sales claims receivable for which Ginnie Mae believes that collection is not
probable, Ginnie Mae records an allowance for short sales receivable; the aggregate of the short
sales receivable and the allowance for short sales receivable is the amount Ginnie Mae
determines to be collectible.

Properties Held for Sale: Ginnie Mae acquires title of the underlying property when foreclosure
is finalized. For instances in which Ginnie Mae does not convey the property to the insuring
agency, Ginnie Mae holds the title until the property is sold. As the properties are available for
immediate sale in their current condition and are actively marketed for sale, they are reported as
properties held for sale on the Balance Sheets in accordance with ASC Subtopic 360-10,
Property, Plant, and Equipment – Overall. Properties held for sale are initially recorded on the
Balance Sheets at fair value less its estimated cost to sell. The fair value less estimated cost to
sell on the date of foreclosure is deemed to be the carrying value of the foreclosed asset.
Subsequent to initial measurement, the properties held for sale are reported at the lower of the
carrying amount or fair value less estimated cost to sell.

Mortgage Servicing Rights: Mortgage servicing rights (MSRs) represent Ginnie Mae’s right
and obligation, obtained from issuers upon default, to service mortgage loans in mortgage
backed securities. Ginnie Mae records a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing contract in
(among other situations) an acquisition or assumption of a servicing obligation that does not
relate to financial assets held by Ginnie Mae.
Ginnie Mae records a mortgage servicing asset on its Balance Sheet when the present value of
the estimated compensation for mortgage servicing activities exceeds adequate compensation for
such servicing activities and records a mortgage servicing liability when the present value of the


                                                25
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estimated compensation for mortgage servicing activities is less than the adequate compensation
for such servicing activities. Ginnie Mae considers adequate compensation to be the amount of
compensation that would be required by a substitute master sub-servicer should one be required.
Market information is used to determine adequate compensation for these services.

Ginnie Mae has elected the fair value option for the MSRs to better reflect the potential net
realizable or market value that could be ultimately realized from the disposition of the MSR asset
or the settlement of a future MSR liability. Upon acquisition, Ginnie Mae measures its MSRs at
fair value and subsequently re-measures them with changes in the fair value recorded in the
Statements of Revenues and Expenses (see Note F for more information regarding the initial and
subsequent valuations of Ginnie Mae’s MSRs).

Fair Value: Ginnie Mae measures the fair value of its financial instruments in accordance with
accounting guidance that requires an entity to base fair value on exit price and maximize the use
of observable inputs and minimize the use of unobservable inputs to determine the exit price.
Accounting guidance defines fair value as the price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Ginnie
Mae’s MSRs are carried at fair value in accordance with applicable accounting guidance.

Ginnie Mae categorizes its financial instruments, based on the priority of inputs to the valuation
technique, into a three-level hierarchy, as described below.

Level 1     Quoted prices in active markets for identical assets or liabilities. Level 1assets and liabilities
            include debt and equity securities and derivative contracts that are traded in an active
            exchange market, as well as certain U.S. treasury and other U.S. Government securities that
            are highly liquid and are actively traded in over-the-counter markets.

Level 2     Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
            liabilities; quoted prices in markets that are not active; or other inputs that are observable or
            can be corroborated by observable market data for substantially the full term of the assets or
            liabilities. Level 2 assets and liabilities include securities with quoted prices that are traded
            less frequently than exchange-traded instruments that are observable in the market or can be
            derived principally from or corroborated by observable market data. This category includes
            mortgages HFI, properties HFS, advances against defaulted MBS pools and guaranty assets
            and liabilities.

Level 3     Unobservable inputs that are supported by little or no market activity and that are significant
            to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
            instruments whose value is determined using pricing models, discounted cash flow
            methodologies, or similar techniques, as well as instruments for which the determination of
            fair value requires significant management judgment or estimation. This category includes
            mortgage servicing rights.


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Reserve for Loss on MBS Program Guaranty: Reserve for Loss on MBS Program Guaranty is
an accrual for loss contingency as a result of the guaranty provided on Mortgage Backed
Securities portfolios when the following two conditions under ASC Subtopic 450-20,
Contingencies – Loss Contingencies are met:
a.     Information available before the issuance of the financial statements indicates that it is
       probable that a triggering event or condition has occurred at the date of the financial
       statements. It is implicit in this condition that it must be probable that one or more future
       events will occur confirming the fact of loss.
b.     The amount of loss can be reasonably estimated.
Reserves are established to the extent management believes losses due to defaults are probable
and estimable and FHA, USDA, VA, and PIH insurance or guarantees are insufficient to recoup
Ginnie Mae expenditures. The reserve for loss on MBS program guaranty is a liability account
on the Balance Sheets. Ginnie Mae recognizes the loss by recording a charge to the provision for
loss on MBS program guaranty on the Statements of Revenue and Expenses. Ginnie Mae records
charge-offs as a reduction to the reserve for loss on MBS program guaranty liability account
when losses are confirmed and records recoveries as a credit to the reserve for loss on MBS
program guaranty liability account. Accordingly, the reserves are increased by provisions
recorded as an expense in the Statements of Revenues and Expenses and reduced by charge-offs,
net of recoveries. Among other losses and recoveries, miscellaneous expenses related to
foreclosure are not capitalized on the balance sheet and are charged off against the reserve for
loss on MBS program guaranty and recoveries of these expenses through the claims process are
shown as recoveries against the reserve for loss on MBS program guaranty.

