oversight

Audit of the Government National Mortgage Association's Financial Statements for Fiscal Years 2014 and 2013

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-02-27.

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

         Government National Mortgage
          Association,Washington, DC
  Fiscal Years 2014 and 2013 Financial Statements Audit




Office of Audit, Financial Audits Division   Audit Report Number: 2015-FO-0003
Washington, DC                                                February 27, 2015
                                             February 27, 2015




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

                //signed//
From:          Thomas R. McEnanly, Director, Financial Audits Division, GAF
Subject:       Audit of the Government National Mortgage Association’s Financial Statements
               for Fiscal Years 2014 and 2013




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our audit of the Government National Mortgage Association’s
fiscal year 2014 financial statements.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
202-402-8216.
                      Audit Report Number: 2015-FO-0003
                      Date: February 27, 2015

                      Audit of the Government National Mortgage Association’s Financial
                      Statements for Fiscal Years 2014 and 2013




Highlights
What We Audited and Why
The Chief Financial Officers Act of 1990, as amended, requires the Office of Inspector General (OIG) or
an independent auditor, as determined by OIG, to audit annually the financial statements of the
Government National Mortgage Association (Ginnie Mae). We were engaged to audit the accompanying
financial statements and notes of Ginnie Mae as of September 30, 2014. This report presents the results
of our fiscal year 2014 audit of Ginnie Mae’s financial statements, including our report on Ginnie Mae’s
internal control and test of compliance with selected provisions of laws and regulations applicable to
Ginnie Mae. We contracted with the independent certified public accounting firm of CliftonLarsonAllen
LLP to audit Ginnie Mae’s fiscal year 2013 financial statements. CliftonLarsonAllen was responsible for
its audit reports and the conclusions expressed on those reports.


What We Found
We were unable to obtain sufficient appropriate evidence to express an opinion on the fairness of the $6.6
billion in nonpooled loan assets from Ginnie Mae’s defaulted issuers’ portfolio and $735 million in
liability for loss on the mortgage-backed securities program guaranty. In addition, Ginnie Mae
improperly accounted for Federal Housing Administration reimbursable costs as an expense instead of
capitalizing the costs as an asset. This error resulted in the misstatement of the asset and net income.
Overall, the issues cited in this report were tied to the problems associated with the acquisition and
management of a multi-billion dollar defaulted issuers’ portfolio, which is a non-core segment of Ginnie
Mae’s business. Due to the scope limitation in our audit work and the effects of material weaknesses in
internal control, we have not been able to obtain sufficient appropriate evidence to provide a basis for an
audit opinion on Ginnie Mae’s fiscal year 2014 financial statements. Accordingly, we do not express an
opinion on the fiscal year 2014 financial statements. We identified four material weaknesses and one
significant deficiency. Ginnie Mae’s inadequate monitoring, oversight and governance of its accounting
and reporting functions by the executive management team, loss of several key Office of Chief Financial
Officer personnel, and the inability to track accounting transactions and events at a loan level due to
system limitations were all contributing factors to these issues.


What We Recommend
Our audit recommendations are directed toward strengthening Ginnie Mae’s governance of its financial
operations. Our audit recommendations for this year are presented after each finding, and the status of
open recommendations from a prior year audit is in the Followup on Prior Audits section of this report.
Table of Contents
Independent Auditor’s Report..................................................................................................... 4

Material Weaknesses ............................................................................................. 10
          Finding 1: Material Asset Balances Related to Nonpooled Loans Were Not
          Auditable.......................................................................................................................... 10
          Finding 2: Ginnie Mae’s Internal Control Over Financial Reporting Had
          Weaknesses ...................................................................................................................... 14
          Finding 3: The Mortgage-Backed Security Loss Liability Account Balance Was
          Unreliable......................................................................................................................... 20
          Finding 4: Financial Management Governance Issues Contributed to Ginnie Mae’s
          Inability to Produce Auditable Financial Statements.................................................. 26

Significant Deficiency ............................................................................................ 32
          Finding 5: Ginnie Mae’s Financial Management Information System Security
          Controls Did Not Fully Comply With Federal Requirements and its Own Security
          Policies .............................................................................................................................. 32

Scope and Methodology ......................................................................................... 34

Followup on Prior Audits ...................................................................................... 35

Appendixes .............................................................................................................. 37
          A. Auditee Comments and OIG’s Evaluation ............................................................. 37
          B. Ginnie Mae Fiscal Years 2014 and 2013 Financial Statements and Notes .......... 41




                                                                        3
                                              U.S. DEPARTMENT OF
                                   HOUSING AND URBAN DEVELOPMENT
                                         OFFICE OF INSPECTOR GENERAL




                             Independent Auditor’s Report
President
Government National Mortgage Association

Report on the Financial Statements
We were engaged to audit the accompanying financial statements of the Government National
Mortgage Association (Ginnie Mae), which comprise the balance sheets as of September 30,
2014, and the related statements of revenues and expenses and changes in investment of the U.S.
Government, the cash flows for the year then ended, and the related notes to the financial
statements. The independent certified public accounting firm of CliftonLarsonAllen LLP, under
contract with the Office of Inspector General (OIG), audited Ginnie Mae’s fiscal year 2013
principal financial statements. CliftonLarsonAllen LLP was responsible for its audit report and
the conclusions expressed on that report.

Management’s Responsibility for the Financial Statements
Ginnie Mae’s management is responsible for the preparation and fair presentation of these
financial statements in accordance with U.S. generally accepted accounting principles. This
responsibility includes the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error.

Management is also responsible for (1) evaluating the effectiveness of internal control over
financial reporting; (2) providing a statement of assurance on the overall effectiveness of internal
control over financial reporting, including providing reasonable assurance that the broad
objectives of the Federal Managers Financial Integrity Act are met; and (3) ensuring compliance
with other applicable laws and regulations.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on conducting the
audit in accordance with U.S. generally accepted government auditing standards. However, we
were not able to obtain sufficient appropriate evidence to provide a basis for an audit opinion
because of the unresolved matters described in the Basis for Disclaimer of Opinion paragraph
below.




                                                 4
Basis for Disclaimer of Opinion
The following unresolved matters are a scope limitation in our audit work that contributed to our
disclaimer of opinion on the fiscal year 2014 financial statements. There were no other
satisfactory alternative audit procedures that we could adopt to obtain sufficient appropriate
evidence with respect to these unresolved matters. Readers are cautioned that amounts reported
in the financial statements and related notes may not be reliable because of these unresolved
matters.

      Nonpooled loan assets. Despite multiple attempts, we were unable to obtain sufficient
       appropriate evidence to express an opinion on the fairness of the $6.6 billion in
       nonpooled loan assets from Ginnie Mae’s defaulted issuers’ portfolio. The nonpooled
       loan assets arose from the acquisition of nonperforming loans (typically over 120 days
       old delinquent) from Ginnie Mae’s defaulted issuers’ portfolio. The $6.6 billion in
       nonpooled loan assets, which represents 26 percent of the total assets, was made up of a
       number of asset line items in the balance sheet. These are (1) mortgage loans held for
       investment ($5.3 billion), (2)advances against defaulted mortgage-backed security pools
       ($193 million), (3) short sale claims receivable ($50 million), (4) foreclosed property
       ($616 million), (5) accrued interest on mortgage loans held for investment ($414 million),
       and (6) properties held for sale ($17 million). Ginnie Mae was unable to provide relevant
       documents and data that we needed to complete our audit testing on these asset balances
       because of functional limitations of financial management systems to perform loan level
       accounting as well as poor accounting and record keeping practices.

      Receivable for reimbursable expenses from FHA and liability for loss on mortgage-
       backed securities program guaranty. Ginnie Mae improperly accounted for Federal
       Housing Administration (FHA) reimbursable costs as an expense. These costs were
       charged to the mortgage-backed security loss liability account instead of being
       capitalized as an asset. This error resulted in the misstatement of the asset and net
       income and may require restatement of previous years’ financial statements resulting
       from multiple years of incorrect accounting. We were not able to determine with
       sufficient accuracy a proposed adjustment to correct the error due to insufficient available
       data. Using Ginnie Mae’s limited data, our estimate of the error is between $144 million
       and $248 million. Ginnie Mae also had an insufficient basis for supporting the fairness of
       the $735 million in the mortgage-backed security loss liability account. The loss liability
       represents Ginnie Mae’s estimated non-recoverable servicing and foreclosure costs to be
       incurred from its defaulted issuers’ portfolio of nonpooled loans. This loss liability
       account was based on estimates and consisted of multiple assumptions. The foreclosure
       cost and loan redefault rate assumptions were two areas of audit concern.

Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion
paragraph, we have not been able to obtain sufficient appropriate evidence to provide a basis for
an audit opinion. Accordingly, we do not express an opinion on these financial statements.



                                                5
Other Matters
Prior Period Financial Statements Audited by a Predecessor Auditor
Ginnie Mae’s financial statements as of September 30, 2013, were audited by
CliftonLarsonAllen LLP (CLA), which expressed in a report on November 25, 2013, an
unqualified opinion on those statements. In fiscal year 2014, we communicated to CLA material
misstatements in the financial statements that we identified during our audit that affected
previously issued financial statements. CLA reviewed the issues raised and concurred with our
conclusion. Accordingly, CLA notified OIG that CLA is withdrawing the opinion rendered in
connection with its audit of Ginnie Mae’s 2013 financial statements because the opinion can no
longer be relied upon.


Other Information
Ginnie Mae’s Annual Report to Congress contains a wide range of information that is not
directly related to the financial statements. This information is presented for purposes of
additional analysis and is not a required part of the financial statements. Therefore, it has not
been subjected to the auditing procedures applied in the audit of the financial statements. As a
result, we do not express an opinion on the information or provide assurance on it.

Report on Internal Control Over Financial Reporting and on Compliance Based on an
Audit of Financial Statements Performed in Accordance With Government Auditing
Standards

Report on Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered Ginnie Mae’s
internal control over financial reporting to determine the appropriate audit procedures for
expressing our opinion on the financial statements. However, we did not plan our audit for the
purpose of expressing an opinion on the effectiveness of Ginnie Mae’s internal control. As a
result, we do not express an opinion on the effectiveness of Ginnie Mae’s internal control.

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 Ginnie Mae’s financial statements will not be
prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency or
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.

Our consideration of internal control was for the limited purpose described in the first paragraph
of this section and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies. Therefore, material weaknesses or significant
deficiencies may exist that were not identified. We identified five deficiencies in internal control
that are described below. We consider the first four issues to be material weaknesses and the
remaining issue to be a significant deficiency.

                                                 6
Material Weaknesses in Financial Reporting

Material Asset Balances Related to Nonpooled Loans Were Not Auditable
Due to deficiencies in Ginnie Mae’s control environment, accounting practices used, and
financial systems deployed, we encountered problems related to the auditability of the
accounting data and records used to support the completeness, accuracy, and reliability of the
$6.6 billion in nonpooled loan assets reported in Ginnie Mae’s financial statements as of
September 30, 2014. These assets include (1) mortgage loans held for investment ($5.3 billion),
(2) advances against defaulted mortgage-backed security pools ($193 million), (3) short sale
claims receivable ($50 million), (4) foreclosed property ($616 million), (5) accrued interest on
mortgage loans held for investment ($414 million), and (6) properties held for sale ($17 million).

Factors contributing to these issues include (1) the inability of the master-subservicers’ servicing
systems to handle loan level transaction accounting at a granular level, and (2) poor servicing
performance of its previous master-subservicers. As a result of these issues, we were unable to
perform all of the audit procedures necessary to obtain sufficient appropriate evidence to express
an opinion on the fairness of Ginnie Mae’s $6.6 billion in assets as of September 30, 2014.

Ginnie Mae’s Internal Control Over Financial Reporting Had Weaknesses
Ginnie Mae had ineffective internal control over its financial reporting processes. Specifically,
these material weaknesses in internal controls were issues related to the (1) improper accounting
for FHA reimbursable costs incurred and accrued interests earned on Ginnie Mae’s $6.6 billion
portfolio of nonpooled loans, (2) errors in the preparation of financial reports, (3) nonreporting of
escrow deposits held in trust by Ginnie Mae for the borrowers in its financial statements, and (4)
improper classification and presentation of financial information in Ginnie Mae’s balance sheet
and statement of cash flows. Ginnie Mae’s inadequate monitoring, governance and oversight of
its accounting and reporting functions by executive management staff, loss of several key Office
of Chief Financial Officer personnel (OCFO) and the inability to track accounting transactions
and events at a loan level because of system limitations contributed to these issues. These
deficiencies resulted in material misstatements in Ginnie Mae’s financial statements.

The Mortgage-Backed Securities Loss Liability Account in Ginnie Mae’s Balance Sheet Was
Unreliable
We questioned the reliability of the $735 million in liability for loss on the mortgage-backed
securities (MBS) program guaranty account reported in Ginnie Mae’s balance sheet as of
September 30, 2014. Specifically, our reliability concerns were related to the (1) improper
accounting treatment of selected accounting transactions related to nonpooled loans in the MBS
loss liability account and (2) insufficient evidence to support the reasonableness of key
management assumptions used in the model. Factors that contributed to the issue included
adoption of an inappropriate loan accounting policy and a lack of in-depth analysis to validate
the reasonableness of the management assumptions. As a result, we believe the loss liability
account is unreliable.


                                                  7
Financial Management Governance Issues Contributed to Ginnie Mae’s Inability to Produce
Auditable Financial Statements
Ginnie Mae failed to establish an appropriate financial management governance structure to
ensure that Ginnie Mae is capable of producing accurate, timely information, and accounting
records to plan, monitor and report its business operations. This failure in the governance was
the underlying cause of the problems cited in this report. We noted a number of problems in the
oversight, management and operations of Ginnie Mae’s OCFO. Specifically, Ginnie Mae (1) left
a number of critical financial management positions unfilled which weakened its organizational
structure and created a gap in Ginnie Mae’s internal control system for monitoring over a $6
billion portfolio of nonperforming loans, (2) failed to adequately identify, analyze and respond to
changes in the control environment and risks associated with the acquisition of a multi-billion
servicing portfolio from one of Ginnie Mae’s largest defaulted issuers, and (3) failed to
adequately establish accounting policies, procedures, and accounting systems to manage and
control the loan accounting and processing of the activities related to its defaulted issuers’
portfolio. This occurred because of Ginnie Mae executive management’s failure to respond
appropriately to changes in its business environment and risks and the void in HUD’s senior
leadership created by an extended absence of a permanent HUD Chief Financial Officer. The
combination of these failures in the governance resulted in material misstatements and
contributed to Ginnie Mae’s inability to produce auditable financial statements for use by its
external and internal users.

Significant Deficiency in Financial Reporting

Ginnie Mae’s Financial Management System Information Security Controls Did Not Fully
Comply With Federal Requirements and Its Own Security Policies
Ginnie Mae did not ensure that information security controls over the Ginnie Mae Financial
Accounting System fully complied with Federal requirements and its own security policies in its
financial management system. The Ginnie Mae Financial Accounting System is a financial
management system that tracks, records, and reports on the agency’s accounting information.
This process involves information used in the aggregate set of accounting practices and
procedures to allow for accurate and effective handling of government revenues, funding, and
expenditures. The Ginnie Mae Financial Accounting System supports the financial functions
required to track financial events and provides information significant to the financial
management of the agency. It also maintains financial information that is used for meeting
Office of Management and Budget and U.S. Government Accountability Office reporting
requirements.

