oversight

Ginnie Mae Improperly Allowed Uninsured Loans To Remain in Mortgage- Backed Securities Pools

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-21.

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

         Government National Mortgage
          Association, Washington, DC
    Mortgage-Backed Securities Secured by FHA Loans




Office of Audit, Region 7    Audit Report Number: 2016-KC-0002
Kansas City, MO                              September 21, 2016
To:            Michael Drayne, Senior Vice President, Office of Issuer and Portfolio
               Management, TS

               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       Ginnie Mae Improperly Allowed Uninsured Loans To Remain in Mortgage-
               Backed Securities Pools




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of single-family Federal Housing Administration
loans held for 1 year or longer in Government National Mortgage Association (Ginnie Mae)
mortgage-backed securities pools without the required mortgage insurance.
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
913-551-5870.
                    Audit Report Number: 2016-KC-0002
                    Date: September 21, 2016

                    Ginnie Mae Improperly Allowed Uninsured Loans To Remain in Mortgage-
                    Backed Securities Pools



Highlights

What We Audited and Why
We audited the Government National Mortgage Association’s (Ginnie Mae) process for
identifying and removing uninsured single-family Federal Housing Administration loans from
mortgage-backed securities (MBS) pools (see page 3 for an explanation of mortgage-backed
securities). We initiated this audit based on indications that loans that have mortgage insurance
terminated are not always removed from Ginnie Mae MBS pools. Our audit objective was to
determine whether loans remained in Ginnie Mae MBS pools for 1 year or longer without the
required mortgage insurance.



What We Found
Ginnie Mae allowed at least 345 uninsured single-family loans valued at nearly $50 million to
remain in its MBS pools for more than 1 year. We reviewed a statistical sample of 85 of 363
pooled loans for which the U.S. Department of Housing and Urban Development’s systems
showed no insurance endorsement date. Eighty-three of the loans were uninsured more than 1
year after the lenders issued the related securities.



What We Recommend
We recommend that Ginnie Mae (1) establish a maximum time that loans may remain pooled
without insurance and (2) establish a process for requiring removal of pooled loans that remain
uninsured at the maximum time to put $49.3 million to better use.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: Ginnie Mae Improperly Allowed Uninsured Loans To Remain Pooled .. 5

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Funds To Be Put to Better Use ............................................................ 10
         B. Auditee Comments and OIG’s Evaluation ............................................................. 11
         C. Criteria ....................................................................................................................... 14
         D. Sampling and Projections......................................................................................... 18




                                                                     2
Background and Objective
The Government National Mortgage Association (Ginnie Mae) Charter Act created Ginnie Mae as a
corporation within the U.S. Department of Housing and Urban Development (HUD) in 1968.
Ginnie Mae assists the secondary market for residential mortgages by increasing the liquidity of
mortgage investments. Ginnie Mae does this through its mortgage-backed securities (MBS)
program. In this program, mortgage lenders originate mortgages under government insurance
programs. The lenders then pool loans made to individual homeowners and sell them, along with
the rights to their future cash flows, for cash in the global securities market. Ginnie Mae guarantees
that investors in these pools receive timely principal and interest payments. This guarantee
transforms individual mortgages from relatively illiquid, individual assets into liquid, tradable, and
homogeneous capital market instruments. Ginnie Mae’s guaranty of MBS is backed by the full
faith and credit of the United States.
Mortgages in MBS pools must be Federal Housing Administration (FHA) insured or guaranteed
under other Federal loan programs. This requirement protects Ginnie Mae. FHA provides
mortgage insurance on loans made by FHA-approved lenders throughout the United States and
its territories. The HUD Office of Housing oversees FHA. Government agency insurance and
lender resources cover losses before Ginnie Mae. Mortgages that do not meet the insurance or
guarantee requirement are considered defective. The Ginnie Mae Mortgage-Backed Securities
Guide requires that lenders remove defective loans from the pools. Before 2003, lenders were
required to certify that all loans in each pool met certain requirements, including that they be
federally insured or guaranteed. Since 2003, Ginnie Mae uses information received from FHA to
determine the insurance status of FHA single-family loans. This change removed the requirement
to obtain third-party verification of FHA insurance, providing cost savings to lenders, representing
the commitment by Ginnie Mae to reduce the costs of homeownership. Lenders were required to
complete the certification within 1 year after the security was issued. Currently, there is no
maximum time in which a loan may remain uninsured and remain in a MBS pool.
In fiscal year 2015, issuers securitized more than 98 percent of FHA fixed-rate single-family loans
into Ginnie Mae pools. Investors held $1.5 trillion in outstanding single-family Ginnie Mae MBS at
the end of fiscal year 2015.