Financial Guarantees: The Financial Accounting Standards Board’s (FASB) Accounting
Standards Codification (ASC) topic 460, Guarantees (ASC 460), formerly known as (FASB)
Interpretation No. 45 (FIN 45), clarifies the requirements of accounting for Contingencies (ASC
450), relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of
guarantees. ASC 450 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. The issuance of a
guaranty under the Mortgage-Backed Securities (MBSs) Program obligates Ginnie Mae to stand
ready to perform over the term of the guaranty in the event that the specified triggering events or
conditions occur.

At inception of the guaranty, Ginnie Mae recognizes a liability for the guaranty it provides on
MBSs issued by third-party issuers. Generally, a guaranty liability is initially measured at fair
value. However, Ginnie Mae applies the practical expedient in ASC 460-10-30-2a (ASC Topic
460, Guarantees (ASC 460)), which allows the guaranty liability to be recognized at inception
based on the premium received or receivable by the guarantor, provided the guaranty is issued in
a standalone arm’s-length transaction with an unrelated party.


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Ginnie Mae provides the guaranty of principal and interest payments to MBS holders in the
event of issuer default and, in exchange, receives guaranty fees from the issuers. Ginnie Mae
receives guaranty fees from the issuers on the unpaid principal balance of the outstanding MBSs
in the non-defaulted issuer portfolio. These fees are paid on a monthly basis over the period that
the guaranty is provided. As Ginnie Mae does not receive guaranty fees at inception of the
guaranty, Ginnie Mae determines the initial measurement of the guaranty liability based on the
expected present value cash flows to be received for the guaranty fee.

Ginnie Mae initially recognizes a guaranty liability at fair value for its obligation to stand ready
to perform on these upon issuance of a guaranty. Subsequently, the guaranty liability is measured
by a systematic and rational amortization method.

Additionally, as the guaranty is issued in a standalone transaction for a premium, Ginnie Mae
records a guaranty asset (representing a receivable at net present value) for the guaranty fees as
the offsetting entry for the guaranty liability in accordance with ASC 460-10-55-23a. Thus,
there is no impact due to the guaranty liability and asset on the net financial position of Ginnie
Mae.

The guaranty asset is calculated based on the present value of the expected future cash flows
from the guaranty fees based on the unpaid principal balance of the outstanding MBSs in the
non-defaulted issuer portfolio; this is the same calculation used to value the guaranty liability
under the practical expedient method permitted in ASC 460-10-30-2a. In fiscal year 2011,
Ginnie Mae’s management updated the runoff variable in the model to use the runoff by year of
issuance versus the runoff for the total portfolio as it was determined that using the runoff by
year of issuance resulted in a more accurate valuation.

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 guaranty 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.

Mortgage-Backed Securities Program Income on the Statements of Revenues and Expenses
includes: $686.2 million of guaranty fees, $74.0 million of commitment fees, $52.5 million of
multiclass fees, $42.3 million of interest income from mortgage loans held for investment and
$1.5 million in other revenue. Mortgage-Backed Securities Program Expenses on the Statements
of Revenues and Expenses are: $21.2 million of multiclass expenses, $17.2 million of MBS


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                                                                                     2012-FO-0001


information systems and compliance expenses, $9.7 million of central paying agent expenses,
$7.6 million of information technology and miscellaneous expenses, $5.1 million of Multifamily
claims, and $12 million of other expenses.

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. Ginnie Mae classifies cash flows from operations related to its programs and overall
business operations (accrued interest, deferred revenue and liabilities, accounts payable and
reserves) as operating activities. Ginnie Mae classifies cash flows from securities that Ginnie
Mae intends to hold for investment (U.S. Government securities and mortgage loans HFI) and
capital expenditures and proceeds from sale of software as investing activities. Ginnie Mae
classifies cash flows from any non-federal transactions necessary to finance or fund the
operations of the agency as financing activities; of which there are none. Management
determines the cash flow classification at the date of purchase of a loan, whether it intends to sell
(operating activity) or hold the loan for the foreseeable future (investing activity). As of fiscal
year 2010, Ginnie Mae has determined that mortgage loans are held for investment. Ginnie Mae
has updated the fiscal year 2010 Statement of Cash Flow to break out the increase in mortgage
loans HFI as a part of the cash flows from investing activities while keeping the increase in
accrued interest on mortgage loans HFI in operating activities.

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 and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Ginnie Mae has made significant estimates in a
variety of areas including, but not limited to, valuation of certain financial instruments and other
assets and liabilities, and establishing the reserve for loss in MBS program guaranty. While
Ginnie Mae believes its estimates and assumptions are reasonable based on historical experience
and other factors, actual results could differ from those estimates.

Adoption of New Accounting Standard: Ginnie Mae adopted the new accounting standard,
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2010-6,
Improving Disclosures about Fair Value Measurements, which was effective for annual reporting
period beginning after December 15, 2009. The adoption of ASU 2010-6 did not affect the
financial statement results since it amends only the disclosure requirements for fair value
measurements.