Report on Compliance
We performed tests of Ginnie Mae’s compliance with certain applicable provisions of laws and
regulations that could have a direct and material effect on the determination of financial
statement amounts except for the Federal Financial Management Improvement Act of 1996,
which was tested agencywide at the HUD consolidated audit level. However, providing an
opinion on compliance with those provisions was not an objective of our audit. Therefore, we do
not express such an opinion. The results of our tests disclosed no instances of noncompliance or

                                                 8
other matters that are required to be reported in accordance with government auditing standards,
issued by the U.S. Comptroller General.



Additional information about the material weaknesses and significant deficiency are presented in
more detail in the body of this report.

Management’s Response to Findings and Our Evaluation
Management’s response to the findings identified in our report and the evaluation of
management’s comments are presented in appendix A. We did not audit management’s
response, and, accordingly, we express no opinion on it.



This report is intended for the information and use of the management of Ginnie Mae, the U.S.
Department of Housing and Urban Development (HUD), the Office of Management and Budget,
the U.S. 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. However, this report
is a matter of public record, and its distribution is not limited. In addition to the internal control
and compliance issues included in this report, other matters involving internal control over
financial reporting and Ginnie Mae’s operation that are not included in this report will be
reported to Ginnie Mae management in a separate management letter.


                        /i
                lv
Randy W/fvlcGinnis
Assistant Inspector General for Audit
February 24, 2015




                                                  9
Material Weaknesses

Finding 1: Material Asset Balances Related to Nonpooled Loans
Were Not Auditable
We encountered problems related to the auditability of the accounting data and records used to
support the completeness, accuracy, and reliability of the $6.6 billion in nonpooled loan assets
reported in Ginnie Mae’s financial statements as of September 30, 2014. These assets include
(1) mortgage loans held for investment ($5.3 billion), (2) advances against defaulted mortgage-
backed security pools ($193 million), (3) short sale claims receivable ($50 million), (4)
foreclosed property ($616 million), (5) accrued interest on mortgage loans held for investment
($414 million), and (6) properties held for sale ($17 million). Contributing to these issues were
(1) the inability of the master-subservicers’ servicing systems to handle loan level transaction
accounting at a granular level, and (2) the poor servicing performance of Ginnie Mae’s previous
master-subservicers. In light of these issues, we were unable to perform all of the audit
procedures that we determined necessary for obtaining sufficient appropriate evidence. As a
result, our audit scope was insufficient to express an opinion on Ginnie Mae’s $6.6 billion in
assets as of September 30, 2014.
Issues Related to the Auditability of Ginnie Mae’s and Previous Master-Subservicers’
Accounting Data and Records to Adequately Support Multiple Significant Financial
Statement Line Items
We were unable to obtain sufficient appropriate evidence to express an opinion on the fairness of
$6.6 billion in balance sheet asset amounts reported in Ginnie Mae’s financial statements as of
September 30, 2014. This condition was due to a lack of accounting data and accounting records
at a loan level to validate the amounts reported for existence, completeness, accuracy, and
reliability. The $6.6 billion represents 26 percent of Ginnie Mae’s total assets as of September
30, 2014, and was over our materiality thresholds.

        Nonpooled loan asset balances were assessed as high risk during our fiscal year 2014
        audit. Historically, Ginnie Mae relied on the accounting reports supplied by the master-
        subservicers for reporting the balances in the financial statements. However, in fiscal
        year 2014, we could not rely on the accuracy and reliability of the accounting reports for
        auditing purposes without performing additional detailed loan level analysis due to
        ineffective controls over financial reporting.

        In fiscal year 2013, there was a significant deficiency reported by the previous auditor,
        CliftonLarsonAllen LLP, concerning the unreliability of monthly accounting reports
        supplied by the master-subservicers to Ginnie Mae.1 Additionally, our preliminary risk
        assessment identified Ginnie Mae’s ineffective controls and oversight over master-
1
 Government National Mortgage Association Fiscal Years 2013 and 2012 Financial Statements Audit, 2014-FO-
0001, dated December 6, 2013
                                                     10
subservicers’ financial reporting functions. These weaknesses included (1) inadequate
financial monitoring and oversight of the contractors’ work due to the loss of several key
Office of Chief Financial Officer personnel since the beginning of fiscal year 2014, (2)
serious concerns expressed by Ginnie Mae’s senior management about the ability of
previous master-subservicers to perform under their contract with Ginnie Mae, and (3)
the absence of other controls, noted during our preliminary risk assessment that were in
place and relied upon in prior years, such as the contract assessment reviews and special
master-subservicer reviews.

Multiple attempts to audit the $6.6 billion in nonpooled loan asset balances failed. Of
the $6.6 billion, $607 million (9 percent) was related to advances against defaulted
mortgage-backed security pools and accrued interest on mortgage loans held for
investment accounts. Ginnie Mae could not provide the requested loan level details and
other supporting documents to support the $607 million asset balance for these two
accounts. Our attempts to audit the remaining four accounts totaling $6 billion are
provided in detail below.

              Interim testing. In response to a high risk assessment for these accounts,
               we expanded our audit procedures with additional loan level detail testing
               to reduce our overall audit risks to a low level. In July 2014, we selected
               197 loan samples (28 initial loan samples and 169 remaining loan
               samples) of 40,518 loans in the population as of March 31, 2014. These
               loans totaled $5.4 billion. To test the 197 loan samples, we requested
               pertinent documents supporting selected loan level transactions that make
               up the mortgage held for investments, foreclosed-upon properties, and
               short sale claims receivable accounts as part of our planned interim
               testing. By late September 2014, we continued to be unable to perform
               our interim testing because Ginnie Mae or its previous master-subservicers
               could not provide all of the documentation to substantiate the accounting
               transactions recorded and processed in their accounting systems, including
               the 28 initial loan samples. Ginnie Mae attributed its inability to produce
               the requested documents to its master-subservicers’ protracted and
               disconnected accounting systems and processes. Ginnie Mae also stated
               that the procurement delay in replacing the previous master-subservicer
               was a contributing factor.

              Yearend testing. Since we were unable to accomplish our interim testing,
               in October 2014, we also attempted to test a full year’s worth of
               transactions as part of the yearend audit testing. Similar to the audit
               process that we used during interim testing, we requested loan level
               transaction datasets from Ginnie Mae. Since our yearend testing occurred
               after the master-subservicer transition, the datasets we received were
               supplied by the new two master-subservicers. However, we could not
               select audit samples using the data from the new master-subservicers
               because we had several data integrity and reliability concerns. For

                                         11
                       example, the loan level data provided to us did not account for 100 percent
                       of the loans that were within the scope of our audit. This condition was
                       partly because an undetermined amount of loan level data from two
                       previous master-subservicers did not move over to the new master-
                       subservicers. Additionally, using the new master-subservicer data, the
                       control totals for each of the assets could not be reconciled when
                       compared to the third quarter financial statement balances. Further, there
                       were several other data integrity issues, such as potential duplicate entries
                       and the sum of the beginning balance and detailed entries not agreeing
                       with the ending balances. As a result, our second attempt to audit the
                       nonpooled loan asset balances failed.

                      Postyearend testing. In light of the audit challenges encountered during
                       the year, as noted above, in mid-November 2014, the Office of
                       Management and Budget granted Ginnie Mae an extension through March
                       1, 2015, to resolve the audit matters with OIG. We worked with Ginnie
                       Mae to obtain an acceptable amount of detailed loan level data needed for
                       our substantative testing of the asset balances related to nonpooled loans.
                       In late December 2014, we received the datasets from Ginnie Mae. In
                       mid-January 2015, we completed our data analysis and data integrity
                       checks and advised Ginnie Mae of the results. However, there continued
                       to be deficiencies in the completeness and accuracy of the data provided.
                       For example, we could not tie the quarterly asset balances according to
                       Ginnie Mae data to the quarterly asset balances in Ginnie Mae’s financial
                       statements. Therefore, for the third time, we were unable to make sample
                       selection and move forward with the audit testing. On February 5, 2015,
                       Ginnie Mae completed a second reconciliation of its third nonpooled loan
                       portfolio submission. We determined that there was not enough time
                       remaining to complete the necessary audit work in this area because of the
                       March 1st extension deadline. Efforts to determine the fairness of the
                       nonpooled loan portfolio valuation are planned for the fiscal year 2015
                       audit.

Conclusion
Ginnie Mae and its master-subservicers failed to adequately maintain sufficient records and data
at a loan level to support the nonpooled loan asset balances reported in Ginnie Mae’s financial
statements. This condition adversely impacted our ability to complete our audit work in fiscal
year 2014 and resulted in a disclaimer of opinion, which is expressed in this year’s audit report.
We will continue to work with Ginnie Mae to resolve these matters during our fiscal year 2015
audit.




                                                 12
Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer


      1A.    Establish and implement policies and procedures to demonstrate how Ginnie Mae
             provides appropriate accounting and financial reporting oversight of the master-
             subservicers to ensure that the master-subservicers are capable of producing
             accurate and reliable accounting records and reports.

      1B.    Establish and implement policies and procedures to properly account for and track
             at a loan level all of the accounting transactions and events in the life cycle of the
             loans. This measure is intended to compensate for the servicing system’s inability
             to perform loan level transaction accounting.




                                               13
Material Weakness

Finding 2: Ginnie Mae’s Internal Control Over Financial Reporting
Had Weaknesses
Ginnie Mae had ineffective internal control over its financial reporting processes. These material
weaknesses in internal controls were issues related to the (1) improper accounting for FHA
reimbursable costs incurred and accrued interests earned on Ginnie Mae’s $6.6 billion portfolio
of nonpooled loans, (2) errors in the preparation of financial reports, (3) nonreporting of escrow
deposits held in trust by Ginnie Mae for the borrowers in its financial statements, and (4)
improper classification and presentation of financial information in Ginnie Mae’s balance sheet
and statement of cash flows. Factors contributing to these issues were Ginnie Mae’s inadequate
monitoring and oversight of its accounting and reporting functions by the executive management
team, loss of several key Office of Chief Financial Officer personnel, and the inability to track
accounting transactions and events at a loan level. These deficiencies resulted in material
misstatements in Ginnie Mae’s financial statements.

Ginnie Mae Took on the Role and Responsibilities of a Servicer in Fiscal Year 2009
Ginnie Mae did not appropriately respond to business changes by analyzing the changes and how
they could impact its internal control system. Given the size of Ginnie Mae’s workforce, it relied
heavily on contractors to perform the day-to-day processing and accounting of activities related
to its defaulted issuers’ portfolio. Before fiscal year 2009, Ginnie Mae did not have a loan level
accounting system and relied on the contractors’ servicing system to track and account for all of
the loan transactions in its portfolio. Ginnie Mae’s internal processes may have been appropriate
at that time, given that the volume in Ginnie Mae’s defaulted issuers’ portfolio was low and
fairly manageable. In fiscal year 2009, however, Ginnie Mae defaulted one of its largest issuers
and acquired 178,000 loans worth more than $25 billion in servicing portfolio. The surge in the
volume of loans that Ginnie Mae was obligated to service, including Ginnie Mae’s acquisition of
more than 40,000 defaulted mortgages, created significant stress in its servicing operations as
well as complexity in accounting for these loans. As Ginnie Mae intended to keep the servicing
of these loans only on a short-term basis, it decided not to make the appropriate changes in its
internal processes and information systems to accommodate the significant changes. This was
not a prudent decision as Ginnie Mae’s inappropriate response to the changes contributed to the
financial reporting problems facing Ginnie Mae in fiscal year 2014.




                                                14
FHA’s Reimbursable Costs Incurred and Accrued Interest Earned on Nonpooled Loans
Were Not Properly Accounted for in Ginnie Mae’s Books in Accordance With Generally
Accepted Accounting Principles
Ginnie Mae failed to properly capitalize FHA’s reimbursable costs2 incurred on nonpooled loans
as receivables. Instead, it used a cash basis of accounting and accounted for these FHA
reimbursable costs as expenses, and posted these expenses as chargeoffs to the mortgage-backed
securities loss liability account, which was a departure from generally accepted accounting
principles. Additionally for short sale loans, we noted that accrued interest earned was
accounted for only through the date of purchase from the mortgage-backed securities pools
rather than accruing interest for all of the periods allowed by the insuring agency, which is from
the date of default to the date of filing.

Ginnie Mae steps into the role of a servicer when an issuer defaults. As a servicer, Ginnie Mae
is required to purchase deliquent loans over 120 days old from the mortgage-backed securities
pools. Ginnie Mae began purchasing significant numbers of seriously delinquent loans from
mortgage-backed securities pools when one of its largest issuers defaulted in August 2009 and
had continued to purchase loans. Ginnie Mae accounted for these delinquent loans in its balance
sheet as nonpooled loan assets. As of September 30, 2014, Ginnie Mae had more than 43,000
nonpooled loan assets with an unpaid principal balance totaling $5.9 billion. Ginnie Mae’s
nonpooled loans consisted of loans insured by FHA, the U.S. Department of Veterans Affairs,
and the U.S. Department of Agriculture – Rural Development, which carry a 100 percent
guarantee on FHA and a partial guarantee on Veterans Affairs and Rural Development loans. A
majority of these loans were insured by FHA.

Since the FHA loans carry a 100 percent guarantee, Ginnie Mae can expect full recovery from
FHA of the unpaid principal balance, accrued interest covering the months allowed by the
insuring agency’s timeline from the date of default through the date of filing, and other
reimbursable costs. Accordingly, Ginnie Mae should capitalize the reimbursable costs and
accrue the allowable interest as receivables in its books because these amounts represent future
claims for cash. However, as noted above, Ginnie Mae accounted for reimbursable costs as
chargeoffs to the mortgage-backed securities loss liability account and the accrued interest was
only partially accounted for by the servicers in its accounting records.

According to Ginnie Mae, its annual FHA reimbursable costs ranged from $144 million to $248
million. OIG believes that these numbers could be in the low- to mid-range of the spectrum
since some of the nonpooled loans were a year or more old and there were prior years’
reimbursable costs that should have been capitalized but were not. Given the significance of
these errors, we concluded that the balances reported by Ginnie Mae as nonpooled loan assets
and mortgage-backed securities loss liability were materially misstated. Additionally, Ginnie

2
  A majority of the Ginnie Mae’s nonpooled loans are insured by FHA. FHA insurance allows Ginnie Mae to
receive reimbursement for certain costs it incurs, such as taxes and insurance, property preservation, foreclosure, and
other allowable costs. Because these costs are recovered by Ginnie Mae upon receipt of the FHA insurance claims
proceeds, they should be capitalized and recorded as receivables in Ginnie Mae’s books.
                                                           15
Mae’s inability to track reimbursable costs and other accounting activities at a loan level caused
Ginnie Mae to not effectively monitor its portfolio and accurately determine the amount of gain
or loss incurred on nonpooled loans.

Financial Reporting Errors Were Identified Related to Mortgage-Backed Securities Loss
Liability and Probable Legal Claims Liability Accounts
During our review of Ginnie Mae’s financial statements for the quarter ending September 30,
2014, the following errors were identified:

        The amounts reported by Ginnie Mae for the mortgage-backed securities loss liability
         line item in the balance sheet and the supporting documents did not agree. The
         mortgage-backed securities loss liability reported in the balance sheet was $411 million,
         while the supporting documents showed $735 million, a net understatement of $324
         million. We brought this matter to Ginnie Mae’s attention during the audit. It was
         determined that the error occurred because of an oversight in Ginnie Mae’s review and
         consolidation of the estimated loss amounts from several reports.