                                                   3
                                 Outstanding Ginnie Mae mortgage-backed securities
                        $2,000
   Amount in billions




                        $1,500

                        $1,000

                         $500

                           $0




Our objective was to determine whether loans remained in Ginnie Mae MBS pools for 1 year or
longer without the required mortgage insurance.




                                                            4
Results of Audit

Finding 1: Ginnie Mae Improperly Allowed Uninsured Loans To
Remain Pooled
Ginnie Mae allowed more than $49 million in uninsured single-family loans to remain in its
MBS pools for more than 1 year without obtaining FHA mortgage insurance. This condition
occurred because Ginnie Mae did not have a process for requiring removal of pooled loans that
remained uninsured for more than 1 year. As a result, it is at risk of becoming financially
responsible for these uninsured mortgages if the lender defaults.
Uninsured Loans in MBS Pools
Ginnie Mae allowed at least 345 uninsured single-family loans valued at nearly $50 million to
remain in its MBS pools for more than 1 year. To allow a reasonable time for GNMA to cure a
lack of insurance, this only includes loans that had been in a GNMA pool for at least 1 year, as of
September 30, 2015. We identified 363 pooled loans for which HUD’s systems showed no
insurance endorsement date. We reviewed a statistical sample of 85 of those loans and found
that 83 were uninsured more than 1 year after the date on which the lenders issued the related
securities. We used these results to project that at least 345 of the 363 loans remained uninsured
for more than 1 year.
The Government National Mortgage Association Charter Act (see Appendix C) requires that all
loans in the MBS pools have Federal insurance or a Federal guarantee. Ginnie Mae allows
lenders to pool loans with pending FHA insurance. This practice is reasonable because loans
originated according to FHA requirements are likely to receive insurance. However, FHA
endorsed most loans within 2 months of closing.
No Removal Process
Ginnie Mae did not have a process for requiring that lenders remove (purchase) loans from their
pools when they remained uninsured for more than 1 year.
Ginnie Mae did not set a maximum length of time in which a loan could be uninsured and still
remain in a MBS pool. Before 2003, the lender had to provide proof of insurance within a year
to obtain pool certification. Ginnie Mae removed the insurance requirement for pool
certification in 2003.
In addition, Ginnie Mae did not take strong action to motivate lenders that did not cure uninsured
loans. It consistently identified uninsured loans, notified the lenders of the deficiency, and sent
additional notifications to lenders that did not respond. While the notices worked to obtain
compliance for the majority of lenders, Ginnie Mae did not take additional actions to ensure that
all lenders removed the loans from the pools.




                                                 5
Potential for Losses
Ginnie Mae is at risk of becoming financially responsible for these uninsured mortgages if it
extinguishes a lender. Ginnie Mae can extinguish a lender in response to a default, such as
failure to make timely payments to security holders or loss of FHA approved status. When
Ginnie Mae extinguishes a lender, it seizes its portfolio and takes on the responsibilities of the
lender, including responsibility to buy uninsured loans from the pools. Our sample universe
included 82 of these uninsured loans that Ginnie Mae seized. Ginnie Mae is responsible for
$11.6 million in mortgages for these loans.
Conclusion
Ginnie Mae’s MBS pools included more than $49 million in at least 345 loans that lacked the
mortgage insurance required by Federal statute. For these loans, Ginnie Mae may have to
advance principal and interest payments to the investors and buy them out of the MBS
pools. Because Ginnie Mae did not formally establish a maximum amount of time loans could
take to obtain FHA insurance and still remain in MBS pools or a process for forcing their
removal from the pool, the risk to Ginnie Mae continues. By addressing this weakness, Ginnie
Mae can protect its financial situation by no longer guaranteeing FHA loans that fail to obtain
insurance for more than 1 year.
Recommendations
We recommend that Ginnie Mae’s Senior Vice President, Office of Issuer and Portfolio
Management
       1A. Establish a maximum time that loans may remain pooled without insurance.
       1B. Establish a process for requiring removal of pooled loans that remain uninsured at the
           maximum time to put $49.3 million to better use.