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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, with a maturity of greater than one year, as of September 30, 2011, range from 0.63
percent to 2.0 percent. As of September 30, 2010, they ranged from 0.63 percent to 3.38 percent.
The amortized cost and fair values as of September 30, 2011, were as follows:


                                                                            Gross                       Gross
                                                    Amortized Cost        Unrealized                  Unrealized             Fair Value
   (Dollars in thousands)                                                   Gains                      Losses
   U.S. Treasury Overnight Certificates             $                 -   $                       -   $                -    $             -
   U.S. Treasury Notes                                      994,100                    44,400                          -        1,038,500
   U.S. Treasury Inflation-Indexed Securities              1,132,700                   56,300                          -        1,189,000
   Total                                            $      2,126,800      $        100,700            $                -    $ 2,227,500



The amortized cost and fair values as of September 30, 2010, were as follows:

                                                                        Gross                       Gross
                                                Amortized Cost        Unrealized                  Unrealized           Fair Value
(Dollars in thousands)                                                  Gains                      Losses
U.S. Treasury Overnight Certificates            $        239,500     $                      -    $                 -   $    239,500
U.S. Treasury Notes                                      991,900                  45,300                           -       1,037,200
U.S. Treasury Inflation-Indexed Securities              2,319,800         121,300                                  -       2,441,100
Total                                           $       3,551,200    $    166,600                $                 -   $ 3,717,800


The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2011, by contractual maturity date, were as follows:

                                                                                                                    Weighted
                                                            Amortized Cost                  Fair Value               Average
           (Dollars in thousands)                                                                                 Interest Rate
           Due within one year                              $                 -         $                 -                       -
           Due after one year through five years                    2,126,800                   2,227,500                  0.16%
           Due after five years through ten years                                  -                          -                   -
           Total                                            $       2,126,800           $ 2,227,500                         0.16%




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The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2010, by contractual maturity date, were as follows:

                                                                                          Weighted
                                                  Amortized Cost       Fair Value          Average
         (Dollars in thousands)                                                         Interest Rate
         Due within one year                      $     239,500    $      239,500              0.12%
         Due after one year through five years         3,311,700        3,478,300              0.07%
         Due after five years through ten years                -                    -               -
         Total                                    $    3,551,200   $ 3,717,800                 0.05%


Although sales of investments are rare, Ginnie Mae liquidated one of its U.S. Government
securities within three months of maturity. The par value of the security sold was $1.0 billion and
the realized gain on the sale was $24.0 million. These funds were used to repurchase mortgage
loans held for investment from defaulted issuer MBS pools. See note on mortgage loans HFI
regarding loan repurchases.


Note C: Mortgage Loans Held for Investment, Net

Ginnie Mae acquires mortgage loans from defaulted issuers’ portfolios to effectively manage the
portfolio. Ginnie Mae owns single family mortgage loans, which are secured by four or fewer
residential dwelling units, multifamily mortgage loans, which are secured by five or more
residential dwelling units and manufactured housing loans which fall under FHA’s Title I
program. Ginnie Mae classifies these loans as held for investment and records these net of
allowance at the net realizable value.

During fiscal year 2011, following the guidelines outlined in the Ginnie Mae MBS Guide, a large
number of loans were repurchased out of pools due to delinquencies of greater than 120 days
(see Note A). Ginnie Mae also acquires mortgages ineligible to remain in pools. In addition,
Ginnie Mae bought loans out of pools in order to complete modifications in accordance with
FHA guidelines. During fiscal year 2011, Ginnie Mae purchased $2.2 billion in mortgages loans
out of pools, primarily in the single family defaulted portfolio and categorized these mortgage
loans as HFI.




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Mortgage loans HFI, net as of September 30, 2011 and 2010 were as follows:

                                                                          September 30
(Dollars in thousands)                                             2011                  2010
Single Family Mortgages                                      $       6,350,300     $       4,496,300
Single Family Mortgages Allowance for Loss                                     -             (53,000)
Single Family Mortgages HFI, net                             $       6,350,300     $       4,443,300

                                                                          September 30
(Dollars in thousands)                                             2011                  2010
Multifamily Mortgages                                        $                 -   $                 -
Multifamily Mortgages Allowance for Loss                                       -                     -
Multifamily Mortgages HFI, net                               $                 -   $                 -


                                                                          September 30
(Dollars in thousands)                                             2011                  2010
Manufactured Housing Mortgages                               $                 -   $            3,000
Manufactured Housing Mortgages Allowance for Loss                              -                (3,000)
Manufactured Housing Mortgages HFI, net                      $                 -   $                 -


                                                                          September 30
(Dollars in thousands)                                             2011                  2010
Total Mortgage Loans HFI                                     $       6,350,300     $       4,499,300
Total Mortgage Loans HFI Allowance for Loss                                    -             (56,000)
Total Mortgage Loans HFI, net                                $       6,350,300     $       4,443,300


As discussed in Note A, Ginnie Mae assesses the collectability of mortgage loans HFI bought out
of the pools of defaulted portfolios. In fiscal year 2010, Ginnie Mae did not have the ability to
assess individual mortgage loans HFI and instead evaluated homogeneous loans for
collectability. As such, Ginnie Mae did not consider any loans to be credit impaired in fiscal
year 2010 and management did not record a loss on credit impairment on mortgage loans HFI.
However, after assessing the quality of the mortgage loans in the portfolio, management
determined the net recoverable value of loans was less than the gross value of mortgage loans
HFI. Thus, an allowance for loan loss of $56.0 million was recorded as of fiscal year 2010.

