oversight

Audit of Ginnie Mae's Fiscal Years 2016 and 2015 (Restated) Financial Statements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-11-14.

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

         Government National Mortgage
          Association,Washington, DC
        Audit of Fiscal Years 2016 and 2015 (Restated)
                     Financial Statements




Office of Audit, Financial Audits Division   Audit Report Number: 2017-FO-0001
Washington, DC                                               November 14, 2016
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 2016 and 2015 (Restated)


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 years 2016 and 2015 (restated) 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: 2017-FO-0001
                    Date: November 14, 2016

                    Audit of the Government National Mortgage Association’s Financial
                    Statements for Fiscal Years 2016 and 2015 (Restated)



Highlights
What We Audited and Why
We were engaged to audit the accompanying financial statements and notes of the Government
National Mortgage Association (Ginnie Mae) as of September 30, 2016 and 2015 (restated). The
Government Corporation Control Act, as amended, requires the Office of Inspector General to
audit the financial statements of Ginnie Mae annually. Additionally, we reviewed restatement
adjustments performed in fiscal year 2016 to restate fiscal year 2015 financial statements. This
report presents the results of our fiscal years 2016 and 2015 (restated) audits 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 that apply to Ginnie Mae.

What We Found
In fiscal year 2016, for the third consecutive year, we were unable to obtain sufficient and
appropriate evidence to express an opinion on the fairness of the $ 4.2 billion (net of allowance)
in nonpooled loan assets from Ginnie Mae’s defaulted issuers’ portfolio as of September 30,
2016. Ginnie Mae also continued to improperly account for the Federal Housing Administration
reimbursable costs as an expense instead of capitalizing them. The combination of these
unresolved issues for a number of years was both material and pervasive because it impacted
multiple financial statement line items across all of Ginnie Mae’s basic financial statements. As
a result of the scope limitation in our audit work and the effects of material weaknesses in
internal control, we have not been able to obtain sufficient and appropriate evidence to provide a
basis for an audit opinion on Ginnie Mae’s fiscal years 2016 and 2015 (restated) financial
statements. A combination of various internal control weaknesses in financial reporting and
continued financial management governance issues contributed to these deficiencies. We
identified four material weaknesses, one significant deficiency, and one reportable
noncompliance with selected provisions of laws and regulations.

What We Recommend
Our audit recommendations are directed toward improving and strengthening Ginnie Mae’s
governance of its financial operations. New recommendations are presented after each finding.
Open recommendations made in previous years are not included on each of the findings in this
report.
Table of Contents
Independent Auditor’s Report................................................................................4

Material Weakness .................................................................................................10
         Finding 1: Material Asset Balances Related to Nonpooled Loans Were Not
         Auditable.......................................................................................................................... 10

         Finding 2: Ginnie Mae’s Internal Control Over Financial Reporting Continued To
         Have Weaknesses ............................................................................................................ 12

         Finding 3: The Allowance for Loan Loss Account Balances Were Unreliable ........ 18

         Finding 4: Progress Had Been Made To Address Ginnie Mae’s Financial
         Management Governance Problems ............................................................................. 22

Significant Deficiency ............................................................................................28
         Finding 5: Ginnie Mae Did Not Provide Adequate Oversight Over the Business
         Process Controls for the Integrated Pool Management System ................................ 28

Compliance with Laws and Regulations ..............................................................32
         Finding 6: Ginnie Mae Did Not Comply With the Debt Collection Improvement Act
         of 1996 .............................................................................................................................. 32

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

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

Appendixes ..............................................................................................................42
         A. Schedule of Funds To Be Put to Better Use ............................................................ 42

         B. Auditee Comments and OIG’s Evaluation ............................................................. 43

         C. Ginnie Mae’s Fiscal Years 2016 and 2015 (Restated) Financial Statements and
            Notes ........................................................................................................................... 45


                                                                       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, 2016
and 2015 (restated), and the related statements of revenues and expenses and changes in
investment of the U.S. Government, the cash flows for the years then ended, and the related notes
to the financial statements.

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 (GAAP).
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 section
below.

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 2016 financial statements. There were no other
satisfactory alternative audit procedures that we could adopt to obtain sufficient and 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.


                                                 4
      Nonpooled loan assets. In fiscal year 2016, for the third consecutive year, Ginnie Mae
       could not bring its material asset balances related to its nonpooled loan assets into an
       auditable state. Therefore, we were unable to audit the $4.2 billion (net of allowance) in
       nonpooled loan assets reported in Ginnie Mae’s financial statements as of September 30,
       2016. These assets relate to (1) claims receivable, net ($709 million); (2) mortgage loans
       held for investment, net ($3.47 billion); (3) accrued interest receivable; net ($19 million);
       and (4) acquired property, net ($41 million). This condition occurred because Ginnie
       Mae lacked financial management systems that were capable of handling its loan level
       transaction accounting requirements. As a result, we were again unable to perform all of
       the audit procedures needed to obtain sufficient and appropriate evidence. As a result, we
       determined that our audit scope was insufficient to express an opinion on Ginnie Mae’s
       $4.2 billion in nonpooled loan assets as of September 30, 2016.