                                                  6
Scope and Methodology
Our audit covered the period October 2014 through September 2015. We performed our audit
work between December 2015 and August 2016.
To accomplish our objective, we

      Reviewed relevant regulations, the Ginnie Mae Mortgage-Backed Securities Guide, and
       Ginnie Mae guidance;
      Reviewed the Ginnie Mae guaranty agreement, which is the contract between Ginnie
       Mae and the issuers of securities;
      Reviewed Ginnie Mae’s insurance matching procedures;
      Interviewed Ginnie Mae personnel; and
      Selected and reviewed a statistical sample of uninsured loans.
We used a statistically selected sample to reach our conclusions. Our sampling universe
consisted of 363 loans valued at more than $52.1 million that were included in Ginnie Mae pools
but showed no record of an insurance endorsement date in the FHA Single Family Data
Warehouse. To allow a reasonable time for GNMA to cure a lack of insurance we only included
loans that had been in a GNMA pool for at least 1 year, as of September 30, 2015. We reviewed
a sample of 85 of those loans. See appendix D for a detailed explanation of our sample selection
and results projection.
We relied on data that included months pooled, start date, and loan balance derived from HUD’s
Single Family Data Warehouse (SFHEDW) to select our sample. SFHEDW is a large and
extensive collection of database tables organized and dedicated to support the analysis,
verification, and publication of Single Family Housing data. The warehouse consists of
datamarts developed to support specific business units and communities within the HUD family.
Although we did not perform a detailed assessment of the reliability of SFHEDW, we compared
the fields used to determine our sample universe with loan information entered by issuers into
the Ginnie Mae Reporting and Feedback System.
Ginnie Mae matches issuer-reported loan-level data with data from FHA’s Single Family
Information System (SFIS, Endorsed Loans A43 Database) to monitor loan activity. SFIS is the
system of record for all FHA insured Single Family loans and case records. Ginnie Mae
produces monthly and quarterly reports using this information.
We compared the information from SFHEDW with the information in the Ginnie Mae aged
missing coverage report from September 2015 and added information from Neighborhood Watch
reports. Neighborhood Watch is a HUD Web-based system, used by FHA employees, lenders,
and the general public to monitor the performance of insured mortgage loans. We supplemented
this review with information from the form HUD-11706, Schedule of Pooled Mortgages. Our
testing confirmed the accuracy of the pool issue date, loan balance, and mortgage insurance
status.



                                                7
Within our sample, we noted 19 loans serviced by one corporation. These loans were part of a
group of loans seized by Ginnie Mae from a defaulted servicer. Ginnie Mae subsequently sold
the corporation servicing rights to these loans. The sales contract noted that Ginnie Mae was
financially responsible for these loans. We matched 100 percent of the uninsured loans in the
sales contract to our sample universe. There were 82 of these loans in our sample universe of
363 loans with an unpaid principal balance of $11.6 million.
Ginnie Mae guarantees payments from loans insured by Federal agencies in addition to FHA.
We considered only loans entered into the FHA system. We also excluded loans with FHA
coverage obtained but later voluntarily terminated by the servicer.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                8
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   Effectiveness and efficiency of operations,
   Reliability of financial reporting, and
   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

   Controls to ensure that uninsured FHA loans are removed from MBS pools.
We assessed the relevant controls identified above.
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, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

   Ginnie Mae did not have a process for requiring removal of pooled loans that remained
    uninsured for an unreasonable length of time (finding).




                                                  9
Appendixes

Appendix A


                       Schedule of Funds To Be Put to Better Use
                         Recommendation Funds to be put
                             number          to better use 1/
                                 1A              $49,300,000

                               Totals            49,300,000



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this case, if Ginnie Mae implements our
     recommendations, it will no longer guarantee FHA loans that do not obtain insurance and
     remain in MBS pools. Our estimate reflects only the initial year of this benefit. These
     amounts do not include potential offsetting costs incurred by Ginnie Mae to implement
     our recommendations to strengthen controls. (See appendix D for additional information
     regarding the statistical sample.)