In fiscal year 2011, Ginnie Mae developed a module within the Policy and Financial Analysis
Model (PFAM) that allowed management to evaluate mortgage loans HFI on an individual basis.
As of fiscal year 2011, the concerns noted in fiscal year 2010 had been resolved and an
allowance for loss on mortgage loans HFI was not recorded. In fiscal year 2011, after evaluating
the mortgage loans HFI on a loan by loan basis, Ginnie Mae recorded a loss on credit impairment
on mortgage loans HFI of $178.7 million related to uninsured and VA-insured mortgage loans;
this was net of the $56.0 million previously recorded allowance for loss that was recaptured.


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The net balance of credit impaired loans was approximately, $457.6 million as of September 30,
2011.

As discussed in Note A, Ginnie Mae records accrued interest on mortgage loans HFI for interest
which Ginnie Mae determines that the ultimate collectability is probable. For non-VA insured
loans, Ginnie Mae recognizes interest income on an accrual basis at the debenture rate for the
number of months allowed under the insuring agency’s timeline. After the allowed timeline,
Ginnie Mae considers these loans to be non-performing as the collection of interest is not
reasonably assured, and places these loans on non-accrual status. Thus, it is important to note
that non-VA insured mortgage loans HFI that are greater than 90 days delinquent continue to
accrue interest during the timeline for which the insurer will reimburse Ginnie Mae. Ginnie Mae
has assessed the collectability of VA and uninsured loans; these loans are non-performing and
hence, are placed on nonaccrual status. In fiscal year 2011, Ginnie Mae recorded $42.3 million
in interest income on mortgage loans HFI.


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

Under its MBS guaranty, Ginnie Mae advanced $998.3 million in fiscal year 2011 and $2.3
billion in fiscal year 2010 against defaulted MBS pools to ensure timely pass-through payments.
Recoveries of advances, either from late payment remittances or through insurance or guaranty
proceeds, were $1.2 billion in fiscal year 2011 and $1.4 billion in fiscal year 2010. There were
$0.1 million advances written off in fiscal year 2011 and $0.4 million fiscal year 2010.


                                                                  September 30
           (Dollars in thousands)                          2011                  2010
           Advances against defaulted MBS pools        $      873,700    $        1,054,300
           Allowance for uncollectible advances              (220,500)             (212,200)
           Advances against defaulted MBS pools, net   $      653,200    $         842,100




Receivables for properties for which foreclosure is complete and that have been conveyed to the
insuring agency are reported in the advance category. As of the fiscal year ended September 30,
2011, Ginnie Mae’s foreclosure claims receivable balance was $714.5 million of the $873.7
million in gross advances. As of the fiscal year ended September 30, 2010, Ginnie Mae’s
foreclosure claims receivable balance was $816.8 million of the $1,054.3 million in gross
advances. Ginnie Mae has calculated an allowance for uncollectible advances on the gross
advances outstanding. Ginnie Mae believes the allowance for uncollectible advances is adequate
to cover any potential losses related to advances against defaulted issuer pools or potential losses
related to claims receivable.


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Note E: Properties Held for Sale, Net

Properties held for sale represent assets that have been completely foreclosed upon, repossessed
and Ginnie Mae has received the title of the underlying collateral. Properties held for sale, net
consists of the foreclosed and repossessed property received in full satisfaction of a loan, net of a
valuation allowance for declines in the fair value of foreclosed properties less estimated costs to
sell. During fiscal year 2011, following guidelines outlined in the Ginnie Mae MBS Guide,
$148.9 million of loans were repurchased out of pools, primarily for the defaulted single family
portfolio and categorized as properties held for sale. Balances and activity for these acquired
properties were as follows:


                                                                    September 30
      (Dollars in thousands)                                2011                   2010
      Balance of properties, beginning of year        $             49,200     $          16,600
         Additions                                                 148,900            118,700
         Dispositions and Losses                                   (190,700)              (86,100)
      Balance of properties, end of year              $               7,400    $          49,200
      Valuation Allowance                                            (4,000)               (6,900)
      Properties held for sale, net                   $               3,400    $          42,300



Note F: Mortgage Servicing Rights

Mortgage servicing rights represent Ginnie Mae’s right and obligation to service mortgage loans
in mortgage backed securities obtained from defaulted issuers. Ginnie Mae contracts with
multiple master sub-servicers to provide the servicing of its mortgage loans. The servicing
functions typically performed by Ginnie Mae’s master sub-servicer include: collecting and
remitting loan payments, responding to borrower inquiries, accounting for principal and interest,
holding custodial (impound) funds for payment of property taxes and insurance premiums,
counseling delinquent mortgagors, supervising foreclosures and property dispositions, and
generally administering the loans. Ginnie Mae receives a weighted average servicing fee of
approximately 38 basis points annually on the remaining outstanding principal balances of the
loans. The servicing fees are included in and collected from the monthly payments made by the
borrowers. Ginnie Mae pays a servicing fee to the master sub-servicers in consideration for
servicing the loans.