      Receivable for reimbursable expenses from FHA. In fiscal year 2016, for the third
       consecutive year, Ginnie Mae continued to account for Federal Housing Administration
       (FHA) reimbursable costs as an expense instead of capitalizing the costs as an asset (see
       finding 2). This practice caused Ginnie Mae’s asset and net income line items to be
       misstated. Due to multiple years of incorrect accounting, we believe the cumulative
       effect of the errors identified was material. However, we were unable to determine, with
       sufficient accuracy, a proposed adjustment to correct the errors due to insufficient
       available data.

      Issue on management representation letter. Ginnie Mae’s general counsel refused to sign
       off on certain matters included in the management representation letter concerning all
       known actual or possible litigation, claims, and assessments related Ginnie Mae. OIG
       believes that Ginnie Mae’s legal counsel is responsible for and knowledgeable about
       those matters which form part in Ginnie Mae management’s preparation and fair
       presentation of the financial statements. Due to the legal counsel’s refusal to sign off on
       these matters, which is a scope limitation, we lacked assurance that all known actual or
       possible litigations, claims and assessments related to Ginnie Mae had been properly
       accounted for or disclosed in the financial statements in accordance with generally
       accepted accounting principles.

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

Emphasis of Matter
As discussed in note 2 to the financial statements, the fiscal year 2015 financial statements have
been restated to correct a number of misstatements. We audited the material restatement
adjustments in 2016 and determined that these adjustments were appropriate and had been properly
applied except for the restatement related to the reclassification of expenses from recapture
(provision) for mortgage loans held for investment and claims receivable to mortgage-backed
securities program and other expenses. Ginnie Mae performed restatements in fiscal years 2016 and

                                                 5
2015. We caution our reader that the scope of the fiscal year 2016 restatement audit was limited to
the restatement adjustments made in fiscal year 2016 and that restatement adjustments made by
Ginnie Mae in fiscal year 2015 to correct fiscal year 2014 financial statements had not been fully
audited by the Office of Inspector General (OIG). Our opinion has not been modified with respect
to this matter.

Other Matters
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 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 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. 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, which are described
below. We consider the first four issues to be material weaknesses and the remaining issue to be
a significant deficiency.

Material Weaknesses in Financial Reporting

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.

Material Asset Balances Related to Nonpooled Loans Were Not Auditable
In fiscal year 2016, for the third consecutive year, Ginnie Mae could not bring its material asset
balances related to its nonpooled loan assets into an auditable state. Therefore, we were unable
to audit the $4.2 billion (net of allowance) in nonpooled loan assets reported in Ginnie Mae’s
financial statements as of September 30, 2016. These assets relate to (1) claims receivable, net
($709 million); (2) mortgage loans held for investment, net ($3.47 billion); (3) accrued interest

                                                  6
receivable, net ($19 million); and (4) acquired property, net ($41 million). This condition
occurred because Ginnie Mae lacked financial management systems that were capable of
handling its loan level transaction accounting requirements. Therefore, we were again unable to
perform all of the audit procedures needed to obtain sufficient and appropriate evidence. As a
result, we determined that our audit scope was insufficient to express an opinion on Ginnie
Mae’s $4.2 billion in nonpooled loan assets as of September 30, 2016.

Ginnie Mae’s Internal Control Over Financial Reporting Continued To Have Weaknesses
In fiscal year 2015, we reported that Ginnie Mae’s internal control over financial reporting was
not effective. This condition continued, and some new issues were identified in fiscal year 2016.
These material weaknesses in internal controls were issues related to the (1) improper accounting
for FHA’s reimbursable costs and accrued interest earned on nonpooled loans; (2) accounting for
cash in transit; (3) revenue accrual accounting, and (4) several other accounting issues, such as
advances, fixed assets, and financial statement note disclosures. The first three issues were
repeat findings from prior years, and the last one was new in fiscal year 2016. These conditions
occurred because of Ginnie Mae’s failure to ensure that (1) adequate monitoring and oversight of
its accounting and reporting functions were in place and operating effectively and (2) accounting
policies and procedures were developed, finalized, and appropriately implemented. As a result,
the risk that material misstatements in Ginnie Mae’s financial statements would not be prevented
or detected in a timely manner increased.