                                            10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1


Comment 2


Comment 3




                               11
Ref to OIG   Auditee Comments
Evaluation




Comment 4




                                12
                         OIG Evaluation of Auditee Comments


Comment 1   Ginnie Mae stated that references to “putting funds to better use” are confusing,
            since there are no government expenditures involved. We recommend that Ginnie
            Mae use its authority to guarantee securities backed by insured loans instead of
            uninsured loans in order to put that amount of guarantee authority to better use.
            Guaranteeing securities backed by uninsured loans increases the risk of loss to
            Ginnie Mae. Ginnie Mae’s MBS pools included more than $49 million in loans
            that lacked the required mortgage insurance. For these loans, Ginnie Mae may
            have to advance principal and interest payments to the investors and buy them out
            of the MBS pools. Already, 82 of these uninsured loans had been seized by
            Ginnie Mae. Ginnie Mae is responsible for $11.6 million in mortgages for these
            loans.
Comment 2   Ginnie Mae stated that in some cases requiring buyout of uninsured loans would
            increase the government’s risk. We recognize Ginnie Mae is granted by Federal
            statute (see Appendix C) the power to ensure the efficient operation of the
            securities program. We are not seeking to limit this power so long as the actions
            are compatible with the Charter Act requirements.
Comment 3   Ginnie Mae objected to our statements on lack of adequate follow up on
            uninsured loans. We revised the report to better recognize the tracking and
            notification of pooled loans by Ginnie Mae. We recognize a large percentage of
            the loans are cured using this process.
Comment 4   Ginnie Mae requested two technical updates. We agree with the changes and
            revised the report using the terminology suggested by Ginnie Mae.




                                             13
Appendix C
                                              Criteria


Excerpts From the Charter Act

                GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
                                  STATUTORY AUTHORITY
                (Title III of National Housing Act, 12 U.S.C. 1716 et seq.)
                                    ___________________
                   TITLE III--NATIONAL MORTGAGE ASSOCIATIONS
                                         PURPOSES
Declaration of Statutory Purposes

Sec. 301. The Congress hereby declares that the purposes of this title are to establish secondary
market facilities for residential mortgages, to provide that the operations thereof shall be
financed by private capital to the maximum extent feasible, and to authorize such facilities to–
Secondary Market Activities

(1) provide stability in the secondary market for residential mortgages;
(2) respond appropriately to the private capital market;
(3) provide ongoing assistance to the secondary market for residential mortgages (including
activities relating to mortgages on housing for low- and moderate-income families involving a
reasonable economic return that may be less than the return earned on other activities) by
increasing the liquidity of mortgage investments and improving the distribution of investment
capital available for residential mortgage financing;

(4) promote access to mortgage credit throughout the Nation (including central cities, rural areas,
and underserved areas) by increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for residential mortgage financing; and

Management and Liquidation Functions

(5) manage and liquidate federally owned mortgage portfolios in an orderly manner, with a
minimum of adverse effect upon the residential mortgage market and minimum loss to the
Federal Government.

Ginnie Mae’s Authority to Buy Mortgages

Sec. 302 (b)(1) For the purposes set forth in section 301 and subject to the limitations and
restrictions of this title, each of the bodies corporate named in subsection (a)(2)7 is authorized,
pursuant to commitments or otherwise, to purchase, service, sell, or otherwise deal in any


                                                  14
mortgages which are insured under the National Housing Act or title V of the Housing Act of
1949, or which are insured or guaranteed under the Servicemen’s Readjustment Act of 1944 or
chapter 37 of title 38, United States Code; and to purchase, service, sell, or otherwise deal in
any loans made or guaranteed under part B of title VI of the Public Health Service Act…

Ginnie Mae’s Authority to Guarantee Securities

Sec. 302(g)(1) The Association is authorized, upon such terms and conditions as it may deem
appropriate, to guarantee the timely payment of principal of and interest on such trust certificates
or other securities as shall (i) be issued by the corporation under section 304(d), or by any other
issuer approved for the purposes of this subsection by the Association, and (ii) be based on and
backed by a trust or pool composed of mortgages which are insured under the National Housing
Act or title V of the Housing Act of 1949, or which are insured or guaranteed under the
Servicemen’s Readjustment Act of 1944 or chapter 37 of title 38, United States Code, or which
are guaranteed under title XIII of the Public Health Service Act; or guaranteed under section 184
of the Housing and Community Development Act of 1992…