        Ginnie Mae did not properly evaluate the legal cases presented to Ginnie Mae in the
         legal representation letter. Our review of the letter identified one case in which Ginnie
         Mae’s legal counsel determined that an unfavorable legal claim amounting to $14.9
         million was likely to occur. This determination met the definition of probable for legal
         contingencies under Accounting Standards Codification number 450. As a result, Ginnie
         Mae should accrue it as a liability in its financial statements. However, it failed to
         properly accrue the $14.9 million in probable legal claims as required.

The errors in financial reporting resulted in a misstatement of Ginnie Mae’s liability balances by
$339 million. Ginnie Mae agreed to correct these errors.

Escrow Deposits Held in Trust by Ginnie Mae for the Borrowers of the Loans in Its
Defaulted Issuers’ Portfolio Were Not Reported in the Financial Statements as Required by
Generally Accepted Accounting Principles
Ginnie Mae failed to report on its financial statements and notes the mortgage escrow funds held
in trust by its master-subservicers that were designated to pay taxes and insurance for its
defaulted issuers. As a servicer, 3 part of Ginnie Mae’s responsibility is to ensure proper
administration and management of the escrow accounts. Although maintaining an escrow
account was not a requirement for obtaining a loan under the Real Estate Settlements Procedures
Act,4 FHA requires lenders to establish escrow accounts and requires that all FHA borrowers
make monthly payments to ensure that funds will be available to pay taxes and insurance
premiums when they come due. Therefore, it is imperative for Ginnie Mae, as FHA’s


3
  Although Ginnie Mae uses contractors to subservice the loans, the responsibility for servicing the loans remains
with Ginnie Mae.
4
  The Real Estate Settlement Procedures Act (12 U.S.C. (United States Code) chapter 27, section 2605) is the statute
that regulates the administration of an escrow account when an escrow account is established by a lender in
connection with a federally related mortgage loan.
                                                         16
counterparty, to comply with FHA’s accounting, reporting, and other compliance requirements.5
Additionally, reporting escrow deposits in the entity’s financial statements is an acceptable
practice under generally accepted accounting principles. However, Ginnie Mae had not reported
the escrow balances in its financial statements in previous years. The balance of the escrow
funds held by Ginnie Mae through its master-subservicers for the pooled loans in its defaulted
issuer’s portfolio was $115 million and $83 million as of September 30, 2013, and September 30,
2014, respectively.6

In accordance with generally accepted accounting principles,7 the balance of the escrow funds
should be reported as an asset and a liability in the balance sheet and statement of cash flows.
According to section 6.20 of the American Institute of Certified Public Accountants’ Audit and
Accounting Guide, Depository and Lending Institutions: Banks and Savings Institutions, Credit
Unions, Finance Companies, and Mortgage Companies, the net increase and net decrease in
mortgage escrow deposits are reported as financing activities in the entity’s statement of cash
flows. Using this guide, the mortgage escrow deposits are accounted for in the cash account8 of
the entity’s balance sheet since the statement of cash flows provides information regarding how
the entity obtains and spends cash.
Ginnie Mae acknowledged that the escrow funds were not reported in its financial statements in
previous years. Additionally, although disclosing the escrow information as a note disclosure
was acceptable to Ginnie Mae, it is also Ginnie Mae management’s view that the escrow deposits
should not be reported on the face of the financial statements. Ginnie Mae and OIG disagree on
this matter.
Given the materiality of the escrow fund balances and how they impacted the reliability of
previously issued financial statements, Ginnie Mae should notify users to not rely on the
financial information until it has been restated. Ginnie Mae should comply with the restatement
procedures as called for in Office of Management and Budget Circular A-136, Financial
Reporting Requirements, section II.4.5.4.
Classification and Presentation of Financial Information Were Not Properly Presented in
Ginnie Mae’s Balance Sheet and Cash Flows Statement in Accordance With Generally
Accepted Accounting Principles
The asset and liability accounts were not properly classified and presented in Ginnie Mae’s
balance sheet as of June 30, 2014. In accordance with generally accepted accounting principles,
the assets and liabilities should be classified as current or noncurrent. Additionally, assets should

5
  Chapter 2 of HUD Handbook 4330.1, REV 5, Administration of Insured Home Mortgage, and section 2-21(B) of
HUD Handbook 4060.1, Mortgagee Approval Handbook, govern the administration and management of escrow
accounts on FHA-insured loans.
6
  Ginnie Mae provided the escrow balances reported here. Nothing has come to our attention to question the escrow
balances that Ginnie Mae reported to OIG based on our limited review.
7
  Financial Accounting Standards Board Accounting Standards Codification, section 105-10-05, and sections 6.18
and 6.20 of the American Institute of Certified Public Accountants Audit and Accounting Guide, Depository and
Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies and Mortgage Companies.
8
  Since the mortgage escrow funds are not Ginnie Mae assets, they should be segregated from the entity’s cash
account, but the activities for these fiduciary accounts need to be tracked and accounted for just like other cash
accounts.
                                                        17
be presented in the order of liquidity, while liabilities should be presented in the order of
maturity. Further, during the review of Ginnie Mae’s fiscal year 2013 financial statements, we
noted that the accounts were not presented and classified consistent with generally accepted
accounting principles. Ginnie Mae had no explanation for why the assets and liabilities were not
classified and presented in accordance with generally accepted accounting principles.
Ginnie Mae’s statement of cash flows was not presented in accordance with generally accepted
accounting principles. Specifically, Ginnie Mae did not present the investing cash inflows
separately from investing cash outflows. Additionally, there was a number of investing activity
cash flows related to nonpooled loan assets that were presented incorrectly in the operating
activity cash flows section of the statement. In accordance with Accounting Standards
Codification 230-10-45-26, investing cash inflows must be reported separately from investing
cash outflows. Ginnie Mae’s practice of reporting the “net” cash flows from its investing
activities was a departure from generally accepted accounting principles.

Conclusion
Overall, Ginnie Mae’s system of internal control over its financial reporting processes was
ineffective. Ginnie Mae’s inadequate monitoring and oversight of master-subservicers’ financial
reporting operations and the need for additional appropriately skilled and experienced personnel
who could perform the required financial management responsibilities contributed to Ginnie
Mae’s inability to produce reliable financial information.
Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer

       2A.    Establish and implement policies and procedures to ensure that reimbursable costs
              are tracked and accounted for at the loan level.
       2B.    Determine the amount of reimbursable costs incurred by Ginnie Mae per loan,
              report the reimbursable costs incurred as receivables rather than expensing them,
              and adjust them out of the mortgage-backed securities loss liability account as
              appropriate.
       2C.    Restate fiscal year 2013 financial statements to correct the impact of the
              accounting errors determined in recommendation 2B.
       2D.    Review and recalculate the appropriate amount of interest accrued on the loans
              and adjust the accrued interest receivable balances reported as appropriate.
       2E.    Report the escrow fund balances on the face of the financial statements, including
              additional disclosure information in the notes, in accordance with generally
              accepted accounting principles.
       2F.    Restate fiscal year 2013 financial statements to show escrow fund balances
              omitted on the face of the financial statements.



                                                18
2G.   Properly present and classify the financial information in the balance sheet in
      accordance with generally accepted accounting principles.
2H.   Comply with generally accepted accounting principles by (1) presenting investing
      cash inflows separately from investing cash outflows and (2) reclassifying the
      presentation of the nonpooled loan assets from cash flow from operating activity
      section to the cash flow from investing activity section.




                                        19
Material Weakness

Finding 3: The Mortgage-Backed Security Loss Liability Account
Balance Was Unreliable
Based on the results of our audit work, we had concerns regarding the reliability of the $735
million in liability for losses on the mortgage-backed securities program guaranty (loss liability)9
account reported in Ginnie Mae’s balance sheet as of September 30, 2014. Our reliability
concerns were related to the (1) improper accounting treatment of selected accounting
transactions related to nonpooled loans in the mortgage-backed securities loss liability account,
and (2) insufficiency of evidence to support the reasonableness of key management assumptions
used in the loss reserve model. Factors that contributed to the issue included the adoption of an
inappropriate loan accounting policy and a lack of in-depth analysis to validate the
reasonableness of the management assumptions. Considering the impact of these issues and their
significance, we deemed the mortgage-backed securities loss liability account to be unreliable.
Selected Accounting Transactions Related to Nonpooled Loans Were Improperly
Accounted for in the Mortgage-Backed Securities Loss Liability Account
Ginnie Mae’s accounting for certain FHA reimbursable costs10 incurred related to nonpooled
loans, including the accounting for the repayment of these costs from the insuring agency, was
not in accordance with generally accepted accounting principles and raised concerns regarding
the accuracy of the amounts shown on the financial statements.

        Ginnie Mae had improperly accounted for the foreclosure costs and advances on taxes
         and insurance as chargeoffs11 against the mortgage-backed securities loss liability account
         rather than capitalizing them as assets (see finding 2). Since FHA’s loan guarantee
         provides reimbursement of these costs, in accordance with generally accepted accounting
         principles, the amount paid by Ginnie Mae for these costs should be accounted for as
         assets rather than expenses because it represents future claims for cash from FHA.12

        The repayment of the costs was also improperly accounted for as a credit to the
         mortgage-backed securities loss liability account. As noted above, the FHA reimbursable
         costs should have been accounted for as assets. Accordingly, the collection of insurance

9
  The loss liability represents Ginnie Mae’s estimated non-recoverable servicing and foreclosure costs to be incurred
from its defaulted issuers’ portfolio of nonpooled loans.
10
   Examples of FHA reimbursable costs incurred by Ginnie Mae related to nonpooled loans are foreclosure costs
and taxes and insurance advances.
11
   According to Ginnie Mae, charge offs represent a reduction to the mortgage-backed securities loss liability
account when losses are confirmed. Therefore, to account for these costs as charge offs before losses are realized
would not be appropriate. Losses are realized when insurance proceeds are not sufficient to fully cover the
foreclosure costs and servicing advances.
12
   Accounting Standards Codification 105-10-05 and Office of the Comptroller of the Currency Bank Accounting
Series, dated September 2013, page 55.
                                                          20
         proceeds to reimburse these costs should have been recorded as a credit to the asset
         account and not to the mortgage-backed securities loss liability account.

According to Ginnie Mae’s accounting record, $239 million in reimbursable costs was incurred
and $194 million in insurance claims reimbursements was received in fiscal year 2014. This
improper accounting treatment resulted in the understatement of Ginnie Mae’s asset and
mortgage-backed securities loss liability accounts. Therefore, the mortgage-backed securities
loss liability account was unreliable because of the impact of these errors.

The condition described above occurred because Ginnie Mae adopted an accounting policy for
loans that was not in accordance with generally accepted accounting principles. Ginnie Mae had
adopted the accounting policy of recording the FHA reimbursable costs as chargeoffs to the
liability account instead of capitalizing them as assets since at least fiscal year 2011.
Ginnie Mae Had an Inadequate Basis for Supporting the Reasonableness of Certain
Management Assumptions in the Loss Reserve Model
We also had concerns regarding the lack of evidence to adequately support the reasonableness of
certain management assumptions used in the loss reserve model; specifically, the foreclosure
cost and loan redefault rate assumptions. The issuance of a guarantee under the mortgage-
backed securities program obligates Ginnie Mae to make future payments if certain triggering
events or conditions occur.13 Ginnie Mae accounts for this obligation in the same way loss
contingencies are measured under Accounting Standard Codification, Subtopic 450-20, Loss
Contingencies, which is to accrue a loss when the loss is probable and estimable. The future loss
estimates14 are reported as mortgage-backed securities loss liability in Ginnie Mae’s balance
sheet. In estimating the loss, Ginnie Mae develops management assumptions, which feed into
the model. The loan redefault rate and foreclosure cost assumptions are two areas of audit
concern.

The mortgage-backed securities loss liability amount was $700 million and $735 million in fiscal
years 2013 and 2014, respectively. In fiscal year 2013, the mortgage-backed securities loss
liability had two components:15 liability for currently defaulted issuers’ pooled loans ($319
million)16 and liability for currently defaulted issuers’ nonpooled loans ($374 million). In fiscal
year 2014, only nonpooled components made up the mortgage-backed securities loss liability
amount. The pooled loan component was excluded in fiscal year 2014 because Ginnie Mae
estimated that this loss component would be brought down to zero primarily because of much
lower servicing costs expected as a result of switching to better master-subservicers.




13
   Under Ginnie Mae’s mortgage-backed securities program, the triggering condition or event occurs when the
borrower stops making the mortgage payment.
14
   Ginnie Mae’s future loss estimates occur when its projection of cash outflows (costs incurred from issuer defaults)
exceed cash inflows (insurance proceeds).
15
   See financial statement note 1 for the definition of the three loss components.
16
   This amount includes liability for probable issuer defaults and other adjustments.
                                                           21
          FHA foreclosure cost assumption. Ginnie Mae did not have sufficient appropriate
           evidence to support the reasonableness of the management assumption used in the
           model related to FHA foreclosure costs.17 The foreclosure cost assumption was a data
           entry to the pooled and nonpooled loan loss components of the model. For pooled
           loans, Ginnie Mae used an annual foreclosure cost of $5,768 and $3,000 in fiscal years
           2013 and 2014, respectively. For nonpooled loans, Ginnie Mae used an annual
           foreclosure cost of $5,768 and $8,600 in fiscal years 2013 and 2014, respectively. We
           believe that the foreclosure cost amounts used in the model were not reasonable and
           appropriate for the following reasons:
               o Based on our analysis, the foreclosure cost assumption used on nonpooled loans
                 was not realistic and may have been overly conservative if we take into account
                 Ginnie Mae’s actual foreclosure cost experience. For example, Ginnie Mae’s
                 foreclosure cost assumption in fiscal year 2014 was $8,600. This was 60
                 percent ($5,600) higher than the $3,400 average foreclosure cost experience
                 based on our estimate.18 To produce a reliable estimate of anticipated loss,
                 Ginnie Mae needs to develop a methodology to validate the accuracy and
                 reasonableness of this foreclosure cost assumption.
               o Ginnie Mae did not take into account FHA’s reimbursement of the foreclosure
                 costs.19 Since part of FHA’s loan guarantee is to make lenders whole for any
                 customary and reasonable foreclosure costs incurred by the lenders, we believe
                 that the cash flows from FHA’s insurance proceeds would have significant
                 impact on the foreclosure cost assumption. Ginnie Mae needs to determine its
                 FHA foreclosure cost reimbursement rate experience to reasonably estimate its
                 expected loss.
               o We did not find sufficient appropriate evidence to support that the foreclosure
                 cost assumption used in the model was an accurate reflection of the master-
                 subservicers’ foreclosure cost performance. For example, on pooled loans, in
                 fiscal year 2013, Ginnie Mae used the maximum foreclosure cost of $5,768
                 based on an industry survey. According to Ginnie Mae, this was due to the poor
                 quality of loan servicing from the previous master-subservicers. In fiscal year
                 2014, Ginnie Mae used the minimum $3,000 annual foreclosure cost because it
                 projected lower cost as a result of much better servicing expected from the new
                 master-subservicers, which is yet to be proven. We did not find sufficient
                 appropriate evidence to support management’s foreclosure cost expectation
                 based on its perceived quality of loan servicing from the master-subservicers.
                 The lack of well-documented analysis to support management’s foreclosure cost
                 expectation based on its perceived quality of loan servicing was a concern.