The Allowance for Loan Loss Account Balances Were Unreliable
In fiscal year 2016, we identified accounting issues related to Ginnie Mae’s allowance for loan
loss accounts. Specifically, we noted that Ginnie Mae improperly (1) accounted for certain
nonpooled loan accounting transactions in its allowance for loan loss accounts and (2) booked a
provision for loan loss against a nonexisting asset account. Factors that contributed to these
issues included (1) the delayed implementation of accounting policies and procedures related to
the allowance accounts and (2) the lack of financial management systems capable of handling
loan level transactions. Due to a combination of all of these accounting issues, we determined
the balance of the allowance for loan loss accounts reported in Ginnie Mae’s financial statements
to be unreliable.

Progress Had Been Made To Address Ginnie Mae’s Financial Management Governance
Problems
In fiscal year 2016, Ginnie Mae’s executive management began to address the financial
management governance problems cited in our fiscal years 2015 and 2014 audit reports. While
progress was made this year, more work is needed to fully address the issues cited in our report.
Specifically, these problems included issues in (1) keeping the Ginnie Mae Office of the Chief
Financial Officer’s (OCFO) operations fully functional; (2) ensuring that emerging risks
affecting its financial management operations were identified, analyzed, and responded to
appropriately and in a timely manner; (3) establishing adequate and appropriate accounting
policies and procedures and accounting systems; and (4) implementing an effective entitywide
governance of the models that are used to generate accounting estimates for financial reporting.
Some of these conditions continued because the implementation of the corrective action plans


                                                 7
required more time than anticipated. This issue again contributed to Ginnie Mae’s inability to
produce auditable financial statements for the third consecutive fiscal year.

Significant Deficiency in Financial Reporting

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.

Ginnie Mae Did Not Provide Adequate Oversight To Ensure Compliance With Federal
Regulations and Guidance
Ginnie Mae did not provide adequate oversight of its pool processing agent for the Integrated
Pool Management System (IPMS) to ensure that adequate controls over business processes
complied with Federal regulations and guidance. Specifically, (1) IPMS does not have adequate
controls that automatically track overrides in the system; (2) IPMS does not have automated
controls to prevent a pool processor from making changes to the master data without prior
approval; and (3) Ginnie Mae lacked adequate policies and procedures for data management.
These conditions occurred because Ginnie Mae did not have policies for monitoring overrides
and IPMS does not sufficiently track the use of overrides or generate a report that captures data
changes. As a result, Ginnie Mae’s data was susceptible to an increased risk of improper use of
authority, which could cause financial harm to Ginnie Mae by attaching its guarantee to
mortgage-backed securities.

Report on Compliance
We performed tests of Ginnie Mae’s compliance with certain provisions of applicable laws and
regulations that could have a direct and material effect on the determination of financial
statement amounts. However, providing an opinion on compliance with those provisions was
not an objective of our audit. Therefore, we do not express such an opinion. Our tests disclosed
one instance of noncompliance with laws and regulations, which is required to be reported in
accordance with Government Auditing Standards, issued by the U.S. Comptroller General.

In fiscal year 2016, Ginnie Mae’s noncompliance with the Debt Collection Improvement Act
(DCIA) of 1996 continued. Specifically, as reported in fiscal year 2015, Ginnie Mae had not
remediated its practice of ensuring that all debt collection tools allowed by law had been
considered before discharging the uninsured mortgage debts owed to Ginnie Mae. This
condition occurred because Ginnie Mae’s management continued to take the position that DCIA
did not apply to Ginnie Mae; therefore, it did not need to comply with DCIA requirements. As a
result, Ginnie Mae may have missed opportunities to collect millions of dollars in debts related
to losses on its Mortgage-Backed Securities program. This finding is described in more detail in
finding 6.

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.

                                                  8
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
(0MB), 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 operations that are not included in this report
will be reported to Ginnie Mae management in a separate management letter.




Randy W. McGinftis
Assistant Inspector General for Audit
November 10, 2016




                                                9
Material Weakness

Finding 1: Material Asset Balances Related to Nonpooled Loans
Were Not Auditable
In fiscal year 2016, for the third consecutive year, Ginnie Mae could not bring its material asset
balances related to its nonpooled loan assets into an auditable state. Therefore, we were unable
to audit the $4.2 billion (net of allowance) in nonpooled loan assets reported in Ginnie Mae’s
financial statements as of September 30, 2016. These assets relate to (1) claims receivable, net
($709 million); (2) mortgage loans held for investment, net ($3.47 billion); (3) accrued interest
receivable, net ($19 million); and (4) acquired property, net ($41 million). This condition
occurred because Ginnie Mae lacked financial management systems that were capable of
handling its loan level transaction accounting requirements. Therefore, we were again unable to
perform all of the audit procedures needed to obtain sufficient and appropriate evidence. As a
result, we determined that our audit scope was insufficient to express an opinion on Ginnie
Mae’s $4.2 billion in nonpooled loan assets as of September 30, 2016.
Continued Concerns Regarding the Auditability of the Accounting Data and Records Used
To Support Multiple Significant Financial Statement Line Items
In fiscal years 2014 and 2015, we expressed a disclaimer of opinion on the fairness of Ginnie
Mae’s financial statements due to the lack of accounting data and records at the loan level to
validate the amounts reported on its nonpooled loan assets and related accounts. In fiscal year
2016, despite our effort to audit the nonpooled loan asset balances, we were unable to audit
them. The progress made by Ginnie Mae to make the nonpooled loan asset balances auditable is
provided in detail below.