Excerpts from Title 12-Banks and Banking - Subsection 1721(g)(E)(iv)

No State or local law, and no Federal law (except Federal law enacted expressly in limitation of
this clause after August 10, 1993) shall preclude or limit the exercise by the Association of its
power to contract with persons or entities, and its rights to enforce such contracts, for the purpose
of ensuring the efficient commencement and continued operation of the multiclass securities
program.

Excerpts from Ginnie Mae MBS Guide 5500.3

Section 1-1

The Government National Mortgage Association (Ginnie Mae), through its Mortgage-Backed
Securities (MBS) Programs, guarantees securities that are backed by pools of mortgages and
issued by mortgage lenders (Issuers) approved by Ginnie Mae. Security holders receive a “pass-
through” of the principal and interest payments on a pool of mortgages, less amounts required to
cover servicing costs and Ginnie Mae guaranty fees. The Ginnie Mae guaranty ensures that the
security holder receives the timely payment of scheduled monthly principal and any unscheduled
recoveries of principal on the underlying mortgages, plus interest at the rate provided for in the
securities. If a borrower fails to make a timely payment on a mortgage, the Issuer must use its
own funds to ensure that the security holders receive timely payment. If an Issuer fails to ensure
that the funds necessary to make timely payment are available or otherwise defaults in the
discharge of its responsibilities, Ginnie Mae, in accordance with its guaranty, will make
payments to security holders.
Ginnie Mae also guarantees Home Equity Conversion Mortgage (HECM) securities, hereinafter
referred to as HMBS. HMBS are accrual coupon pass-th[r]ough securities which perform
differently than Ginnie Mae’s forward MBS pass-through securities. In addition to program



                                                  15
requirements applicable to the forward MBS, HMBS Issuers must also meet special Program
requirements found in Chapter 35 of this Guide.
Section 5-2(K)

If Ginnie Mae declares a default and extinguishment under the applicable Guaranty Agreement,
the Issuer forfeits and waives any and all rights to reimbursement or recovery of any advances
and expenditures made by the Issuer, all such rights of the Issuer are extinguished and Ginnie
Mae becomes the absolute owner of such rights, subject only to the unsatisfied rights of the
security holders.

Section 11-3

By a final certification, the document custodian certifies to Ginnie Mae that the Issuer has
submitted all required loan documents in correct form. Final certification of a pool or loan
package must be completed no later than 12 months after the issue date of the related securities.
Excerpt from Appendix III-19 Guaranty Agreement Ginnie Mae Project Loan Securities
Section 10-3
On the occurrence or development of any event of default, Ginnie Mae may, in its sole
discretion, but is not required to, confer and negotiate with the Issuer with respect to remedying
and correcting the default. Any such arrangements mutually agreed upon shall be placed in
written contractual form, and shall be supplementary to this Agreement.
Section 10-4
On the occurrence or development of any event of default, unless arrangements under section
10.03 above are mutually agreed upon by and between Ginnie Mae and the Issuer and placed in
written contractual form duly executed by Ginnie Mae, Ginnie Mae may, by letter directed to the
Issuer, pursuant to section 306(g) of the National Housing Act, automatically effect and
complete the extinguishment of any redemption, equitable, legal, or other right, title, or interest
of the Issuer in the Mortgages. The Mortgages, together with all accounts, books and all other
hard copy or electronic records related to the Mortgages or the Securities, automatically shall
become the absolute property of Ginnie Mae, subject only to unsatisfied rights of the Security
Holders. Upon such extinguishment, the Issuer automatically forfeits, waives and releases any
and all rights to seek recovery of or reimbursement for any property or monies related in any
way to the Mortgages (including but not limited to undisbursed Mortgage proceeds or Advances
that the Issuer made or makes) that the Issuer might otherwise have recovered from any person
or entity.