17
   Ginnie Mae’s foreclosure costs management assumption was based on the industry participant survey.
18
   Based on Ginnie Mae’s accounting record, actual foreclosure costs incurred in fiscal year 2014 were $137 million,
and the total number of loans was more than 40,000.
19
   Ginnie Mae used foreclosure cost data in the industry survey. Ginnie Mae made the assumption that the FHA
reimbursements were considered in the survey data even though there was no information in the survey that
indicates so.
                                                         22
               o We found inconsistency in the foreclosure cost assumptions between pooled and
                 nonpooled loans. As noted above, Ginnie Mae switched to new master-
                 subservicers in fiscal year 2014. For pooled loans, Ginnie Mae changed the
                 foreclosure cost assumption from maximum to minimum based on the
                 expectation of much better servicing from the new master-subservicers. For
                 nonpooled loans, Ginnie Mae kept the maximum foreclosure cost assumption.
                 If there was an expectation of much better loan servicing from the new master-
                 servicers, we would expect that much improved servicing would trickle down to
                 the nonpooled loans as well.

          Loan redefault rate20 assumption. Ginnie Mae did not have sufficient evidence to
           support its loan redefault rate management assumption. Specifically, on nonpooled
           loans, Ginnie Mae assumed that 100 percent of the defaulted issuers’ portfolio of
           nonperforming loans,21 which were previously modified, would eventually redefault.
           We took exception to the 100 percent redefault rate assumption because we did not find
           sufficient appropriate evidence to support the reasonableness of this assumption. Our
           conclusion was based on the analysis of Ginnie Mae data and redefault rate experience
           according to the Office of the Comptroller of the Currency Mortgage Metrics Report,
           dated December 2014.22
           In fiscal year 2014, of $735 million (43,150 loans) in the nonpooled loans loss
           component, our analysis indicated that $348 million was the reserve for loss set aside
           for the 16,324 loans for which borrowers had resumed paying the full amount of the
           restructured principal and interest payments after a loan modification. Of 16,324 loans,
           5,755 (35 percent) had demonstrated at least 6 months of sustained contractual
           performance. The amount of reserve for loss for the 5,755 reperforming loans was
           $130 million. When a loan has demonstrated a sustained performance in accordance
           with the modified contractual terms for a reasonable period, the borrower’s loan has
           returned to a performing loan status. Therefore, the probability of 100 percent of the
           reperforming loans redefaulting would be highly unlikely.




20
   Redefault rate means the percentage of modified loans that later become delinquent or enter the foreclosure
process.
21
   Ginnie Mae’s Chief Risk Officer has represented to OIG that there may be some loans in this group that were not
previously modified.
22
   The Office of the Comptroller of the Currency Mortgage Metrics Report presents data on first-lien residential
mortgages serviced by seven national banks (Bank of America, JP Morgan Chase, Citibank, Hong Kong and
Shanghai Banking Corporation, PNC, U.S. Bank, and Wells Fargo) and one Federal savings association (One West
Bank) with large mortgage-servicing portfolios. The data in this report represent 46 percent of all first-lien
residential mortgages outstanding in the country.
                                                         23
           According to the Office of the Comptroller of the Currency’s study of the mortgage
           performance of the eight largest financial institutions, their redefault rate experience
           was 42 percent as of September 30, 2014.23 Ginnie Mae asserted that the redefault rate
           experience of its portfolio was worse than the redefault rate experience of non-
           government insured loans. For this reason, the overall performance for all modified
           loans delivered into a Ginnie Mae security was more than 65 percent.24
           Taking all of these points together, we believe that Ginnie Mae’s 100 redefault
           assumption was unsupported and may be unrealistic and overly conservative. Ginnie
           Mae should perform further analysis of its data to adequately determine its historical
           redefault rate experience. While it would not be possible for us to estimate the
           redefault rate, taking into account Ginnie Mae’s suggested redefault experience of 65
           percent, we estimated that the mortgage-backed securities loss liability provision may
           have been overstated by at least $122 million.
The condition described above occurred because Ginnie Mae failed to perform proper validation
of the management assumptions used in the loss reserve model. According to Ginnie Mae, it
leveraged third-party sources because of limitations in the data. Additionally, management made
conservative assumptions to account for other factors such as the poor quality of Ginnie Mae’s
defaulted portfolios and the quality of the loan servicing delivered by Ginnie Mae’s master-
subservicers. While applying conservative assumptions may be acceptable, it needs to be within
a reasonable range to ensure that it could produce a reliable estimate of anticipated loss.

According to section II(A) of Office of Management and Budget Circular A-123, Appendix A,
Management’s Responsibility for Internal Control, Ginnie Mae management is responsible for
establishing internal control over financial reporting. Reliability of financial reporting means
that management can reasonably make assertions that all assets and liabilities in the financial
statements have been properly valued. Ginnie Mae uses accounting estimates to accrue a
liability related to the contingent portion of its mortgage-backed securities activities. It is Ginnie
Mae management’s responsibility to establish a process for basing its estimates, including the
development of assumptions that best represent management’s judgment of the most likely
circumstances and events with respect to the relevant factors that may affect the accounting
estimates.




23
   The study analyzed redefault experience on 3.6 million loan modifications completed from 2008 through
September 2014.
24
   The 65 percent redefault rate was the cumulative loan performance of those loans that have been modified in the
last 6 months of 2010 and was based on the data analysis performed by Ginnie Mae from its active (i.e. non-
defaulted) issuers’ portfolio. However, OIG has not audited this analysis. Cumulative redefault rate loan
performance of other loans was 55 percent, 42 percent, and 17 percent at the end of 2011, 2012 and 2013
respectively.
                                                         24
Conclusion
Ginnie Mae estimates the amount of accrual for loss contingency on defaulted issuer portfolios in
connection with its mortgage-backed securities program. Accounting estimates generally
involve the development of assumptions by management based on judgments about the outcome
of future conditions, transactions, or events. Because management assumptions cited in this
report are critical to the development of the accounting estimate, it is imperative that the
management assumptions be based on a careful, well-documented, and consistently applied
analysis of the loans. In developing the assumptions, Ginnie Mae relied on the information
supplied by the third party without performing proper validations. While sourcing the data from
a third party could provide a reasonable starting point, this alone would not be sufficient, without
further analysis, to ensure that the data are sufficiently reliable to produce a reasonable estimate.
Taking into consideration the impact of the accounting errors related to nonpooled loan
transactions and the issues related to the reasonableness of the management assumptions, we
determined that the mortgage-backed securities liability account balance was materially
unreliable.


Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer coordinate with the Chief Risk
Officer to

       3A.     Establish and implement policies and procedures for the documentation and
               validation of Ginnie Mae management assumptions, including foreclosure costs
               and redefault rates, used in the loss reserve model going forward.
       3B.     Reevaluate the reasonableness of foreclosure cost and redefault rate management
               assumptions used in fiscal year 2014, considering the audit points cited in this
               report; document the results of the reevaluation for OIG’s review; and determine
               the accounting adjustments needed, if any, to the fiscal year 2014 mortgage-
               backed securities loss liability account as a result of the changes in the
               management assumptions.

       3C.     Determine Ginnie Mae’s foreclosure cost reimbursement rate and take this
               information into account when developing its foreclosure cost management
               assumption.
       3D.     Perform a validation of the FHA foreclosure cost assumption amount used in
               fiscal year 2014, document the results of the validation, and determine whether an
               adjustment to the fiscal year 2014 financial statements is warranted based on the
               updated foreclosure cost management assumption.
       3E.     Perform a separate reserve for loss estimate analysis on reperforming nonpooled
               loans and, based on the results of this analysis, establish separate loss reserve
               estimates on reperforming nonpooled loans.


                                                  25
Material Weakness

Finding 4: Financial Management Governance Issues Contributed
to Ginnie Mae’s Inability to Produce Auditable Financial
Statements
In fiscal year 2014 Ginnie Mae failed to establish an appropriate financial management
governance structure25 to ensure that Ginnie Mae is capable of producing accurate, timely
information, and accounting records to plan, monitor and report its business operations. This
failure in the governance was the underlying cause of the problems cited in this report. We noted
a number of problems in the oversight, management and operations of Ginnie Mae’s Office of
the Chief Financial Officer (OCFO). Specifically, Ginnie Mae (1) left a number of critical
financial management positions unfilled which weakened its organizational structure and created
a gap in its internal control system for monitoring a more than $6 billion portfolio of
nonperforming loans, (2) failed to adequately identify, analyze and respond to changes in the
control environment and risks associated with the acquisition of a multi-billion servicing
portfolio from one of its largest defaulted issuers, and (3) failed to adequately establish and
maintain accounting policies, procedures, and accounting systems to manage and control the
loan accounting and processing of the activities related to its defaulted issuers’ portfolios. This
condition occurred because of Ginnie Mae executive management failed to respond
appropriately to changes in its business environment and additional risks and the void in HUD’s
senior leadership created by the extended absence of a permanent HUD Chief Financial Officer
was a contributing factor. The combination of these failures in governance resulted in material
misstatements and contributed to Ginnie Mae’s inability to produce auditable financial
statements for use by its external and internal users. Overall, the issues cited in this report were
tied to the problems associated with the acquisition and management of a multi-billion dollar
defaulter issuers’ portfolio, which is a non-core segment of Ginnie Mae’s business.
Ginnie Mae Organizational Structure Within the Office of the Financial Officer Was
Insufficient to Handle the Demands and Complexity of its Financial Management
Operations
Ginnie Mae’s executive management did not ensure that key positions within the OCFO were
properly staffed by experienced personnel with the appropriate skills despite significant changes
in its operating environment. Ginnie Mae’s main mission is to provide a guarantee on the timely
payment of principal and interest to investors on securities backed by government-insured

25
  Financial management governance, in this context, is the exercise of putting together a framework that requires
appropriate policies, procedures, people, systems and control in place to ensure the reliability and integrity of Ginnie
Mae’s financial and accounting information. This framework is driven by financial management statutes such as
Federal Financial Management Improvement Act, Federal Managers Financial Integrity Act of 1982, and the Chief
Financial Officers Act of 1990, generally accepted accounting principles, Office of Management and Budget
guidance such as A-123 appendixes C and D, as well as Government Accountability Office’s Standards for Internal
Control for the Federal Government in addition to Ginnie Mae’s operating environment.
                                                           26
mortgages. Ginnie Mae’s role and business model significantly changed when it defaulted one
of its largest issuers beginning in August 2009 and became the servicer of a multi-billion dollar
servicing portfolio. In addition, Ginnie Mae’s decision to buy over $6 billion in non-performing
loans out of mortgage-backed securities pools to save money by minimizing on the cost of
capital, rather than continue principal and interest payments to investors changed Ginnie Mae’s
accounting and reporting requirements in that Ginnie Mae is now required to perform loan level
accounting on these loans. The additional level of detailed information, which was not collected,
also became a problem because this information was necessary to prepare accurate reports for
non-pooled loans receivable accounts and for more precise assumptions used in the reserve for
loss calculation.

As far back as 201126, Ginnie Mae executive management was aware of the need for loan level
information. Attempts were made to collect additional information, but as noted in the fiscal
year 2013 financial statement audit report,27 the accounting reports were inaccurate and
incomplete. Ginnie Mae staff has stated that intense efforts at monthly reconciliation were
required to prepare monthly financial reports.
Before fiscal year 2014, there were already signs of a weakening organizational OCFO structure
due to the stresses created by an increase in financial management, reporting and operational
accounting responsibilities resulting from Ginnie Mae’s assumption of a multi-billion dollar
defaulted issuer portfolio. Ginnie Mae’s organizational structure within the OCFO was further
weakened at the beginning of fiscal year 2014 by the departure of 4 key staff within the OCFO.
The Deputy Chief Financial Officer left in November 2013, the Chief Financial Officer left in
December 2013, and the Controller left in April 2014. In addition, the Internal Controls
Manager transferred to a different office within Ginnie Mae in June 2013.
Based on our review, we determined that executive management made little effort to retain key
staff, with the exception of a cash award paid to the former Ginnie Mae Controller. Ginnie Mae
filled the Chief Financial Officer position within 4 months; however the selected individual’s
resume indicated no Federal financial management experience. The Deputy Chief Financial
Officer position has remained vacant as of January 2015, more than a year after the former
Deputy Chief Financial Officer left; and the announcement for the Controller position was not
posted until January 2015, 9 months after the former Controller left; and the announcement for
Internal Controls Director (Governance and Compliance Office) was not posted until November
2014, more than a year after the former Internal Controls Director left. We also noted other key
staff with financial reporting responsibilities that vacated their positions because they either left
Ginnie Mae or transferred to other offices. As of April 18, 2014, 7 positions were vacant out of
20 total positions in the OCFO; the number of vacancies in the OCFO was unchanged as of
January 23, 2015. The largest number of vacancies within OCFO was in the Controller’s
division. Ginnie Mae indicated that backfilling the vacancies was deferred temporarily to allow
the new Chief Financial Officer an opportunity to assess the organization and overall staffing

26
   Enhancing Ginnie Mae’s Risk Management Capabilities, dated June 24, 2011. This was a study performed by a
consulting firm to provide an independent enterprise wide risk assessment of Ginnie Mae.
27
   Audit Report of the Government National Mortgage Association Financial Statements, 2014-FO-0001, issued
December 6, 2013.
                                                      27
needs. We question how this could be that executive management would not have already known
its staffing skills and needs in such an important office. The loss of institutional knowledge and
experienced staff is impossible to replace, and without timely replacements, create difficulties in
an organization’s ability to produce accurate, timely financial statements.
Due to the additional financial management and accounting responsibilities taken on by Ginnie
Mae when it assumed a large defaulted portfolio, Ginnie Mae’s executive management should
have ensured that key staff positions within OCFO were filled in a timely manner and that
experienced staff was hired to fill those key staff positions. Ginnie Mae’s management should
also have been focused on filling other vacancies within OCFO, especially in the Controller’s
division.

Ginnie Mae Did Not Appropriately Respond to the Changes in its Business Environment
and Risks to Maintain an Effective Internal Control System
Ginnie Mae did not analyze and respond appropriately to the significant changes in its business
environment and risks related to financial management goverance and operations. The change in
conditions and risks was triggered by the acquisition of a large defaulted issuer portfolio. In
accordance with internal control standards for the Federal government and HUD Handbook
1840.1, Departmental Management Control Program, Ginnie Mae is responsible for identifying
risks throughout the entity, as part of its risk assessment, to form a basis for designing
appropriate risk responses. As noted earlier, Ginnie Mae failed to implement an appropriate
organizational structure that could withstand the rigors and complexities of the changed
conditions resulting from the acquisition of a large defaulted issuer portfolio.

Additionally, there were inherent operational and financial reporting risks associated with the
acquisition of a large defaulted issuer portfolio in fiscal year 2009 and Ginnie Mae did not
evaluate the significance of the risks and how the risks would impact the achievement of its
financial reporting responsibilities. For example, the accounting for Ginnie Mae’s business
activities was simple and less complex before the acquisition. The acquisition of Taylor, Bean
and Whitaker’sservicing portfolio and purchase of delinquent loans out of mortgage-backed
securities pools changed the dynamics of Ginnie Mae’s role from being a guarantor to a multi-
billion dollar servicer and investor of whole loans. Ginnie Mae executive management’s failure
to properly respond to changes did not allow for an adjustment in its processes to ensure that an
effective internal control system would be maintained.