Ginnie Mae’s Subledger Database Solution Had Been Delayed
In February 2016, Ginnie Mae, through its contractor, started pursuing the subledger database
(SLDB) solution to address the material weaknesses related to the nonpooled loan assets. Ginnie
Mae proposed adding several components to the existing finance platform to capture and
organize accounting data needed to support the financial statement balances. Ginnie Mae’s
proposed timeline targeted July 2016 for OIG to start its preliminary audit work. However,
given the limitations faced with (1) procuring and funding the contract1 and (2) gaining access to
available mastersubservicers’ (MSS) data, Ginnie Mae experienced delays in providing OIG with
the necessary information to begin the audit.

As of October 2016, Ginnie Mae was continuing its SLDB work. Ginnie Mae has reengaged its
contractor (after a 2-month break) to continue developing the SLDB solution. Ginnie Mae stated
that it is approximately 95 percent completed with its data conversion efforts and is now

1
    The contract relates to Ginnie Mae’s financial reporting and audit readiness contractor that assisted in
    developing its loan level accounting system and related infrastructure.


                                                          10
gathering additional transaction data2 from the MSSs. Further, the agency has proposed a new
target date of March 20173 to provide OIG with relevant information to start the preliminary
review of its nonpooled loan assets.

HUD OCFO’s Efforts to Establish Nonpooled Loan Asset Estimation Methodology Failed
Since the timeline for the SLDB was expected to go beyond the current fiscal year, in April
2016, Ginnie Mae and HUD OCFO changed course and decided to pursue a statistical estimation
approach for Ginnie Mae’s nonpooled loan assets. The plan was to award a contract in June to
develop the methodology and prepare for OIG review by the beginning of August. However,
HUD OCFO experienced delays in the procurement process, which resulted in awarding the
contract in late August, two months behind its planned date. This delay created a scope
limitation, which prevented OIG from conducting an adequate audit during fiscal year 2016.
HUD OCFO continues to pursue the statistical estimation methodology. This work will continue
into fiscal year 2017, along with the SLDB.

In fiscal year 2016, Ginnie Mae made some progress in remediating the deficiencies cited in our
previous audit reports. For example, it developed and conducted compliance reviews of MSSs
and augmented the finance office with additional personnel to assist in performing oversight of
the MSSs. In addition, Ginnie Mae enhanced its allowance for its loan loss4 model in an effort to
make it GAAP compliant (finding 3). However, without the critical financial management
systems, Ginnie Mae continued to face challenges to fully implement all action plans.
Conclusion
Although Ginnie Mae had made efforts to address some of our fiscal years 2014 and 2015 audit
issues related to the $4.2 billion in nonpooled loan assets, we noted slow progress in remediating
the issues. As a result, we determined that our fiscal year 2016 audit scope was insufficient to
express an opinion on Ginnie Mae’s financial statements as of September 30, 2016. We will
continue to work with Ginnie Mae in resolving these matters during our audit in fiscal year 2017.
Recommendations
Because we are not making further recommendations on this finding this year, audit
recommendations made in fiscal year 2014, which are still open, are not repeated in this finding.




2
    Ginnie Mae is gathering transaction, operational balance and loan state data.
3
    This date is dependent on Ginnie Mae’s receipt of the MSS data.
4
    Beginning in fiscal year 2015, Ginnie Mae’s nonpooled loan assets line items were reported net of allowances
    on the balance sheet.
                                                        11
Material Weakness

Finding 2: Ginnie Mae’s Internal Control Over Financial Reporting
Continued To Have Weaknesses
In fiscal year 2015, we reported that Ginnie Mae’s internal control over financial reporting was
not effective. This condition continued, and some new issues were identified in fiscal year 2016.
These material weaknesses in internal controls were issues related to the (1) improper accounting
for FHA’s reimbursable costs and accrued interest earned on nonpooled loans; (2) accounting for
cash in transit; (3) revenue accrual accounting; and (4) several other accounting issues, such as
advances, fixed assets, and financial statement note disclosures. The first three issues were
repeat findings from prior years, and the last one was new in fiscal year 2016. These conditions
occurred because of Ginnie Mae’s failure to ensure that (1) adequate monitoring and oversight of
its accounting and reporting functions were in place and operating effectively and (2) accounting
policies and procedures were developed, finalized, and appropriately implemented. As a result,
the risk that material misstatements in Ginnie Mae’s financial statements would not be prevented
or detected increased.