Excerpt from Ginnie Mae All Participant Memorandums 03-26

Subject: Elimination of Third-Party Review for Insurance Status of Single-Family FHA
Loans




                                                 16
Effective for Single-Family FHA loans placed in Ginnie Mae pools with an issue date of
January 1, 2003 or later, third-party verification of FHA insurance is no longer required.
Ginnie Mae will now utilize information received from FHA to determine insurance status of
FHA single-family loans. With this change, document custodians may certify loans without
ascertaining the existence of FHA mortgage insurance. For FHA loans pooled prior to
January 1, 2003, and not yet insured, third-party confirmation of insurance is still required.




                                                17
Appendix D
                                      Sampling and Projections


Our sampling objective was to determine whether there were single-family FHA loans being
held for 1 year or longer in Ginnie Mae MBS pools without the required mortgage
insurance. Our sampling universe consisted of 363 loans valued at more than $52.1 million that
were included in Ginnie Mae pools but showed no record of an insurance endorsement date in
the FHA Single Family Data Warehouse. To allow a reasonable time for GNMA to cure a lack
of insurance we only included loans that had been in a GNMA pool for at least 1 year, as of
September 30, 2015. This number did not include 17 statistical outliers that had asset amounts
(unpaid loan balance) less than $15,000
or greater than $375,000.
                                                            Sample design
To control for variance, we stratified on
the amount of the asset. Loans were               Strata         Universe    Samples          Wts.
sorted and ranked by dollar value and
                                            0-10pct                  36          8       4.5000
then stratified in six groups according
to percentile points along this             10-30pct                 73          17      4.2941
continuum.                                  30-50pct                 72          17      4.2353
                                            50-70pct                 74          17      4.3529
We validated the sample design using        70-90pct                 72          17      4.2353
replicated sampling (computer
                                            90-100pct                36          9       4.0000
simulations) across several audit
scenarios. A sample size of 85 was                Totals            363          85        
found to be sufficient.
Based on the design, we selected a statistical sample using the surveyselect procedure in SAS®,
a widely used statistical software package. Using the selected sample, the audit team acquired
records from Ginnie Mae and other sources and examined the actual loan records try to confirm a
lack of insurance. Percentages, counts, and average dollar amounts were estimated and projected
to the universe as a whole. Because all randomly selected samples are subject to “the luck of the
draw,” we calculated a margin of error for each type of measure and made a final projection on
that basis. This calculation was done by computing the mean and standard error of the
percentages and dollar amounts using the means estimating procedure (surveymeans) and counts
estimating procedures (surveyfreq) in SAS®. Variances were calculated using a Taylor series.
We used the traditional formulas (Cochran 1977, Wayne W. Daniel 1983) for estimating the
lower bounds (LCL) of counts and dollar amounts as noted below:

              = N (pct -   /     %)

                = N(µ -    /    $)

In auditing the 85 records, we found that a high percentage of the loans were uninsured.
Sampling distributions under high rates of audit findings do not follow a true bell curve so we


                                                 18
had to modify / in the formula above. We tested the sample performance at this rate of
findings and determined that / needed to be increased from 1.6643 to 2.5000 to maintain a
true one-sided confidence interval of 95 percent.
We found that Ginnie Mae failed to ensure that lenders obtained insurance for 83 of the 85 loans
in our sample. Applied to the 363 Ginnie Mae loans in our universe, we can say the following
with a one-sided confidence interval of 95 percent:
Ginnie Mae Included Meaningful Amounts of Uninsured Assets in the Investment Pools of
Government-Insured Loans That It Offered to the Public
Based on our sample, we can say that Ginnie Mae failed to ensure that lenders obtained
insurance for at least $49.3 million in assets, after deducting a margin of error. These problems
affected at least 345.5 loans.
Calculations below:
 
(97.63% ‐ 1.6643 X 1.47%) x N = 95.2% x N ≈ 345.5 Uninsured loans 
(142573 ‐ 2.5000 X 2596.4) x N = 136082 x N ≈ 49,300,000 Uninsured pool assets 
  
Since our sample period covered an entire year, we can say that these findings represent $49.3
million per year that could be going uninsured and could be put to better use by properly
protecting these assets.




Cochran, William G. Sampling Techniques. New York: John Wiley & Sons, Inc., 1977
Wayne W. Daniel, James C. Terrell. Business Statistics. Houghton Mifflin, Company, 1983




                                                      19