Ginnie Mae Did Not Establish Appropriate Accounting Policies, Procedures and
Accounting Systems To Effectively Manage and Control the Loan Accounting and
Processing of the Activities Related to its Defaulted Issuers’ Portfolio
Ginnie Mae failed to establish appropriate accounting policies, procedures and accounting
systems to ensure that management had accurate, timely and complete information, including
accounting records, to plan, monitor and report business operations. As noted earlier, when
Ginnie Mae was presented with the financial reporting and operational challenges related to the
acquisition of a large defaulted issuer portfolio, it did not appropriately respond to the changes
and risks in its business. Ginnie Mae may have underestimated the impact or significance of the
change in conditions and did not adequately prepare to respond to these risks. As in previous

                                                 28
years, Ginnie Mae’s initial plan was to hold these loans on a short-term basis only. However, its
initial plan did not materialize. As a result, Ginnie Mae was left with the responsibility of
accounting for these loans at a loan level without the appropriate policies, procedures and
accounting systems in place. For example, Ginnie Mae did not have an accounting system in
place to account for and track the reimbursable costs at a loan level. Additionally, it adopted a
policy of expensing reimbursable costs, instead of capitalizing them, which was a departure from
generally accepted accounting principles.

Due to staffing and accounting system limitations, Ginnie Mae historically relied on contractors
and their information systems to perform most of the work needed to accomplish its mission and
manage its day-to-day activities. Ginnie Mae’s contractors used a servicing system that was not
designed to function as an accounting system. Therefore, the system was not adequate to
perform loan level accounting, which is needed to comply with generally accepted accounting
principles. With more than 40,000 loans in its nonpooled loan assets, the effort to produce
auditable accounting and financial information was nearly impossible to achieve without
adequate accounting systems. Another problem created as a result of an inadequate accounting
system was the inability to produce accounting and financial information to estimate Ginnie
Mae’s guaranty loss reserves. Specifically, financial information needed to develop the
foreclosure costs and redefault rate management assumptions. This is more fully described in
Finding 3. These problems would have been prevented or mitigated with the appropriate
accounting policies and procedures and accounting systems in place to effectively manage and
control risks related to defaulted issuers’ portfolio.

Ginnie Mae Did Not Effectively Monitor the Service Organization Engaged To Perform
Operational Processes and Accounting for Ginnie Mae
Ginnie Mae did not effectively monitor the accounting and reporting activities of the master-
subservicers as service organization because the division of operational servicing and financial
reporting oversight responsibilities had not been appropriately assigned and clearly defined.

The master-subservicers are responsible for nearly 95,000 loans worth more than $11 billion in
servicing portfolio. Although Ginnie Mae assigns the operational servicing and accounting
responsibility to the master-subservicers with regard to its defaulted issuers’ portfolio, Ginnie
Mae retains the responsibility for the performance of processes assigned to the master-
subservicers. As the nature of the services provided by the master-subservicers is significant to
Ginnie Mae, it is critical to Ginnie Mae’s financial reporting responsibility to ensure that the
controls over the outsourced functions are in place and working effectively. Ginnie Mae did not
require the master-subservicers to provide it with the appropriate Statements on Standards for
Attestation Engagements No. 16 (SSAE16)28 report, from both the report type and audit scope
perspectives. Other examples and the outcome of Ginnie Mae’s ineffective monitoring of the
mastersubservicers are discussed in more detail in findings 1 and 2.
28
  Statements on Standards for Attestation Engagement No. 16 is an attestation standard that addresses engagements
undertaken by a service auditor for reporting on controls at organizations that provide services to user entities, for
which a service organization's controls are likely to be relevant to user entities’ internal control over financial
reporting.


                                                           29
A contributing factor to the inadequate monitoring of the master-subservicers’ accounting and
reporting activities was that Ginnie Mae executive management placed more emphasis on
operational servicing and less on its financial management and reporting responsibilities. The
office responsible for the monitoring of the master-subservicers is the Monitoring and Asset
Management Division, which is part of the Office of Issuer and Portfolio Management. To
adequately monitor the activities of the master-subservicers from the operational servicing and
accounting perspectives, Ginnie Mae needs to balance the monitoring oversight responsibilities
between the OCFO and the Office of Issuer and Portfolio Management. Additionally, Ginnie
Mae’s bylaws have not been updated to appropriately define the division of responsibilities.

Overall, the financial management governance problems described in this report stemmed from
Ginnie Mae executives’ failure to respond appropriately to the risks and changes in its business.
The absence of a permanent HUD Chief Financial Officer for 3 years was another contributing
factor. The new HUD Chief Financial Officer, who was confirmed in September 2014, had
made efforts consistent with the Chief Financial Officers Act requirements, to address some of
the financial management governance issues facing Ginnie Mae.

Conclusion
Ginnie Mae is responsible for designing, implementing, and operating an effective internal
control system to ensure the reliability and integrity of its financial and accounting information.
Although Ginnie Mae had expanded its role to include being a servicer and investor in addition
to being a guarantor, Ginnie Mae executives did not appropriately respond to the changes in its
business environment and risks by appropriately adjusting the organizational structure, policies,
procedures and systems to adequately respond to the risks. In fiscal year 2015, Ginnie Mae
needs to address its financial management governance deficiencies by filling the gaps in its
financial management staff, reviewing its control environment to identify and analyze its risks,
and developing the appropriate accounting policies and procedures.


Recommendations
We recommend that Ginnie Mae’s President
  4A. Work with HUD’s Chief Financial Officer to ensure that Ginnie Mae has a sufficient
      number of appropriately skilled and experienced staff in place to perform the required
      financial management duties by filling the vacancies of key personnel that oversee or
      work in OCFO.
  4B. Work with HUD’s Chief Financial Officer to design and implement a compliant
      financial management governance structure.
  4C. Review and update Ginnie Mae’s bylaws and delegations of authority to correspond to
      the current organizational structure and agency mission requirements.
We recommend that the HUD Chief Financial Officer, in accordance with provisions of the
Chief Financial Officers Act of 1990, assist Ginnie Mae to implement a compliant financial
management governance structure by
                                                  30
4D. Overseeing a comprehensive risk assessment of Ginnie Mae’s financial management
    governance.
4E. Preparing and implementing a plan, based on the results of the risk assessment in
    recommendation 4D, that
    i) Demonstrates HUD OCFO oversight of Ginnie Mae’s, as a HUD component,
         financial management activities;
    ii) Ensures that Ginnie Mae updates its financial management policies to reflect
         conclusions reached in the financial management risk assessment;
    iii) Provides complete, reliable, consistent and timely information for defaulted issuers’
         pooled and non-pooled loans, prepared on a uniform basis for preparation of Ginnie
         Mae financial statements, management reporting, and cost reporting; and
    iv) Ensures all of Ginnie Mae’s financial management systems, both owned and
         outsourced, provide the financial information necessary to prepare and support
         financial statements that comply with generally accepted accounting principles.




                                             31
Significant Deficiency

Finding 5: Ginnie Mae’s Financial Management Information
System Security Controls Did Not Fully Comply With Federal
Requirements and its Own Security Policies
Ginnie Mae did not ensure that information security controls over the Ginnie Mae Financial
Accounting System (GFAS)29 fully complied with Federal requirements and its own security
policies. This process involves information used in the aggregate set of accounting practices
and procedures to allow for the accurate and effective handling of government revenues,
funding, and expenditures. GFAS supports the financial functions required to track financial
events and provides financial information significant to the financial management of the agency.
It also maintains financial information that is used for meeting the Office of Management and
Budget and U.S. Government Accountability Office reporting requirements. Based on our
review of general and application controls over GFAS, the following deficiencies were
identified.
Router and Firewall Access Paths Were Not Adequately Protected
GFAS information flow protections were not enforced to the extent possible. GFAS networks
were not appropriately configured to enforce the flow of information to adequately protect access
paths in the system. As a result, the network access paths for processing and recording financial
events within the GFAS network were vulnerable to several different types of network attacks.
Remote Access Sessions Were Not Completely Protected With Encryption
GFAS remote access sessions were not completely protected with encryption. Ginnie Mae did
not ensure that its contractors identified access paths outside the virtual private network30 and
validated those paths for encryption. If the weaknesses in these access paths were exploited,
there could be unauthorized disclosure and modification of GFAS data while in transit. This
information includes sensitive data, programs, or password files, which are used to process,
record, and track financial events that support reporting on the financial management of the
agency.
Authentication Management Needs Improvement
The GFAS network administrator did not consistently implement locally configured passwords
on all firewalls, routers, and switches. This condition occurred because the GFAS system owner
did not focus on all aspects of password security. Not sufficiently protecting passwords on
network devices increased risk of unauthorized disclosure or modification of GFAS data.


29
   Ginnie Mae Financial Accounting System is a financial management system that tracks, records, and reports on
the agency’s accounting information.
30
   A virtual private network is a protected information system link, using tunneling, security controls, and endpoint
address translation, giving the impression of a dedicated line
                                                           32
Conclusion
Ginnie Mae must improve its information security controls over GFAS to fully comply with
Federal requirements and its own security policies to prevent an increased risk of unauthorized
disclosure or modification of GFAS data.
Recommendations
Recommendations were included in a separate OIG audit report.31 Therefore, no
recommendations are reported here.




31
     Audit report 2015-DP-0002, Ginnie Mae Financial Accounting System, issued October 29, 2014.
                                                         33
Scope and Methodology
In accordance with the Chief Financial Officers Act of 1990, as amended, OIG is responsible for
the conduct of the annual financial statement audit of Ginnie Mae. The scope of this work
includes the audit of Ginnie Mae’s balance sheet as of September 30, 2014 and 2013, and the
related statements of revenues and expenses and changes in investment of the U.S. Government
and cash flows for the years then ended and the related notes to the financial statements. We
conducted the audit in accordance U.S. generally accepted government auditing standards and
Office of Management and Budget Bulletin 14-02, as amended, Audit Requirements for Federal
Financial Statements.

In fiscal year 2014, we were unable to express an opinion on the accompanying financial
statements because of the limitation in the scope of our audit work. The limitation in our audit
scope was due to a number of unresolved audit matters, which are described in detail in the body
of this report. These unresolved matters restricted our ability to obtain sufficient appropriate
audit evidence to form an audit opinion. Accordingly, we do not express an opinion on the
financial statements and notes.




                                                34
Followup on Prior Audits
Government National Mortgage Association Fiscal Years 2013 and 2012 Financial
Statements Audit, 2014-FO-0001
The underlying issue relative to the inaccuracy of the accounting reports has not been fully
resolved. In fiscal year 2014, Ginnie Mae transferred the servicing of its defaulted issuer to two
new master-subservicers. As this issue continues to evolve, we will continue to monitor Ginnie
Mae’s efforts to reconcile accounting reports and the loan level detail support.

We reviewed the recommendations for audit report 2014-FO-0001 covering Ginnie Mae’s
financial statement audit for fiscal years 2013 and 2012. The report had three recommendations
for improving Ginnie Mae’s internal controls over financial reporting process. Our assessment
of the current status of the recommendations is presented below:

     Fiscal year 2013 recommendations             Type                Fiscal year 2014 status
1A: Obtain a corrective action plan from the  Significant        Closed/Merged to Finding 1 –
master-subservicing contractor with critical  deficiency         the fiscal year 2013 audit
milestones to document how all information is 2013               recommendation could not be
to be provided, supported, and reconciled to                     implemented in its present form
the appropriate underlying information                           because of the master-
system.                                                          subservicers’ transition that
                                                                 occurred on July 31, 2014. In
                                                                 fiscal year 2014, in response to
                                                                 the audit recommendation
                                                                 Ginnie Mae’s switched the
                                                                 servicing of its defaulted
                                                                 issuers’ portfolio to two master-
                                                                 subservicers. However, since
                                                                 there was insufficient time left
                                                                 in fiscal year 2014 for the new
                                                                 process to run to determine if
                                                                 the new process is working
                                                                 effectively, we do not consider
                                                                 this issue resolved and we plan
                                                                 to test it during fiscal year 2015
                                                                 audit.
1B: Review the projected workload               Significant      Closed/Merged to Finding 1 –
requirements with the master-subservicing       deficiency       the fiscal year 2013 audit
contractor, evaluate the remaining impact of    2013             recommendation could not be
ongoing delays in recording servicing activity,                  implemented in its present form
and document the anticipated effort on future                    because of the master-
financial reporting.                                             subservicers’ transition that
                                                 35
                                                               occurred on July 31, 2014. In
                                                               fiscal year 2014, in response to
                                                               the audit recommendation
                                                               Ginnie Mae’s switched the
                                                               servicing of its defaulted
                                                               issuers’ portfolio to two master-
                                                               subservicers. However, since
                                                               there was insufficient time left
                                                               in fiscal year 2014 for the new
                                                               process to run to determine if
                                                               the new process is working
                                                               effectively, we do not consider
                                                               this issue resolved and we plan
                                                               to test it during fiscal year 2015
                                                               audit.
1C: Continue efforts to confirm the insured      Significant   Not implemented – Although
status of loans not yet matched with data from   deficiency    Ginnie Mae agreed in May
the insuring agencies.                           2013          2014 to perform an analysis
                                                               between the master-subservicer
                                                               and insuring agency data to
                                                               identify and resolve differences
                                                               in the insured status of loans, as
                                                               of the report date, Ginnie Mae
                                                               had not implemented this
                                                               recommendation.




                                                 36
Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1


Comment 2


Comment 3



Comment 4




Comment 1


                               37
Ref to OIG   Auditee Comments
Evaluation




Comment 1




                                38
                           OIG Evaluation of Auditee Comments


On February 19, 2015, OIG provided a draft of this report to Ginnie Mae for review and
comment. OIG received a written response dated, February 24, 2015, which is presented in
appendix A of this report. We also received technical comments from Ginnie Mae, which we
considered and incorporated in the final audit report as appropriate. We did not audit
management’s response, and, accordingly, we express no opinion on it.
Comment 1     In its written comments, Ginnie Mae acknowledged the serious and specific
              accounting and financial reporting challenges that affected Ginnie Mae in fiscal
              year 2014. Additionally, it recognized the need to strengthen the governance of
              its financial operations to overcome these challenges. The Ginnie Mae executive
              management team’s recognition of the financial accounting and reporting
              problems related to its defaulted issuers’ portfolio is a step in the right direction.
              Ginnie Mae needs to continue taking positive steps toward improving its
              accountability by pledging its commitment to address material weaknesses in its
              internal control system cited in this report. We will work with Ginnie Mae during
              the fiscal year 2015 financial statement audit in resolving the accounting,
              financial reporting, financial management governance and other issues affecting
              its ability to produce reliable financial information for use by its internal and
              external users.
Comment 2     Since this is a financial statement audit, our audit was specifically designed to
              obtain sufficient appropriate evidence to express an opinion on the fairness of the
              financial statements. Because of this limited purpose, our audit was not designed
              to assess the efficiency and effectiveness of its operations nor did we intend to
              provide any assurance about the effectiveness of Ginnie Mae’s execution and
              reporting of its core activity related to the $1.5 trillion guarantee business
              portfolio. Accordingly, we do not express such an opinion. According to the
              U.S. Government Accountability Office’s Standards for Internal Control in the
              Federal Government, ensuring that Ginnie Mae runs its operations efficiently and
              effectively is equally important as ensuring that Ginnie Mae is also capable of
              producing accurate, timely information and accounting records to plan, monitor
              and report on its business operations. Therefore, maintaining the right balance in
              meeting these two objectives is the key to achieving Ginnie Mae’s mission.
Comment 3     As discussed in the audit report, the $6.6 billion in total assets that we were
              unable to audit was not strictly confined to mortgage held for investments. The
              $6.6 billion in nonpooled loan assets was made up of six financial statement line
              items. These assets included (1) mortgage held for investment ($5.3 billion), (2)
              advances against defaulted mortgage-backed security pools ($193 million), (3)
              short sale claims receivable ($50 million), (4) foreclosed property ($616 million),
              (5) accrued interest on mortgage loans held for investment ($414 million), and (6)
              properties held for sale ($17 million). Collectively we called these assets,
              nonpooled loan assets, because Ginnie Mae became the owner/investor of these

                                                 39
            assets as a result of purchasing delinquent mortgages that did not meet program
            requirements out of its defaulted issuers’ portfolio of mortgage-backed security
            pools.
Comment 4   While we recognize that the financial crisis may be a contributing factor to some
            of the accounting and operational problems experienced by Ginnie Mae in fiscal
            year 2014 related to its defaulted issuers’ portfolio, OIG believes that Ginnie Mae
            executive management team’s failure to (1) appropriately respond to changes in
            its business environment and risks, (2) establish appropriate accounting policies
            and procedures, and accounting systems in place to effectively manage and
            control the loan accounting and processing of activities related to its defaulted
            issuers’ portfolio, and (3) ensure that the organizational structure within the
            Office of the Chief Financial Officer was sufficient to handle the demands and
            complexity of its financial management operations, should also be recognized as
            the underlying causes of problems facing Ginnie Mae. Since Ginnie Mae acquired
            its large defaulted portfolio in 2009, it had ample time to make
            changes/adjustments to its operations, systems and processes. However, since
            Ginnie Mae failed to respond appropriately to the changes, it lost the opportunity
            to mitigate the risks. We also note Ginnie Mae executive management’s failure to
            appropriately act on the recommendation by a consulting firm to obtain a loan
            level data to enhance its master-subservicer monitoring based on an independent
            study of enterprise wide risk assessment of Ginnie Mae.