Current-Year Status of Prior-Year Audit Matters
In fiscal year 2016, Ginnie Mae corrected some audit issues identified in our fiscal years 2014
and 2015 audit reports.5 However, the following material audit issues reported last year and the
year before were not resolved in fiscal year 2016. New recommendations made on these issues
are included in this finding; however, unresolved audit recommendations made in fiscal years
2014 and 2015 are not reported again in this finding.
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 GAAP
In fiscal years 2014 and 2015, we reported that Ginnie Mae’s accounting for FHA reimbursable
costs was not in accordance with GAAP. Instead of capitalizing the FHA reimbursable costs as
an asset, Ginnie Mae improperly charged the costs to the mortgage-backed securities (MBS) loss
liability account. In addition, the accrued interest earned was accounted for only through the
date of purchase from the MBS pools, rather than accruing interest for all periods allowed by the
insuring agency, which is from the date of default to the date of filing. In 2016, Ginnie Mae’s
improper accounting for FHA reimbursable costs and accrued interest continued because
although Ginnie Mae had updated its accounting policies with respect to these issues, its
implementation is not expected until fiscal year 2017.



5
    In prior years, we reported an issue related to Ginnie Mae’s failure to present escrow balance on the face of the
    statements. While this issue has not been resolved and we continue to take exception on Ginnie Mae’s escrow
    policy, its significance was diminished in fiscal year 2016 as a result of the mortgage servicing right sale in
    January 2016.
                                                          12
Issues Related to Ginnie Mae’s Accounting for Cash in Transit Continued
In fiscal year 2015, we reported that Ginnie Mae failed to report cash retained by the MSSs in
the custodial accounts at the end of the month because it did not consider any cash received by
the MSSs as being received until those funds were deposited into Ginnie Mae’s account with the
U.S. Treasury. In fiscal year 2016,6 the accounting problem identified in the prior fiscal year
audit relating to the custodial account month end cash balance continued. This deficiency
occurred because Ginnie Mae did not have final MSSs’ custodial accounting policies and
procedures in place in fiscal year 2016. This issue caused inconsistent accounting application of
the MSSs’ custodial accounts process from month to month.

In addition, in fiscal year 2016, we determined that Ginnie Mae failed to record cash in transit
related to real estate mortgage investment conduit (REMIC) and commitment fees7 that were
paid to Ginnie Mae’s agents. Specifically, Ginnie Mae delayed the booking of the cash
transactions until the funds were deposited into Ginnie Mae’s account at the U.S. Treasury.
Similar to the role of the MSSs, the agents are acting for Ginnie Mae, and any funds collected by
the agents on Ginnie Mae’s behalf should be treated as cash to Ginnie Mae. This issue occurred
because Ginnie Mae did not have policies and procedures to ensure that the cash-in-transit
balance was properly accounted for. As a result, Ginnie Mae’s cash balance at the end of the
reporting period was misstated.

Ginnie Mae’s Accrual Accounting and Real Estate Mortgage Investment Conduit Accounting
Adjustments Made in Fiscal Year 2015 Were Not Appropriate and Reliable
In fiscal year 2015, we determined that Ginnie Mae did not appropriately defer recognition of
REMIC fees in accordance with GAAP. Specifically, it recognized a majority of the guarantee
fees collected from REMIC deals as earned revenue during the month in which the deal was
issued and the remaining fees as unearned, rather than amortizing the revenues using the incurred
cost method. Ginnie Mae agreed to our finding and updated its revenue recognition
methodology8 as well as prepared accounting adjustments to correct the understatement of
deferred revenue. In fiscal year 2016, we reviewed Ginnie Mae’s analysis and support for the
accounting adjustments made and found some issues. These issues included (1) guarantee fee
amounts and weighted average maturity reported for certain REMIC deals were not verified, (2)
some costs that were used to calculate the revenue recognition ratio should have been excluded,
and (3) improper application of the average incurred cost ratio from the 2014 and 2015 invoice


6
    Ginnie Mae developed a process to capture the cash balance in its MSSs’ custodial accounts at the end of each
    month. We found that Ginnie Mae recorded funds in custodial accounts at the end of each month between
    October 2015 and June 2016 except for April and May. According to the U.S. Government Accountability
    Office’s Green Book, control activities include accurate and timely recording of transactions. Transactions are
    promptly recorded to maintain relevance and value to management in controlling operations and making
    decisions.
7
    Ginnie Mae’s agent sent commitment fees to Ginnie Mae 2 business days after it received the funds from an
    issuer. Ginnie Mae received the fees on July 1, 2016, which indicated that the agent received the fees on June
    29, 2016. The report extracted from the Commitment Management System also indicated that the funds were
    received in June.
8
    Ginnie Mae did not finalize its revenue recognition accounting policy in fiscal year 2016.