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The following table presents activity for residential first mortgage MSRs:

                                                                      September 30
               (Dollars in thousands)                                     2011
               Balance, October 1, 2010                           $          137,700
               Additions                                                             -
               Changes in Fair Value                                         (26,800)
               Balance, September 30, 2011                        $          110,900



                                                                      September 30
               (Dollars in thousands)                                     2010
               Balance, October 1, 2009                           $                  -
               Additions                                                     137,700
               Changes in Fair Value                                                 -
               Balance, September 30, 2010                        $          137,700


The net balance of Ginnie Mae’s MSRs of $110.9 million is included in a table in Note G: Fair
Value Measurements. Ginnie Mae uses a valuation model that calculates the present value of
estimated future net servicing income to determine the fair value of MSRs, which factors in
prepayment risk. This approach consists of projecting servicing cash flows under multiple
interest rate scenarios and discounting these cash flows using risk-adjusted discount rates.

The key economic assumptions used in valuations of MSRs include weighted-average lives and
prepayment rates of the MSRs. The discount rate is used to discount expected cash flows in order
to derive the fair value of the MSRs. The discount rate assumptions reflect the market’s required
rate of return adjusted for the relative risk of the asset type. Discount rates assumptions are
derived from a range of observed discount rate assumptions in the industry to which a risk
premium is added in order to account for current credit conditions. These variables can, and
generally do, change from period to period as market conditions and projected interest rates
change, and could have an adverse impact on the value of the MSRs and could result in a
corresponding reduction in servicing income.




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Key economic assumptions used in determining the fair value of the Ginnie Mae’s MSR are as
follows:

                                                                  September 30
(Dollars in thousands)                                         2011                 2010

Valuation at period end:
            Fair value (thousands)                         $     110,900        $     137,700
            Weighted- average life (years)                             3.97                2.77
Prepayment rates assumptions:
            Rate assumption                                       20.62%               29.90%
            Impact on fair value of a 10% adverse change              (6,245)          (9,000)
            Impact on fair value of a 20% adverse change          (11,875)            (16,900)
Discount rate assumptions:
            Rate assumption                                       12.50%               12.51%
            Impact on fair value of a 10% adverse change              (3,740)          (3,600)
            Impact on fair value of a 20% adverse change              (7,251)          (7,200)


These sensitivities are hypothetical and should be considered with caution. Changes in fair value
based on a 10% or 20% variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumptions to the change in fair value may not be linear. Also, the
effect of a variation in a particular assumption on the fair value is calculated without changing
any other assumption. In reality, changes in one factor may result in changes in another (e.g.,
increased market interest rates may result in lower prepayments and increased credit losses) that
could magnify or counteract the sensitivities. Further, these sensitivities show only the change in
the asset balances and do not show any expected change in the fair value of the instruments used
to manage the interest rates and prepayment risks associated with these assets. The primary risk
of Ginnie Mae’s MSRs is interest rate risk and the resulting impact on prepayments. A
significant decline in interest rates could lead to higher−than−expected prepayments that could
reduce the value of the MSRs.

Ginnie Mae collected $73.0 million and $93.7 million in mortgage servicing fees for the years
ended September 30, 2011 and 2010, respectively. This amount is recorded as a recovery in the
reserve for loss on MBS program guaranty.




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Note G: Fair Value Measurements

Fair value measurement guidance defines fair value, establishes a framework for measuring fair
value and expands disclosures around fair value measurements. This guidance applies whenever
other accounting pronouncements require or permit assets or liabilities to be measured at fair
value.

The guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the
valuation techniques used to measure fair value. The fair value hierarchy gives the highest
priority, Level 1, to measurements based on unadjusted quoted prices in active markets for
identical assets or liabilities. The next highest priority, Level 2, is given to measurements of
assets and liabilities based on limited observable inputs or observable inputs for similar assets
and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable
inputs.

Recurring Changes in Fair Value

The following table presents for each of these hierarchy levels, Ginnie Mae’s assets that are
measured at fair value on a recurring basis subsequent to initial recognition, including financial
instruments for which Ginnie Mae has elected the fair value option:


                                                            September 30, 2011
(Dollars in thousands)               Level 1        Level 2                Level 3      Total
Assets
         Mortgage Servicing Rights             -              -              110,900     110,900


Total Assets at Fair Value           $         -        $     -        $     110,900   $ 110,900




                                                            September 30, 2010

(Dollars in thousands)               Level 1        Level 2                Level 3      Total
Assets
         Mortgage Servicing Rights             -              -              137,700     137,700

Total Assets at Fair Value           $         -        $     -        $     137,700   $ 137,700



Total assets measured at fair value on a recurring basis and classified as Level 3 were $110.9
million or less than 1% of Total Assets, and $137.7 million or less than 1% of Total Assets, on
the Balance Sheets as of September 30, 2011 and 2010, respectively.




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The following table presents a reconciliation for all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the years ended
September 30, 2011 and 2010:


              (Dollars in thousands)                                                                 MSRs
              Assets:
                                                                                                $        137,700
              October 1, 2010

              Net realized losses included in Excess of Revenue over Expenses (1)                        (26,800)

              September 30, 2011                                                                $        110,900

              Unrealized gains(losses) still held                                                                -


              Assets:
                                                                                                $                -
              October 1, 2009

              Net realized losses included in Excess of Revenue over Expenses (1)                        137,700

              September 30, 2010                                                                $        137,700

              Unrealized gains(losses) still held                                                               -

(1) Net realized/ unrealized gains (losses) included in Excess of Revenue over Expenses represent the periodic fair value changes
of the MSR


The table below summarizes gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in excess of revenue over expenses for the
fiscal year ended 2011 for Level 3 assets:


                                                                                                      Total Gains
                                                                                                      and Losses
           (Dollars in thousands)                                                                        MSR
           Classification of gains and losses
           (realized/unrealized) included in Excess of
           Revenue over Expenses for the period:

                                                              Loss on MSR                                    26,800
           Total                                                                                     $       26,800




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The following is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis, as well as the basis for classifying these assets and
liabilities as Level 1, Level 2 or Level 3. The estimated fair value was calculated using certain
facts and assumptions, which vary depending on the specific financial instrument:

Mortgage Servicing Rights – Ginnie Mae elected fair value option for its MSRs and they are
recorded on the Balance Sheets at fair value on a recurring basis. Ginnie Mae measures the fair
value of MSRs based on the present value of expected cash flows of the underlying mortgage
assets using management’s best estimates of certain key assumptions, which include prepayment
speeds, forward yield curves, adequate compensation, and discount rates commensurate with the
risks involved. Changes in anticipated prepayment speeds, in particular, result in fluctuations in
the estimated fair values of the master servicing rights. If actual prepayment experience differs
from the anticipated rates used in the model, this may result in a material change in the fair
value. MSRs are classified within Level 3 of the valuation hierarchy because significant inputs
are unobservable.




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Nonrecurring Changes in Fair Value

The following tables display assets measured on the Balance Sheets at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example, when Ginnie Mae
evaluates for impairment), and the gains or losses recognized for these assets and liabilities for
the years ended September 30, 2011 and 2010, as a result of fair value measurements:


                                         September 30, 2011
             (Dollars in thousands)       Level 1        Level 2       Level 3    Total Losses
             Assets:

             Properties held for sale                              $      3,400            -


                                         September 30, 2010
             (Dollars in thousands)       Level 1        Level 2       Level 3    Total Losses
             Assets:

             Properties held for sale                              $     42,300            -




The following is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a nonrecurring basis, as well as the basis for classifying these assets
and liabilities as Level 1, Level 2 or Level 3. The estimated fair value was calculated using
certain facts and assumptions, which vary depending on the specific financial instrument. The
same valuation methodologies are used to estimate the fair value of financial instruments not
carried at fair value but disclosed as part of the fair value of financial instruments:

Properties Held for Sale, net – Properties held for sale, net represents foreclosed property
received in full satisfaction of a loan net of a valuation allowance. Properties held for sale is
initially recorded on the Balance Sheets at its fair value less its estimated cost to sell. Subsequent
to initial measurement, the properties held for sale are reported at the lower of the carrying
amount or fair value less estimated cost to sell. The fair value estimate is based on relevant
current and historical factors available at the time of valuation. Acquired property is classified
within Level 3 of the valuation hierarchy because significant inputs are unobservable.




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Fair Value of Financial Instruments

The following table displays the carrying value and estimated fair value of Ginnie Mae’s
financial instruments as of September 30, 2011and 2010. The fair value of financial instruments
disclosed in the table includes commitments to guaranty MBS, which are off-balance sheet
financial instruments as described in Note I. The fair values of these commitments are presented
as “unrecognized MBS commitment”.

                                                 September 30, 2011                   September 30, 2010

(Dollars in thousands)                      Carrying Value        Fair Value     Carrying Value       Fair Value

Financial Assets:
Funds with U.S. Treasury                    $   7,210,300     $     7,210,300    $   6,650,500    $     6,650,500
U.S. Government securities                  $   2,126,800     $     2,227,500    $   3,551,200    $     3,717,800
Mortgages held for investment, net          $   6,350,300     $     6,350,300    $   4,443,300    $     4,443,300
Advances against defaulted MBS Pools, net   $     653,200     $       653,200    $     842,100    $       842,100
Short sales claims receivable, net          $      32,300     $        32,300    $          -     $            -
Properties held for sale, net               $        3,400    $          3,400   $      42,300    $        42,300
Mortgage servicing rights                   $     110,900     $       110,900    $     137,700    $       137,700

Financial Liabilities:
Guaranty liability                          $   2,175,100     $     2,175,100    $   1,103,800    $     1,103,800

Unrecognized financial instruments:

Unrecognized MBS commitments                $     213,900     $       213,900    $     166,700    $       166,700



The following are valuation techniques for items not subject to the fair value hierarchy either
because they are not measured at fair value other than for the purpose of the above table or
because they are only measured at fair value at inception:

Unrecognized MBS Commitment – During the mortgage closing period and prior to granting its
guaranty, Ginnie Mae enters into commitments to guaranty 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 the outstanding balance of MBS commitments.
Outstanding MBS commitments as of September 30, 2011 and September 30, 2010 were $102.6
billion and $80.0 billion, respectively. If the Outstanding MBS commitments were utilized in
FY 2011, Ginnie Mae’s corresponding guaranty liability, its obligation to stand ready to perform
on these securities, would be approximately $213.9 million as of September 30, 2011 and $166.7
million, respectively; these are shown as unrecognized MBS commitments.




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Guaranty Liability – Ginnie Mae initially recognizes a guaranty liability at fair value for its
obligation to stand ready to perform on these upon issuance of a guaranty. The fair value of
guaranty liabilities is measured based on the unpaid principal balance of the guaranteed MBSs
outstanding in the non-defaulted issuer portfolio which results from new issuances of MBSs,
scheduled run-offs of MBSs, prepayments and defaults. Subsequently, the guaranty liability is
measured by a systematic and rational amortization method.