                                             40
Appendix B
      Ginnie Mae Fiscal Years 2014 and 2013 Financial Statements and Notes




                                       41
Government National Mortgage Association
Financial Statements




See the accompanying notes to the financial statements.


                                                          42
See the accompanying notes to the financial statements.




                                                          43
See the accompanying notes to the financial statements.




                                                          44
Notes to the Financial Statements

September 30, 2014 and 2013


Note 1: Entity and Mission
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
United States (U.S.) 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 U.S. Federal Housing Administration (FHA),
another government Corporation within HUD, 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 to the mortgage markets, 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 Ginnie Mae product structure 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 – Ginnie Mae insures securities backed by FHA and USDA purchase
    and refinance loans for the purchase, construction, and renovation of apartment buildings,
    hospitals, nursing homes, and assisted living facilities.
   HMBS Program – Ginnie Mae’s Home Equity Conversion Mortgage (HECM) securities
    program provides capital and liquidity for FHA-insured reverse mortgages. HECM loans are
    insured separately from regular single family mortgages due to their unique cash flow and fee


                                                 45
    structure. HECM loans can be pooled into HECM Mortgage Backed Securities (HMBS)
    within the Ginnie Mae II MBS program.
   Manufactured Housing Program – Ginnie Mae’s Manufactured Housing program allows
    the issuance of pools of loans insured by FHA’s Title I Manufactured Home Loan Program.


Note 2: Summary of Significant Accounting Policies
Basis of Presentation: The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) established by the Financial
Accounting Standards Board (FASB).
Use of Estimates: The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the reported amounts of revenues and expenses
during the reporting period, and related disclosures in the accompanying notes. Ginnie Mae has
made significant estimates in a variety of areas including, but not limited to, valuation of certain
financial instruments and assets (such as MSRs, properties held for sale, and fixed assets -
software), and liabilities (such as accruals for payments of contracts and miscellaneous expenses
related to maintaining mortgage assets, and litigation-related obligations), including establishing
the MBS loss liability. While Ginnie Mae believes its estimates and assumptions are reasonable
based on historical experience and other factors, actual results could differ from those estimates.

Fair Value: Ginnie Mae measures the fair value of its financial instruments in accordance with
ASC Topic 820, Fair Value Measurement (ASC 820) 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. ASC 820 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date.

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 1 assets 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


                                                46
           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.
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.

Funds with U.S. Treasury: All Ginnie Mae receipts and disbursements are processed by the
U.S. Treasury Department, which in effect maintains Ginnie Mae’s bank accounts. All funds are
accessible in the event of a default. For purposes of the Statements of Cash Flows, 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 them until their maturity, and
accordingly, they are carried at amortized cost. U.S. Treasury short-term securities are one-day
overnight certificates that are issued with a stated rate of interest to be applied to their par
amount with a maturity date on the next business day. These overnight certificates are measured
at fair value. Interest income on such securities is presented on the Statements of Revenues and
Expenses and Changes in Investment of U.S. Government. Discounts and premiums are
amortized, on a level yield basis, over the life of the related security.
Insurance Claims Receivable: Ginnie Mae records a receivable for insurance claims which
have been submitted to an insuring agency for claim, but have not been paid as of the end of the
reporting period. Because it is a Federal Receivable, Ginnie Mae expects full reimbursement.
As a result, no allowance is calculated on this receivable.

Accrued Fees and Other Receivables: Ginnie Mae’s Accrued Fees and Other Receivables line
item includes accrued guarantee fees and miscellaneous program receivables. The accrued
guarantee fees are discussed in the Financial Guarantees section above. There is no allowance
related to the miscellaneous program receivables because they are receivables with the U.S.
Government.

Fixed Assets: Ginnie Mae’s fixed assets consist solely of computer systems (software) that are
used to accomplish its mission. Ginnie Mae capitalizes software development project costs
based on guidance in the ASC Subtopic 350-40 Intangibles—Goodwill and Other – Internal-Use
Software (ASC 350-40). Ginnie Mae amortizes costs over a three- to five-year period beginning
with the project’s completion on a straight-line basis.




                                                47
Mortgage Loans Held for Investment (HFI): 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, assumes the servicing rights and obligations of the issuer’s entire
Ginnie Mae guaranteed, pooled loan portfolio of the defaulted issuer. Ginnie Mae utilizes the
Master Subservicers (MSSs) to service these portfolios. There are currently two MSSs for
Single Family and one MSS for Manufactured Housing defaulted issuers. These MSSs currently
service 100% of all non-pooled loans. As of August 1, 2014, Ginnie Mae changed the two
servicers for the Single Family portfolios.
In its role as servicer, Ginnie Mae assesses individual loans within its pooled portfolio to
determine whether the loan must be purchased out of the pool as required by the Ginnie Mae
MBS Guide. Ginnie Mae purchases mortgage loans out of the MBS pool when:

a.     Mortgage loans are uninsured by the FHA, USDA, VA or PIH

b.     Mortgage loans were previously insured but insurance is currently denied (collectively
       with (a.), referred to as uninsured mortgage loans)

c.     Mortgage loans are insured but are delinquent for more than 90 and 120 days based on
       management discretion for manufactured housing and single family loans, respectively.
During the year ended September 30, 2014, the majority of purchased mortgage loans were
bought out due to borrower delinquency of more than 90 or 120 days depending on loan type
(i.e., Single Family or Manufactured Housing).
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 mortgage loans as held for investment
(HFI). The mortgage loans HFI are reported net of allowance for loan losses. Mortgage loans
HFI also includes mortgage loans that are undergoing a foreclosure process.

Ginnie Mae evaluates the collectability of all purchased loans and assesses whether there is
evidence of credit deterioration subsequent to the loan’s origination and if 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 FHA insured loans, Ginnie Mae expects to collect the full amount of the unpaid principal
balance and debenture rate interest (only 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 accounted for under ASC Subtopic 310-20, Receivables – 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


                                               48
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 nonaccrual status. Ginnie Mae recognizes interest
income for loans on nonaccrual status when cash is received.
Ginnie Mae separately assesses the collectability of mortgage loans bought out of the defaulted
portfolios that are uninsured and loans that are non-FHA insured for which Ginnie Mae only
receives a portion of the outstanding principal balance. If the principal and interest payments are
not fully guaranteed from the insurer (i.e., there is a lack of insurance), or 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, Receivables – 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 performs periodic and systematic reviews of its loan portfolios to identify credit
risks and assess the overall collectability of the portfolios for the estimated uncollectible portion
of the principal balance of the loan. As a part of this assessment, Ginnie Mae incorporates the
probable recovery amount from mortgage insurance (e.g., FHA, USDA, VA, or PIH) based on
established insurance rates. Additionally, Ginnie Mae reviews the delinquency of mortgage
loans, industry benchmarks, as well as the established rates of insurance recoveries from
insurers. Ginnie Mae records an allowance for the estimated uncollectible amount. 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 netted against the balance of mortgage loans HFI.
Ginnie Mae records a charge-off as a reduction to the allowance for loan losses when losses are
confirmed through the receipt of assets in full satisfaction of a loan, such as the receipt of claims
proceeds from an insuring agency or underlying collateral upon foreclosure.
Advances Against Defaulted MBS Pools: Advances against defaulted MBS pools represent
pass-through payments made to fulfill Ginnie Mae’s guaranty of timely principal and interest
payments to MBS security holders. The advances are reported net of an allowance to the extent
that management believes that 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. Other factors considered in the estimate include
market analysis and appraised value of the loans. These loans are still accruing interest because
they have not reached the required delinquency thresholds to be purchased from the defaulted
issuer pools.
Once Ginnie Mae purchases the loans from the pools after the 90 and 120 day delinquency
thresholds for Manufactured Housing and Single Family loans, respectively, the loans are

                                                 49
reclassified as Mortgage Loans Held for Investment (HFI) below. The cost basis for the
purchased loans includes any unrecovered advances. Any advances that are not ultimately
recovered through sales of the loan or the related insurance proceeds are recorded as a charge-off
as a reduction to the related allowance for loan losses when losses are confirmed through the
receipt of assets in full satisfaction of a loan, such as the receipt of claims proceeds from an
insuring agency or underlying collateral upon foreclosure.

Short Sales Claims Receivable: As an alternative to foreclosure, a property may be sold for its
appraised value even if the sale results in what is referred to as a short sale where the proceeds
are not sufficient to pay off the mortgage. Ginnie Mae’s MSSs analyze mortgage loans HFI for
factors such as delinquency, appraised value of the loan, and market in locale of the loan to
identify loans that may be short sale eligible. These transactions are analyzed and approved by
Ginnie Mae’s MBS program office.
For FHA insured loans, for which the underlying property was sold in a short sale, the FHA
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. 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 claims receivable. The allowance for short
sales claims receivable is estimated based on actual and expected recovery experience including
expected recoveries from FHA, USDA, VA, and PIH. The aggregate of the short sales
receivable and the allowance for short sales receivable is the amount that Ginnie Mae determines
to be collectible. Ginnie Mae records a charge-off as a reduction to the allowance for loan losses
when losses are confirmed through the receipt of claims in full satisfaction of a loan from an
insuring agency.

Foreclosed Property: Ginnie Mae records foreclosed property when a MSS receives title to a
property which has completed the foreclosure process in the respective state. These properties
differ from properties held for sale because they will be conveyed to an insuring agency, and not
sold by the MSS. The asset is measured as the principal and interest of a loan which is in the
process of being conveyed to an insuring agency, net of an allowance. These assets are
conveyed to the appropriate insuring agency within six months. Foreclosed property has
previously been placed on nonaccrual status after the loan was repurchased from a pool.
The allowance for foreclosed property is estimated based on actual and expected recovery
experience including expected recoveries from FHA, USDA, VA, and PIH. The aggregate of the
foreclosed property and the allowance for foreclosed property is the amount that Ginnie Mae
determines to be collectible. Ginnie Mae records a charge-off as a reduction to the allowance for
loan losses when losses are confirmed through the receipt of assets in full satisfaction of a loan,
such as the receipt of claims proceeds from an insuring agency.



                                                50
Properties Held for Sale: Properties held for sale represent assets that Ginnie Mae has received
the title of the underlying collateral (e.g. completely foreclosed upon and repossessed) and
intends to sell the collateral. 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. The Properties held for sale are reported at
the lower of the carrying amount or fair value less estimated cost to sell. The properties are
appraised by independent entities on a regular basis throughout the year. Ginnie Mae expects
sale of the property to occur prior to one year from the date of the foreclosure. As a result,
Ginnie Mae does not depreciate these assets. Ginnie Mae records an allowance to account for
potential sale costs including maintenance and miscellaneous expenses, along with a loss
percentage based on historical data, which includes declines in the fair value of foreclosed
properties.

Mortgage Servicing Rights: Mortgage Servicing Rights (MSR) represent Ginnie Mae’s right
and obligation to service mortgage loans in mortgage backed securities obtained from defaulted
issuers. Ginnie Mae contracts with multiple MSSs to provide the servicing of its mortgage loans.
The servicing functions typically performed by Ginnie Mae’s MSSs include: collecting and
remitting loan payments, responding to borrower inquiries, accounting for principal and interest,
holding custodial 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 annually on the
remaining outstanding principal balances of the loans. These servicing fees are included in and
collected from the monthly payments made by the borrowers. Ginnie Mae pays a servicing
expense to the MSSs in consideration for servicing the loans.
Ginnie Mae records a servicing asset or liability each time it takes over a defaulted issuer’s
Ginnie Mae-guaranteed portfolio. The balance of the MSR represents the present value of the
estimated compensation for mortgage servicing activities that exceeds the fair market cost for
such servicing activities. Ginnie Mae considers its fair market cost to be the amount of
compensation that would be required by a substitute MSS should one be required. Typically, the
benefits of servicing are expected to be more than adequate compensation to a substitute MSS
for performing the servicing, and the contract results in a servicing asset. However, if the
benefits of servicing are not expected to adequately compensate a substitute MSS for performing
the servicing, the contract results in a servicing liability.
Ginnie Mae has irrevocably elected to us the fair value method or 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. To determine the fair value of the
MSRs Ginnie Mae uses a valuation model that calculates the present value of estimated future
net servicing income. The model factors in key economic assumptions and inputs including


                                                51
prepayment rates, cost to service a loan, contractual servicing fee income, ancillary income,
escrow account earnings, and the discount rate. The discount rate is used to estimate the present
value of the projected cash flows in order to estimate 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. This approach consists of projecting servicing cash flows and estimating the present
value of these cash flows using discount rates. Upon acquisition, Ginnie Mae measures its
MSRs at fair value and subsequently re-measures the assets or liabilities with changes in the fair
value recorded in the Statements of Revenues and Expenses.

Financial Guarantees: Ginnie Mae, as guarantor, follows the guidance in FASB Accounting
Standards Codification (ASC) Topic 460, Guarantees (ASC 460), for its accounting, and
disclosure, relating to the issuance of certain types of guarantees. ASC 460 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 MBS 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. Ginnie Mae will advance funds to investors and will
service an issuer’s portfolio in the event of their default.
At inception of the guaranty, Ginnie Mae recognizes a liability for the guaranty it provides on
MBS issued by third-party issuers. Ginnie Mae applies the practical expedient in 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.

Ginnie Mae provides the guaranty of principal and interest payments to MBS holders in the
event of issuer default and, in exchange, receives monthly guaranty fees from the issuers on the
unpaid principal balance of the outstanding MBS in the non-defaulted issuer portfolio.
Accordingly, the guaranty asset is based on the expected present value of these fees, taking into
account anticipated amortization of defaults and prepayments.