                                                         13
data9 to all of the REMIC deals closed from 1994 to 2013. Ginnie Mae’s insufficient review of
invoice data, unsupported incurred cost ratio assumption, and improper use of unverified
guarantee fees and weighted average maturity data caused the earned and unearned portions of
the reported REMIC guarantee fees to be misstated.

While Ginnie Mae modified its revenue recognition methodology in fiscal year 2016 to comply
with GAAP, its month end accrual journal entries intended to recognize earned revenue on
REMIC deals were improper. At the end of each month, Ginnie Mae did not make proper
accrual entries, such as a debit to an asset account (for example, cash or receivable) and a credit
to a revenue account, to recognize the REMIC deals that were closed and earned. Instead,
Ginnie Mae made a deferred credit entry, such as a debit to a revenue account and credit to
deferred credit account, to recognize the unearned portion of the REMIC deals without making
the entry to the revenue account on closed REMIC deals. This was Ginnie Mae’s practice
because REMIC guarantee fees were generally collected the month after the deals were closed.
We attributed this issue to Ginnie Mae’s lack of oversight. As a result, Ginnie Mae’s revenue
account was misstated.

Unsupportable Writeoffs of Balances in Advances Against Defaulted MBS Pools
Ginnie Mae wrote off the advances against defaulted MBS pools, net accounts (advances)
totaling $248 million (asset) and $171 million (allowance), respectively, without adequate
support. In fiscal year 2016, we attempted to review Ginnie Mae’s support for the advances
writeoff but were unable to validate the accuracy of the information used in its analysis. For
example, of $248 million, Ginnie Mae stated that it accounted for $180 million of this balance as
realized losses incurred on liquidated loans from fiscal years 2009 through 2016. Ginnie Mae
explained that the advances account was incorrectly not charged off against these realized losses.
However, we could not validate the accuracy of the $180 million realized losses because this
information was either based on rough estimates ($50 million) or MSS accounting reports that
we considered unauditable ($130 million). Ginnie Mae could not explain the other $68 million.
Additionally, for the past 2 fiscal years, we had not audited Ginnie Mae’s advances account due
to a lack of reliable loan level information. Therefore, the accuracy of the $248 million advances
account balance is also in question.

Ginnie Mae had not kept up with the true balance in its advances accounts for years due to the
absence of loan level accounting, poor accounting, and poor record keeping. For expediency,
Ginnie Mae senior management decided to writeoff the advances since Ginnie Mae could not
independently verify settlement amounts for principal and interest advances, escrow, and
corporate advances due to the absence of a loan level accounting system. As a result, Ginnie
Mae may have missed its opportunity to recover some of the good advances.

Inadequate System and Processes for Ginnie Mae’s Accounting of Fixed Assets
Ginnie Mae did not have an appropriate system, processes, and controls in place for tracking and
completely and accurately accounting for its system or software development costs in accordance
with GAAP. We found instances in which Ginnie Mae did not review supporting documentation
9
    Ginnie Mae informed OIG that invoice data were retained for 7 years and, therefore, should have data available
    to reasonably estimate the recognition ratio over a period greater than 2 years.
                                                         14
to determine the amounts that should be capitalized. In addition, the capitalized amounts for
several software in Ginnie Mae’s fixed asset register exceeded the capitalized amounts noted in
supporting documents. Specifically, we noted instances in which (1) Ginnie Mae capitalized all
invoiced costs even though the statements of work indicated that some services provided by the
contractors did not meet the capitalization criteria to include training costs and costs incurred
during the preliminary project stage, (2) Ginnie Mae did not reclassify costs incurred in fiscal
year 2013 for the capitalized portion until fiscal year 2015, and (3) the capitalized balance or
book value of an asset from Ginnie Mae’s fixed asset register did not agree with the amortization
schedule and software project ready-to-use report.