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. Therefore, the fair values presented in the
table above do not purport to present the net realizable, liquidation, or market value as a whole.
Furthermore, amounts Ginnie Mae ultimately realizes from the disposition of assets or settlement
of liabilities may vary significantly from the fair values presented.


Note H: Reserve for Loss on MBS Program Guaranty

Ginnie Mae establishes a reserve for loss through a provision charged to operations when, in
management’s judgment, losses associated with existing defaulted issuers or new issuer defaults
are probable and estimable. 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. Ginnie Mae’s Reserve for Loss on MBS Program Guaranty is made up of the three
components:
a.     Reserve for currently defaulted issuers’ pooled loans - loss contingency that arises from
       the guaranty obligation that Ginnie Mae has to the MBS holders subsequent to issuer
       default. Ginnie Mae is obligated to make timely principal and interest payments to
       investors subsequent to issuer default even if Ginnie Mae is unable to collect payments
       for the underlying loans from the homeowners or insuring agencies. Accordingly, GNMA
       records a reserve for the loss contingency that arises from the net present value of cash
       outflows being in excess of cash inflows as related to the defaulted issuer pooled loans.
b.     Reserve for currently defaulted issuers’ non-pooled loans – loss contingency related to
       any non-recoverable foreclosure costs that arise from the Mortgage Loans Held for
       Investment and Properties Held for Sale. Ginnie Mae records the net present value for
       the estimated non-recoverable foreclosure costs that arise as part of the guaranty
       fulfillment for the MBS program.
c.     Reserve for probable issuer defaults – loss contingency that arises from the guaranty
       obligation that Ginnie Mae has to the MBS holders as a result of a probable issuer
       default. The issuers have the obligation to make timely principal and interest payments to
       investors, however, in the event whereby the issuer defaults, Ginnie Mae steps in and


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       continues to make the contractual payments to investors. Ginnie Mae estimates the
       amount of reserve by determining the net present value of cash outflows and inflows for
       issuers that are determined to be probable defaults. For the issuers who are identified as
       probable defaults, Ginnie Mae records a contingent liability for the amount of these cash
       flows in the Reserve.

Management also considers uncertainties related to estimates in the reserve setting process.
When losses are confirmed and realized on the defaulted issuers’ portfolios, Ginnie Mae records
the amounts as charged-off (debit) to the reserve. Ginnie Mae recovers part of its losses through
servicing fees on the performing portion of the portfolios which are recorded as a recovery
(credit) to the reserve. As Ginnie Mae’s defaulted issuer portfolio changes, original estimates are
compared with actual results over time and the reserve’s adequacy is assessed and adjusted as
necessary. Management believes that its reserve is adequate to cover probable and estimable
losses on the MBS program guaranty.

Changes in the reserve for the years ended September 30, 2011, and 2010 were as follows:


                                                                         Manufactured
                                   Single Family       Multifamily                           Total
         (Dollars in thousands)                                            Housing
         Reserve for Loss
         September 30, 2009        $    445,300    $         58,700      $     55,900    $    559,900
            Provision for losses        721,100                1,500            7,400         730,000
            Charge-offs                (541,800)            (122,600)         (10,700)       (675,100)
            Recoveries                  261,500             123,700             4,900         390,100

         Reserve for Loss
         September 30, 2010        $    886,100    $         61,300      $     57,500    $   1,004,900
            Provision for losses       (287,400)             (61,300)         (58,300)       (407,000)
            Charge-offs                (296,200)                     -         (1,300)       (297,500)
            Recoveries                   91,700                                 3,700          95,400
         Reserve for Loss
         September 30, 2011        $    394,200    $                 -   $      1,600    $    395,800




Ginnie Mae incurs losses when FHA, USDA, VA, and PIH insurance and guaranty proceeds do
not cover losses that result from issuer defaults.

In fiscal year 2011, Ginnie Mae recaptured a portion of its previous Reserve for Losses on MBS
Program Guaranty. The recapture was the result of an assessment of the adequacy of the reserve.
In addition, as loans were bought of pools and recognized on the balance sheet, losses for credit
impairment and allowances were recorded to depict these assets at the amounts that were
collectible.


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During fiscal year 2011, Ginnie Mae defaulted one single family issuer with a portfolio of $0.5
million. Ginnie Mae has included this issuer in its calculation of the reserve for loss for existing
defaulted issuers. Ginnie Mae believes that the Reserve for Loss on MBS Program Guaranty is
adequate to cover probable and estimable guaranty related losses.