Additionally, as the guaranty is issued in a standalone transaction for a premium, Ginnie Mae
records a guaranty liability to recognize the future expense for its guaranty as the offsetting entry
for the guaranty asset. Thus, there is no net impact from the initial recording of the guaranty
liability and asset on the net financial position of Ginnie Mae.
Liability for Loss on MBS Program Guaranty: Liability for loss on MBS program guaranty
(MBS loss liability) represents management’s estimate of future losses to be incurred as a result
of the guaranty provided on MBS portfolios when information indicates a loss is probable and
the amount of loss can be reasonably estimated.
The MBS loss liability is established to the extent management believes losses due to issuer
defaults are probable and estimable and servicing income and FHA, USDA, VA, and PIH
insurance proceeds do not fully cover Ginnie Mae servicing and loan acquisition related costs.


                                                 52
Ginnie Mae establishes a MBS loss liability through a provision charged to operations when, in
management’s judgment, losses associated with existing defaulted issuers or performing 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 also analyzes the ability of the borrowers to pay as well as the
recovery amount from mortgage insurance when estimating valuations of the mortgage-related
assets and liabilities.

Additionally, Ginnie Mae’s Office of Enterprise Risk (ERO) utilizes CorporateWatch to assist in
the analysis of potential defaults. CorporateWatch assigns each issuer an internal risk grade
using an internally developed proprietary risk-rating methodology. The objective of the
methodology is to identify those Ginnie Mae issuers that display an elevated likelihood of default
relative to their peers. To this end, the methodology assigns each active Issuer a risk grade
ranging from 1-8, with 1 representing a low probability of default and 8 representing an elevated
probability of default. A higher probability of default would arise from an observed weakness
in an entity's financial health. Those Issuers with an elevated probability of default are assigned
an internal risk grade of 7 or 8 and are automatically included in Risk Category I of the Watch
List. ERO prepares written financial reviews on all Issuers appearing in Risk Category I of
Watch List to assess the level of on-going monitoring needed to ensure that these Issuers remain
viable Ginnie Mae counterparties or to take other mitigation actions.

Ginnie Mae’s MBS loss liability is made up of two components:

   A. Liability for currently defaulted issuers’ non-pooled loans – Separate from the unpaid
      principal and interest of MHI, Ginnie Mae records a liability for estimated non-
      recoverable foreclosure costs that arise from the servicing and managing of mortgage
      loans HFI and properties held for sale.
   B. Liability 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 that the issuer defaults Ginnie Mae will advance funds
      to investors in the Ginnie Mae MBS and will service the issuer’s portfolio. The liability
      is valued as the net present value of future advances and servicing costs, net of insurance
      proceeds and recoveries. For the issuers who are identified as probable defaults, Ginnie
      Mae records a contingent liability for the estimated amount of the cash flows in the loss
      liability.




                                                53
The MBS loss liability is a liability account on the Balance Sheet. 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 MBS loss
liability account when losses are confirmed and records recoveries as a credit to the MBS loss
liability account. Ginnie Mae recovers part of its losses through servicing fees on the performing
portion of the portfolios. Accordingly, the MBS loss liability is 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 MBS loss liability and
recoveries of these expenses through the claims process are shown as recoveries against the MBS
loss liability.

On an annual basis, Ginnie Mae assesses the loss liability model for reasonableness and
predictive capabilities. As Ginnie Mae’s defaulted issuer portfolio changes, the Budget and
Economic Modeling Division reviews the original estimates by comparing them with actual
results and historical data. This includes reviewing market inputs such as interest rates and
volatility. If changes are necessary, the model is changed appropriately and reevaluated to verify
that the changes were implemented properly.

Recognition of Revenues and Expenses: Ginnie Mae recognizes revenue from the following
sources:

      Guaranty Fees – Ginnie 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.
      Interest Income – Mortgage Loans HFI – Ginnie Mae earns interest income on an accrual
       basis at the debenture rate for the number of months allowed under the insuring agency’s
       timeline.
      Interest Income – U.S. Government Securities – Ginnie Mae earns interest income on
       U.S. Government Securities related to U.S. Treasury Overnight Certificates, Treasury
       Notes, and Treasury Inflation-Index Securities.
      Commitment Fees – 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.
      Multiclass Fees – Ginnie Mae receives one-time upfront fees related to the issuance of
       multiclass products. These multiclass fees are recognized as revenue over the service
       period in proportion to the costs expected to be incurred.
      Other MBS Program Income – Ginnie Mae also recognizes income through fees related
       to New Issuer Applications and Transfers of Servicing.



                                               54
Ginnie Mae’s expenses are classified into three groups: MBS program expenses, administrative
expenses, and fixed asset amortization. The main components of the MBS program expense line
item are multiclass expenses, MBS information systems and compliance expenses, and transfer
agent 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 (i.e., accrued interest, deferred revenue and liabilities, accounts payable, and
MBS loss liability) as operating activities. Ginnie Mae classifies cash flows from securities that
Ginnie Mae intends to hold for investment (i.e., 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, of which there were none in 2014 and 2013, as financing activities.
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).



Note 3: 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 include U.S. Treasury overnight certificates, U.S. Treasury notes, and U.S. Treasury
inflation-indexed securities (reflecting inflation compensation). Ginnie Mae’s long-term
securities matured during the year ended September 30, 2014 , with a realized gain of $17.1
million. The coupon rates in overnight certificates as of September 30, 2014 were 0.01 percent.
As of September 30, 2013, they ranged from 1.88 percent to 2.00 percent.


The amortized cost and fair values as of September 30, 2014 were as follows:




                                                 55
The amortized cost and fair values as of September 30, 2013 were as follows:

                                                                    Gross              Gross
                                              Amortized Cost      Unrealized         Unrealized       Fair Value
 (Dollars in thousands)                                             Gains             Losses
 U.S. Treasury Overnight Certificates         $        192,100 $               - $                - $    192,100
 U.S. Treasury Notes                                   998,600            24,500                  -     1,023,100
 U.S. Treasury Inflation-Indexed Securities            619,500            33,800                  -      653,300
 Total                                        $     1,810,200 $           58,300 $                - $ 1,868,500




The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2014, by contractual maturity date, were as follows:

                                                                                              Weighted
                                                    Amortized Cost            Fair Value       Average
  (Dollars in thousands)                                                                    Interest Rate
  Due within one year                              $             150,540 $          150,540         0.01%
  Due after one year through five years                               -                    -
  Due after five years through ten years                              -                    -
  Total                                            $             150,540 $          150,540               0.01%



The amortized cost, fair value, and annual weighted average interest rates of U.S. Government
securities at September 30, 2013, by contractual maturity date, were as follows:
                                                                                                 Weighted
                                                    Amortized Cost           Fair Value           Average
   (Dollars in thousands)                                                                      Interest Rate
   Due within one year                             $        1,810,200 $            1,868,500             -3.03%
   Due after one year through five years                              -                    -
   Due after five years through ten years                             -                    -
   Total                                           $        1,810,200 $            1,868,500             -3.03%



Note 4: Financial Guarantees and Financial Instruments with Off-Balance Sheet Risk
Ginnie Mae receives a guaranty fee from issuers which is calculated based on the unpaid
principal balance of outstanding MBS in the non-defaulted issuer portfolio. It is Ginnie Mae’s



                                                   56
compensation for taking on the risk of providing the guaranty to MBS investors for the timely
payment of principal and interest in the event of issuer default.
Ginnie Mae recognizes a guaranty asset upon issuance of a guaranty for the expected present
value of these guaranty fees. The guaranty liability is a non-contingent guaranty liability for
Ginnie Mae’s obligation to stand ready to perform on the guaranty. The guaranty liability
recognized on the Balance Sheets is $5,963.1 million and $7,012.9 million as of September 30,
2014 and 2013, respectively.
In addition to the guaranty liability, Ginnie Mae recognizes a MBS loss liability, which is
contingent liability for estimable and probable losses in relation to these guarantees (i.e., MBS
Loss Liability). The MBS loss liability recognized on the Balance Sheets is $735.4 million and
$700.3 million as of September 30, 2014 and 2013, respectively.
For the guarantee asset and liability 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, 2014, the amount of securities outstanding, which is
guaranteed by Ginnie Mae, was $1.5 trillion, including $0.4 million of Ginnie Mae-guaranteed
MBS. However, Ginnie Mae’s potential loss is considerably less because of the financial
strength of its issuers. Additionally, in the event of default of an issuer, 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 MBS loss liability, Ginnie Mae
does not anticipate nonperformance by its other counterparties. The approximate term of the
guarantee is 15-30 years. The maximum term is capped at 40 years.
Ginnie Mae is also subject to credit risk for its outstanding commitments to guarantee MBS
which are not reflected in its Balance Sheets. The fair values of these commitments are an
unrecognized MBS commitment for financial statement purposes. 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 due in part to Ginnie Mae’s ability to limit commitment authority granted to
individual MBS issuers. Outstanding MBS and commitments were as follows:
                                                              September 30
              (Dollars in billions)                   2014                   2013
              Outstanding MBS                $               1,526.5   $        1,457.1
              Outstanding MBS Commitments    $                 97.8    $            118.1




                                                 57
If all outstanding MBS commitments were utilized as of September 30, 2014, Ginnie Mae’s
corresponding guaranty liability, its obligation to stand ready to perform on these securities,
would be approximately $401.0 million as of September 30, 2014 and $602.4 million as of
September 30, 2013.
The Ginnie Mae MBS serves as the underlying collateral for multiclass products, such as Real
Estate Mortgage Investment Conduits (REMIC), Callable Trusts, Platinum, 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 its multiclass securities program, Ginnie Mae issued a total of $113.7 billion as of September
30, 2014 and $99.1 billion as of September 30, 2013. . The estimated outstanding balance of
multiclass securities included in the outstanding MBS balance was $487.1 billion and $468.5
billion as of September 30, 2014 and September 30, 2013, respectively. These guaranteed
securities do not subject Ginnie Mae to additional credit risk beyond that assumed under the
MBS program.



Note 5: Mortgage Servicing Rights
The following table presents activity for residential first mortgage MSRs:



                                                                       September 30
               (Dollars in thousands)                                      2014
               Balance, October 1, 2013                            $              65,100
               Additions                                                               -
               Changes in Fair Value                                          (20,500)
               Balance, September 30, 2014                         $              44,600



                                                                       September 30
               (Dollars in thousands)                                      2013
               Balance, October 1, 2012                            $              60,700
               Additions                                                               -
               Changes in Fair Value                                               4,400
               Balance, September 30, 2013                         $              65,100




The Unpaid Principal Balance (UPB) of the MSRs for the total portfolio was $5.6 billion and 7.8
billion as of September 30, 2014 and September 30, 2013, respectively.


                                               58
The amounts reflected in the table above 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. The
decrease in MSR value is attributable to sale of pooled loans, increase in prepayments, higher
cost of servicing, and higher delinquency and foreclosure rates, amongst other fair value drivers.

The impact of key economic assumptions used in determining the fair value of the Ginnie Mae’s
MSRs are as follows:

                                                                            September 30
    (Dollars in thousands)                                           2014                  2013

    Valuation at period end:
                  Fair value (thousands)                         $          44,600 $              65,100
                  Weighted- average life (years)                              4.14                  5.38
    Prepayment rates assumptions:
                  Rate assumption                                           19.91%                17.69%
                  Impact on fair value of a 10% adverse change              (2,600)               (4,000)
                  Impact on fair value of a 20% adverse change              (5,000)               (7,700)
    Discount rate assumptions:
                  Rate assumption                                           12.58%                12.57%
                  Impact on fair value of a 10% adverse change              (1,700)               (2,700)
                  Impact on fair value of a 20% adverse change              (3,200)               (5,200)

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.
One of the primary risks associated with 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 $27.1 million and $41.1 million in mortgage servicing fees for the years
ended September 30, 2014 and 2013, respectively. This amount is recorded as a recovery in the
MBS loss liability.

Note 6: Advances Against Defaulted MBS Pools
The advances against defaulted MBS pools balance are $81.8 million as of September 30, 2014
and $99.1 million as of September 30, 2013, as follows:




                                                         59
                                                                            September 30
         (Dollars in thousands)                                      2014                  2013
         Advances against defaulted MBS pools             $             192,500 $             261,600
         Allowance for Uncollectible Advances                          (110,700)              (162,500)
         Advances against defaulted MBS pools, net        $                 81,800 $              99,100




Note 7: Ginnie Mae Defaulted Issuer Loan Portfolio Profile
Ginnie Mae’s defaulted issuer loan portfolio profile consists of primarily single family loans. As
of September 30, 2014, there are no multifamily mortgage loans within the Ginnie Mae defaulted
issuer portfolio. The table below describes the aging of the single family defaulted issuer loan
profile (i.e., mortgage loans HFI, foreclosed property, properties held for sale, short sale claims
receivable, etc.) and UPB in thousands:




Ginnie Mae analyzes its risk structure based on a loan’s insurance coverage. Loans, which are
insured by the FHA, have the least credit risk and are classified as Credit Risk Level 1 because
Ginnie Mae expects to receive full recovery of principal in the event of a loan default. Loans,
which are classified as a Credit Risk Level 2, are insured by other agencies (i.e., VA, USDA,
etc.). These loans are more risky than Credit Level 1 loans because Ginnie Mae expects to
receive partial recovery of principal. All loans without insurance coverage are classified as a
Credit Risk Level 3. These loans are high risk because they have a lower probability for
recovery than insured loans. The breakdown of loans by credit risk level and UPB in thousands
is below:

                                                                     September 30
                                                              2014                     2013
             Credit Risk Level 1 - FHA Loans         $          5,009,300 $              5,836,700
             Credit Risk Level 2 - Non-FHA Loans                 331,600                   396,700
             Credit Risk Level 3 - Uninsured Loans               535,100                   526,100
             Total                                   $          5,876,000 $              6,759,500




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Note 8: Mortgage Loans Held for Investment, Net
Mortgage loans HFI, net as of September 30, 2014 and 2013 were as follows:

                                                             September 30
(Dollars in thousands)                                2014                         2013
Total Mortgage Loans HFI                         $      5,309,000        $           6,169,600
Total Mortgage Loans HFI Allowance for Loss                 (465,400)                 (502,200)
Total Mortgage Loans HFI, net                    $      4,843,600        $           5,667,400




Ginnie Mae purchased $488.9 million and $1.1 billion of loans from defaulted issuer pools as of
September 30, 2014 and 2013, respectively. As of September 30, 2014 and September 30, 2013
there were no multifamily mortgage loans within the Ginnie Mae defaulted issuer portfolio.

Ginnie Mae’s credit risk on the MHI loans is limited by the underlying insurance on the loans
provided by FHA, USDA, VA, and PIH. The table below presents the UPB of MHI loans by the
underlying insurer.
In the years ended September 30, 2014 and 2013, Ginnie Mae recorded $346.8 million and
$116.4 million, respectively, in interest income on mortgage loans HFI.


Note 9: Foreclosed Property, Net
The Foreclosed property balance is $577.2 million as of September 30, 2014 and $481.1 million
as of September 30, 2013, net of the allowance for foreclosed property, as follows:


                                                                         September 30
                  (Dollars in thousands)                         2014                     2013
                  Foreclosed property                   $               615,800 $                494,600
                  Allowance for foreclosed property                     (38,600)                 (13,500)
                  Foreclosed property, net              $               577,200 $                481,100



Ginnie Mae utilizes the non-pooled valuation and allowance methodology to evaluate Foreclosed
Property on an individual basis. Items are evaluated to determine impairment include insurance
status and probable recovery amount based on experience and industry studies. As of September
30, 2014 and September 30, 2013 there was no multifamily foreclosed property.