These deficiencies occurred due to Ginnie Mae’s inability to track fixed asset activities on a
timely basis. Additionally, Ginnie Mae’s insufficient review of supporting documents to
determine whether costs should be expensed or capitalized contributed to the control deficiency
in accounting for its fixed assets. Given the control deficiencies as noted above, we have
concerns regarding the reliability of the fixed asset account balance reported in Ginnie Mae’s
financial statements.
Issues Identified Related to Note Disclosures
Ginnie Mae did not have effective controls over its note disclosures of escrow, outstanding MBS
commitment, and indemnification or repurchase agreements and mortgage loans held for
investment. Specifically, we identified the following issues:

        Our audit of Ginnie Mae’s fiscal year 2016 third quarter financial statements found errors
         in Ginnie Mae’s notes reporting of its escrow balance10 and outstanding MBS
         commitment balance.11 Specifically, we noted that the outstanding MBS commitment
         balance at the end of June 30, 2016, and September 30, 2015, was misreported by $36
         billion and $31 billion, respectively. Additionally, the escrow balance was incorrectly
         reported by $12 million and $15 million as of June 30, 2016, and September 30, 2015,
         respectively. In both cases, Ginnie Mae failed to establish effective controls in ensuring
         the accuracy of the information reported.

        Ginnie Mae failed to adequately analyze the financial reporting impact of new events
         affecting its business, such as the indemnification and repurchase agreements. In recent
         years, Ginnie Mae has entered into a number of indemnification and repurchase
         agreements in connection with servicing portfolio transfer. For example, when the
         mortgage servicing rights (MSR) was sold in early 2016, an indemnification clause was
         included in the contract as part of the sale agreement. On another prior year MSR sale,
         Ginnie Mae entered into a repurchase agreement related to uninsured loans in the pool.
         As these are considered unusual business arrangements, in both cases, Ginnie Mae failed


10
     Ginnie Mae’s escrow balance consists of taxes and insurance as well as funds in the unapplied account. An
     example of unapplied funds is a partial payment received from a borrower. Escrow funds are held in custodial
     accounts by the MSSs on behalf of Ginnie Mae.
11
     Outstanding MBS commitments represent the unused commitment authority granted to the issuers by Ginnie
     Mae.
                                                         15
       to adequately analyze and respond to the financial reporting implications of these
       agreements in its financial statements.

      Ginnie Mae did not have adequate note disclosure for certain required information on its
       mortgage loans held for investment (MHI) and the related allowance for loan loss in its
       notes to the fiscal year 2016 third quarter financial statements. In accordance with
       Accounting Standards Codification 310-10-50, Ginnie Mae is required to disclose
       information, such as (1) changes in the accounting policy or allowance methodology
       from the prior year, (2) activity in the allowance accounts, (3) balance in allowance
       accounts disaggregated by impairment methodology, (4) description of credit quality
       indicators, (5) accounting policy and recorded investment for impaired loans, (6) factors
       considered in determining loan impairment, and (7) the nonaccrual and past due MHI
       policy. According to Ginnie Mae, it lacked the necessary loan level data to generate all
       necessary information to fully comply with accounting standards. Ginnie Mae agreed
       that more work is needed to comply with GAAP in this area as it improves its access to
       loan level information in fiscal year 2017.

Conclusion
In fiscal year 2016, Ginnie Mae continued to face significant challenges in addressing material
weaknesses in its internal control over financial reporting. While Ginnie Mae had taken positive
steps to address some of these issues, resolving them may take time due to the complexity and
pervasiveness of the issues. For this reason, we will work with Ginnie Mae in fiscal year 2017 as
it continues to strengthen its processes and controls with respect to these issues.
Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer

       2A.    Update Ginnie Mae’s cash and cash equivalents accounting policies and
              procedures to ensure that its cash-in-transit balance is properly accounted for.

       2B.    Review the cash and cash equivalents account and determine the appropriate
              adjustments needed to correct the misstatement.

       2C.    Revisit the REMIC accounting adjustments made in fiscal year 2015 based on the
              points cited in this finding to determine appropriate accounting adjustments. At a
              minimum, Ginnie Mae should
                  Conduct a review of invoice documents for each REMIC deal to
                      determine the appropriate amount of upfront costs that should be included
                      in the incurred cost ratio calculation,
                  Review source data to ensure the accuracy of the weighted average
                      maturity data used in its analysis,
                  Determine the appropriate incurred cost ratio for REMIC deals from the
                      1994 to 2013 cohort years based on reasonable and acceptable
                      methodology, and


                                                16
            Review source data for deals issued between 1994 and 2013 to ensure the
             accuracy of the guarantee fees data used in its analysis.

2D.   Establish and implement policies and procedures to ensure that proper accrual
      accounting entries are made to record the accounting event related to closed
      REMIC deals at the end of each month.

2E.   Review the revenue account balances based on points cited related to the
      improper accruals of REMIC deals and determine the appropriate adjustments
      needed to correct the misstatement.

2F.   Reverse the accounting writeoff of the advances accounts. In conjunction with
      the subledger data solution, conduct a proper analysis to determine whether any of
      the $248 million balances in the advances accounts are collectible.