Note I: Financial Guarantees and Financial Instruments with Off-Balance Sheet Risk

Ginnie Mae guarantees the timely payment of principal and interest to MBS holders in the event
of issuer defaults and, in exchange, receives guaranty fees from the issuers. The guaranty fee is
calculated based on the unpaid principal balance of outstanding MBS in the non-defaulted issuer
portfolio and is Ginnie Mae’s compensation for taking on the risk. The MBS securities are
backed by pools of insured or guaranteed FHA, USDA, VA, or PIH mortgage loans. Ginnie Mae
recognizes a guaranty asset upon issuance of a guaranty and also recognizes a guaranty
obligation for its obligation to stand ready to perform on these guarantees. The guaranty liability
recognized on the Balance Sheets is $2,175.1 million and $1,103.8 million as of September 30,
2011 and 2010, respectively. In addition to the guaranty obligation, Ginnie Mae recognizes a
reserve for loss on MBS program guaranty for estimable and probable losses in relation to these
guarantees (See Note H).
For those guarantees recognized on the Balance Sheets, Ginnie Mae’s maximum potential
exposure under these guarantees is primarily comprised of the amount of MBS securities
outstanding. On September 30, 2011, the amount of securities outstanding, which is guaranteed
by Ginnie Mae, was $1.2 trillion, including $8.8 million of Ginnie Mae-guaranteed bonds.
However, Ginnie Mae’s potential loss is considerably less because of the financial strength of
our issuers. Additionally, in the event of default, the underlying mortgages serve as primary
collateral, and FHA, USDA, VA, and PIH insurance or guaranty indemnifies Ginnie Mae for
most losses. 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 of Ginnie Mae issuers. Other
than those issuers considered in the reserve for loss on the MBS program, Ginnie Mae does not
anticipate nonperformance by the counterparties.

Ginnie Mae is also subject to credit risk for its outstanding commitments to guarantee MBS
which are not reflected in its Balance Sheets in the normal course of operations. During the
mortgage closing period and prior to granting its guaranty, 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 guarantee commitments is much less than for the
commitment amount authorized, due in part to Ginnie Mae’s ability to limit commitment
authority granted to individual MBS issuers.


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Outstanding MBS and commitments were as follows:

                                                             September 30
              (Dollars in billions)                   2011                  2010
              Outstanding MBS                $           1,221.7      $        1,046.2
              Outstanding MBS Commitments    $               102.6    $            80.0



The Ginnie Mae MBS serves as the underlying collateral for multiclass products, such as Real
Estate Mortgage Investment Conduits (REMICs), Callable Trusts, Platinums, and Stripped
Mortgage-Backed Securities (“SMBS”), for which Ginnie Mae also guarantees the timely
payment of principal and interest. These structured transactions allow the private sector to
combine and restructure cash flows from Ginnie Mae MBS into securities that meet unique
investor requirements for yield, maturity, and call-option features.

In fiscal year 2011, Ginnie Mae issued a total of $153.0 billion in its multiclass securities
program. The estimated outstanding balance of multiclass securities included in the outstanding
MBS balance as of September 30, 2011, was $547.5 billion. These guaranteed securities do not
subject Ginnie Mae to additional credit risk beyond that assumed under the MBS program.
Note J: 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. It is important to note that many of Ginnie Mae’s largest
performing issuers are regulated institutions and as such are subjected to regulation and reviews
by other government entities in addition to monitoring by Ginnie Mae.




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Concentrations of credit risk are as noted below, as of September 30, 2011:

                                                                                                       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        25 $    1,069.2       17    $        49.3        1   $        0.3     8   $   27.8
Other performing issuers         145 $       51.9       39    $         8.8        2   $         -      0   $        -
Defaulted issuers                 21 $       14.9        1    $          -         3   $         -      0   $        -




As of September 30, 2011, Ginnie Mae’s single family, multifamily, and manufactured housing
defaulted portfolio had remaining principal balances of $14.9 billion, $60.8 thousand, and $1.3
million, respectively.

Note K: Commitments and Contingencies

As of September 30, 2011, and as of this report, Ginnie Mae’s Office of General Counsel has
identified one pending or threatened action or unasserted claim or assessment in which Ginnie
Mae’s exposure is $1,000,000, individually, or in the aggregate for similar matters. Additionally,
Ginnie Mae’s Office of General Counsel has determined that there are no pending or threatened
actions or unasserted claims or assessments in which Ginnie Mae’s potential loss exceeds
$3,000,000 in the aggregate for cases not listed individually or as part of similar cases that could
be material to the financial statements. In the opinion of Ginnie Mae’s management and Office
of General Counsel the likelihood of an unfavorable outcome is remote in the case. It is the
opinion of Ginnie Mae that the disposition or ultimate resolution of the case will not have a
material adverse effect on the financial position of Ginnie Mae. Ginnie Mae’s management
recognizes the uncertainties that could occur in regard to potential defaulted issuers and other
indirect guarantees.
Note L: 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 to use $12.8 million during fiscal year 2011 for payroll and payroll-
related costs only. During fiscal year 2011, Ginnie Mae incurred $11.0 million, net, for Salaries
and Expenses including payroll and payroll-related costs. This covered the payroll-related costs


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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.

Note M: 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, 2011,
the U.S. Government has an investment of $15.8 billion in Ginnie Mae. 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 N: Subsequent Events

Ginnie Mae management has evaluated subsequent events through November 4, 2011, the date
through which the financial statements were made available to be issued.
On October 11, 2011, Ginnie Mae defaulted a single family issuer with a remaining principal
balance of $490.5 million. The contingent liability associated with this default has been included
in the reserve for loss on MBS program guaranty recorded on the Balance Sheets as of
September 30, 2011.




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On November 1, 2011, Ginnie Mae defaulted, without extinguishment, a single family issuer
with a remaining principal balance of $411.4 million.
During October 2011, Ginnie Mae repurchased approximately $345.3 million of loans out of the
defaulted MBS pools. Ginnie Mae management has determined that the repurchase will not have
a material adverse effect on the financial position of Ginnie Mae.




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