Note 10: Short Sale Claims Receivable, Net



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The Short Sale Claims Receivable balance is $22.4 million as of September 30, 2014 and $61.7
million as of September 30, 2013, as follows:


                                                                            September 30
           (Dollars in thousands)                                    2014                   2013
           Short Sale Claims Receivable                          $          50,100 $               81,600
           Allowance for Short Sale Claims Receivable                   (27,700)               (19,900)
           Short Sale Claims Receivable, net                     $          22,400 $               61,700




Ginnie Mae utilizes the non-pooled valuation and allowance methodology to evaluate Short Sale
Claims Receivable on an individual basis. Items are evaluated to determine impairment
including insurance status and probable recovery amount based on experience and industry
studies. As of September 30, 2014, there are no multifamily mortgage loans within the Ginnie
Mae defaulted issuer portfolio.


Note 11: Insurance Claims Receivable
The Claims Receivable balance is $1.8 million as of September 30, 2014 and $8.4 million as of
September 30, 2013. There is no allowance on Insurance Claims Receivable because it is a
Federal receivable.


Note 12: Properties Held for Sale, Net
Balances and activity for these acquired properties were as follows:

                                                                             September 30
    (Dollars in thousands)                                           2014                          2013
    Balance of properties, beginning of year                 $                29,600    $                   15,500
       Additions                                                              20,200                        42,600
       Dispositions and Losses                                               (32,400)                     (28,500)
    Balance of properties, end of year                       $                17,400    $                   29,600
    Valuation Allowance                                                       (3,200)                       (6,200)
    Properties held for sale, net                            $                14,200    $                   23,400


During the year ended September 30, 2014, $20.2 million of loans were repurchased out of pools
and categorized as properties held for sale. The properties held for sale balance is composed
primarily of single family collateral.



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Note 13: Fair Value Measurements
This note discusses the recurring and non-recurring changes in fair value measurement as well as
the fair value of financial instruments.
Recurring Changes in Fair Value
The following table presents the fair value measurement hierarchy level for 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. Mortgage
Servicing Rights is the only Ginnie Mae asset which is measured on a recurring basis subsequent
to initial recognition. The fair value of the Mortgage Servicing Rights and its measurement basis
is shown below.

                                                                  September 30, 2014
    (Dollars in thousands)                  Level 1            Level 2            Level 3       Total
    Mortgage Servicing Rights           $                 -   $        -      $      44,600 $      44,600


    Total Assets at Fair Value          $                 -   $           -   $      44,600 $      44,600




                                                                  September 30, 2013
    (Dollars in thousands)                  Level 1            Level 2            Level 3       Total
    Mortgage Servicing Rights           $             -       $      -        $      65,100 $      65,100

    Total Assets at Fair Value          $             -       $       -       $      65,100 $      65,100



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 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. Note 5 contains additional detail in regards to specific fair
value assumptions.

The following table presents a reconciliation for the MSRs measured at fair value on a recurring
basis using significant unobservable inputs for the years ended September 30, 2014 and 2013:




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                                                                                               Mortgage
                                                                                            Servicing Rights
            (Dollars in thousands)
                                                                                            $          65,100
            October 1, 2013

            Net realized/unrealized gains (losses) included in Excess of Revenue over                  (20,500)
            Expenses

            September 30, 2014                                                              $          44,600



            Assets:
                                                                                            $          60,700
            October 1, 2012

            Net realized/unrealized gains (losses) included in Excess of Revenue over                   4,400
            Expenses

            September 30, 2013                                                              $          65,100


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 2014 and 2013 for the MSRs:


                                                                                        Total Gains and Losses on
                                                                                         Mortgage Service Rights

(Dollars in thousands)                                                                          2014              2013
Classification of gains and losses
(realized/unrealized) included in Excess of
Revenue over Expenses for the period:

                                                Gain (Loss) on MSR                                (20,500)          4,400
Total                                                                                   $         (20,500) $        4,400




Nonrecurring Changes in Fair Value

The following table displays the asset 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 (e.g., when Ginnie Mae evaluates
for impairment), and the gains or losses recognized for these assets and liabilities for the years
ended September 30, 2014 and 2013, as a result of fair value measurements:




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                                                                     September 30, 2014
(Dollars in thousands)                                                                      Level 1          Level 2             Level 3          Total Losses
Properties held for sale, net                                                                                            $             14,200                      -


                                                                     September 30, 2013
(Dollars in thousands)                                                                      Level 1          Level 2             Level 3          Total Losses
Properties held for sale, net                                                                                            $             23,400                      -




Properties held for sale, net represents foreclosed property received in full satisfaction of a loan,
which Ginnie Mae intends to sell, net of a valuation allowance. 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. The properties are appraised by independent entities on a regular basis throughout the
year. The appraisals include viewing the condition of properties and analyzing market
conditions (e.g. comparing similar properties, recent sales, etc.). Acquired property is classified
within Level 3 of the valuation hierarchy because significant inputs are unobservable.


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, 2014 and 2013.
                                                                        September 30, 2014                                            September 30, 2013
(Dollars in thousands)                          Carrying Value        Level 1            Level 2           Level 3               Carrying Value       Fair Value

Financial Assets:
Funds with U.S. Treasury                    $       13,470,000   $     13,470,000    $             -   $             -       $        9,622,400   $      9,622,400
U.S. Government securities                  $          150,500   $       150,500     $             -   $             -       $        1,810,200   $      1,868,500
Mortgages held for investment, net          $        4,843,600   $              -    $             -   $     4,843,600       $        5,667,400   $      5,667,400
Foreclosed property, net                    $          577,200   $              -    $             -   $      577,200        $          481,100   $        481,100
Advances against defaulted MBS Pools, net   $           81,800   $              -    $             -   $        81,800       $           99,100   $         99,100
Short sale claims receivable, net           $           22,400   $              -    $             -   $        22,400       $           65,100   $         65,100
Mortgage servicing rights                   $           44,600   $              -    $             -   $        44,600       $           65,100   $         65,100
Guaranty asset                              $        5,963,100   $              -    $             -   $     5,963,100       $        7,012,900   $      7,012,900

Financial Liabilities:
Guaranty liability                          $        5,963,100   $              -    $             -   $     5,963,100       $        7,012,900   $      7,012,900

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.
Amounts which Ginnie Mae ultimately realizes from the disposition of assets or settlement of
liabilities may vary significantly from the fair values presented.

U.S. Government Securities – Ginnie Mae records the fair value of this asset based on quoted
data from the U.S. Bureau of Public Debt.


                                                                                65
Mortgage loans held for investment, net – Mortgage loans held for investment, net is impaired
when purchased and is measured as the unpaid principal balance which Ginnie Mae pays to
purchase the loans from a defaulted issuer pool. These loans are reported net of an allowance for
loan losses. Ginnie Mae expects to receive the entire principal and interest balances through the
insurers or borrowers in most instances, except for VA-insured loans.
Guaranty asset and liability – Ginnie Mae uses the practical expedient to determine the guaranty
asset and liability based on the present value of the expected future cash flows from the guaranty
fees based on the unpaid principal balance of the outstanding MBS in the non-defaulted issuer
portfolio which results from new issuances of MBS, scheduled run-offs of MBS, prepayments
and defaults. Subsequently, the guaranty asset and liability is measured by a systematic and
rational amortization method. It is not practicable to calculate a fair value on the guaranty asset
and liability because there is no market to compare the estimates. Note 4 provides additional
information in regards to the guaranty asset and liability.

Note 14: MBS Loss Liability

Ginnie Mae establishes a MBS loss liability on an annual basis. The changes in the MBS loss
liability for the years ended September 30, 2014, and 2013 were as follows:



                                                                                  Manufactured
                                Single Family                 Multifamily                                Total
 (Dollars in thousands)                                                             Housing
 MBS Loss Liability
 September 30, 2012        $                    356,500   $            100        $        800       $     357,400
    Provision for losses                        403,300               (100)              (1,100)           402,100
    Charge-offs                             (203,200)                        -            (800)           (204,000)
   Recoveries                                   143,100                      -           1,700             144,800
 MBS Loss Liability
 September 30, 2013        $                    699,700   $                  -    $        600       $     700,300
   Provision for losses                     (114,595)                       5             (410)           (115,000)
    Charge-offs                             (280,205)                       (9)           (400)           (280,614)
   Recoveries                                   430,500                     4              210             430,714
 MBS Loss Liability
 September 30, 2014        $                    735,400   $                  -    $              -   $     735,400

Management believes that its MBS loss liability is adequate to cover probable and estimable
losses on the MBS program guaranty. Ginnie Mae incurs losses when FHA, USDA, VA, and
PIH insurance and guaranty proceeds do not cover losses that result from issuer defaults or in the
event loans are uninsured and proceeds do not cover losses from default. As of September 30,
2014, Ginnie Mae’s single family and pooled defaulted portfolio had remaining principal
balances of $5.6 billion.

Note 15: Concentrations of Credit Risk


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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. Concentrations of credit risk are as noted below, as of September
30, 2014:

                                                                                                                         Home Equity
                                   Single Family                    Multifamily             Manufactured Housing          Conversion
                                                                                                                        (HECM/HMBS)
                                          Remaining                           Remaining                  Remaining               Remaining
                              Number                                                         Number                  Number
                                           Principal     Number of Issuers     Principal                  Principal               Principal
                             of Issuers                                                     of Issuers              of Issuers
(Dollars in billions)                      Balance                             Balance                    Balance                 Balance

Largest performing issuers          25 $      1,163.5                   20   $       75.9           1    $      0.3        14    $     48.9
Other performing issuers           237 $       222.3                    33   $       12.1           2    $       -          0    $       -
Defaulted issuers                   18 $           5.6                   0   $         -            0    $       -          0    $       -


Concentrations of credit risk are as noted below, as of September 30, 2013

                                                                                                                         Home Equity
                                   Single Family                    Multifamily             Manufactured Housing          Conversion
                                                                                                                        (HECM/HMBS)
                                          Remaining                           Remaining                  Remaining               Remaining
                              Number                                                         Number                  Number
                                           Principal     Number of Issuers     Principal                  Principal               Principal
                             of Issuers                                                     of Issuers              of Issuers
(Dollars in billions)                      Balance                             Balance                    Balance                 Balance

Largest performing issuers          25 $      1,169.6                   21   $       70.7           1    $      0.3        12    $     44.6
Other performing issuers           210 $       157.1                    36   $        9.2           2    $       -          0    $       -
Defaulted issuers                   23 $           7.8                   0   $         -            1    $       -          0    $       -




Issuers are permitted only to pool insured or guaranteed loans (from FHA, USDA, VA or PIH).
The insuring and guarantying entities have strict underwriting standards and criteria for quality
of collateral. In the event of issuer default, Ginnie Mae assumes the rights and obligations of the
issuer and becomes the owner of the MSR asset, which typically is a saleable asset. In addition,
in the event of borrower delinquency in excess of 90 or 120 days for Single Family or
Manufactured Housing respectively, Ginnie Mae has the right to repurchase the loan out of the
pool and can obtain access to the underlying collateral or insurance claim by pursuing
foreclosure.

Note 16: Contingencies
As of September 30, 2014, and as of this report, Ginnie Mae’s Office of General Counsel has not
identified one pending or threatened action or unasserted claim or assessment in which Ginnie
Mae’s exposure is $1.0 million, individually, or in the aggregate for similar matters.
Additionally, Ginnie Mae’s Office of General Counsel has determined that there are no pending

                                                                   67
or threatened actions or unasserted claims or assessments in which Ginnie Mae’s potential loss
exceeds $3.0 million 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 each case.
It is the opinion of Ginnie Mae’s management that the disposition or ultimate resolution of the
case will not have a material adverse effect on the financial position of Ginnie Mae.


On or about August 20, 2014, the Department of Justice, on behalf of Ginnie Mae, among others,
entered into a settlement agreement with Bank of America. The settlement agreement addressed
the contractual legal claims of Ginnie Mae against Bank of America and Countrywide relating to
the performance of Bank of America and Countrywide under the Master Subservicer contract
with Ginnie Mae. Pursuant to the settlement agreement, Ginnie Mae will receive $200
million. This settlement amount represents that mutual agreement of Ginnie Mae and Bank of
America to resolve the contractual claims of Ginnie Mae.

Taylor, Bean & Whitaker, a defaulted Ginnie Mae issuer, made three corporate advances totaling
roughly $78 million on its Ginnie Mae portfolio using money from Ocala Funding (Ocala), its
financing affiliate. On July 8, 2014, Ocala filed a lawsuit under the Bankruptcy Code 11 U.S.C.
§ § 105,541,544, 550 and 551 which permits Ocala, the debtor, to raise claims under state
law. The claims that Ocala asserts arise under Florida Uniform Fraudulent Transfers Act. Ocala
claims that Ginnie Mae was a direct transferee of the fraudulent transfers and therefore is liable
to return the funds. Parties engaged in settlement negotiations and the agreement was reached in
principle to settle the lawsuit. Ginnie Mae agreed to pay Ocala $14.9 million in exchange for
Ocala releasing its claims against Ginnie Mae in a subsequent period.

Ginnie Mae has commitments to guaranty MBS, which are off-balance sheet financial
instruments. Additional information is provided in Note 4: Financial Guarantees and Financial
Instruments with Off-Balance Sheet Risk.
Ginnie Mae’s management recognizes the uncertainties that could occur in regard to potential
defaulted issuers and other indirect guarantees, such as large issuer portfolio default, lack of
proper insurance coverage of defaulted loans, etc. Additional information is discussed in Note
14: MBS Loss Liability.
Note 17: 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.




                                                68
Ginnie Mae was authorized to use $21.4 million during the year ended September 30, 2014 for
personnel (payroll) and non-personnel (travel, training) costs only. During the year ended
September 30, 2014, Ginnie Mae incurred $20.3 million, net, for Salaries and Expenses. Ginnie
Mae has no liability for future payments to employees under the CSRS or FERS 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 and are treated as such for the Statements of Cash Flow.
Ginnie Mae has authority to borrow from the U.S. Treasury to finance operations in lieu of
appropriations, if necessary.
Additionally, Ginnie Mae has an intra-entity relationship with the FHA, which is part of HUD.
Of the total mortgage loans HFI, net, approximately $5.4 billion and $5.3 billion of loans were
insured by FHA as of September 30, 2014 and 2013, respectively. In addition, Ginnie Mae
submits and receives claim proceeds for FHA-insured loans that have been through the
foreclosure and short sale process. The breakdown of FHA claims pending payment or pre-
submission to FHA is below:




                                                                 September 30
         (Dollars in thousands)                           2014                  2013
         Foreclosed Property                        $        493,600     $         479,500
         Short Sales Claims Receivable                           6,500                 44,100
         Insurance Claims Receivable                             1,800                  8,400
         Total FHA Claims, net                      $        501,900     $         532,000


Note 18: 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.




                                               69
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,
2014, the U.S. Government has an investment of $19.0 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 19: Subsequent Events
Ginnie Mae management has evaluated potential subsequent events through November 27, 2014,
the date through which the financial statements were made available to be issued. Based on the
evaluation, Ginnie Mae management identified no subsequent events.




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