2G.   Establish and implement policies and procedures to ensure that a subledger is
      maintained to accurately account for the advances balances at a loan level.

2H.   Enhance existing policies and procedures for its fixed assets, to include systems,
      processes, and controls, to ensure (1) proper review of invoices to determine
      whether costs are capitalized or expensed in accordance with GAAP, (2)
      development costs are capitalized when incurred, and (3) book value is consistent
      across all documents.

2I.   Establish and implement controls to ensure that escrow and outstanding MBS
      commitment balances reported in the financial statements are accurate and
      complete.

2J.   Establish and implement procedures and controls to ensure that indemnification or
      repurchase agreements (guarantees) are properly accounted for and disclosed in
      the financial statements in accordance with GAAP.

2K.   Establish and implement adequate procedures and controls to ensure that
      information related to mortgages held for investment and the associated allowance
      for loan losses are adequately disclosed in the notes to the financial statements in
      accordance with GAAP.




                                        17
Material Weakness

Finding 3: The Allowance for Loan Loss Account Balances Were
Unreliable

In fiscal year 2016, we identified accounting issues related to Ginnie Mae’s allowance for loan
loss accounts. Specifically, we noted that Ginnie Mae improperly (1) accounted for certain
nonpooled loan accounting transactions in its allowance for loan loss accounts and (2) booked a
provision for loan loss against a nonexisting asset account. Factors that contributed to these
issues included (1) the delayed implementation of accounting policies and procedures related to
the allowance accounts and (2) the lack of financial management systems capable of handling
loan level transactions. Due to a combination of all of these accounting issues, we determined
the balance of the allowance for loan loss accounts reported in Ginnie Mae’s financial statements
to be unreliable.

Current-Year Status of Prior-Year Audit Matters
For the past 2 fiscal years, we were unable to audit the MBS loss liability account because
Ginnie Mae could not provide all of the relevant information and data needed to audit this
account. In July 2015, Ginnie Mae management acknowledged to OIG that the financial model
used to estimate loss liability was flawed and not in accordance with GAAP. To address this
problem, Ginnie Mae developed a new financial model in fiscal year 2015 to bring its loan loss
account into compliance with GAAP. This action resulted in Ginnie Mae’s restating its fiscal
year 2014 MBS loss liability account by reallocating the entire balance into the allowance for
loan loss accounts.12 This accounting adjustment brought the loss liability account down to zero,
which made this account insignificant in the fiscal year 2016 financial statement audit. Given
the state of the MBS loss liability account, we shifted our focus in auditing the propriety of the
allowance for loan loss accounts in fiscal year 2016. One recommendation from the previous
year’s audit related to the MBS loss liability account is still open in fiscal year 2016. We
summarized below the current-year status of the accounting issues identified in our fiscal year
2015 audit report.

Selected Accounting Transactions Related to Nonpooled Loans Were Again Improperly
Accounted for in Ginnie Mae’s Books
In fiscal years 2014 and 2015, we reported that Ginnie Mae improperly accounted for certain
FHA reimbursable costs as chargeoffs against the loss liability account rather than capitalizing
them as an asset. In fiscal year 2016, Ginnie Mae again engaged in improper accounting, but this
time instead of charging it against the liability account, the reimbursable costs were charged off
against the allowance for loan loss accounts. This condition occurred because Ginnie Mae had
not finalized its accounting policies and procedures that govern these accounting transactions.

12
     Ginnie Mae’s allowance for loan losses are included in the “Mortgage loans held for investment, net” and
     “Claims receivable, net” line items.
                                                         18
This issue resulted in the understatement of both the affected asset and allowance accounts, and
Ginnie Mae’s departure from GAAP in processing these transactions continued.

Provision for Loan Loss Booked Against Nonexisting Asset Account
Ginnie Mae improperly booked a $436 million loan impairment, which is associated with other
indebtedness13 (for example, reimbursable costs). This loan impairment is reported as a contra
asset to the MHI account. As the majority of MHI’s account balance, as reported in Ginnie
Mae’s financial statements, is made up of the mortgage loan’s unpaid principal balance and
excludes other indebtedness, it would not be appropriate for Ginnie Mae to include loan
impairments for other indebtedness against the MHI account. In short, we believe there is a
mismatch between the respective allowance and asset accounts because the model output (that is,
loan loss estimates)14 pertains to Ginnie Mae’s expected losses on the loans’ unpaid principal
balance and reimbursable costs, while the MHI asset pertains only to the unpaid principal
balance of the loans. For example, our review of allowance provision for the third quarter of
2016 found that of $458 million allowance estimates that were reported as contra asset account
against the MHI, $436 million (95 percent) of this allowance pertained to other indebtedness.
Therefore, to properly report the correct allowance on MHI, Ginnie Mae needs to report only $22
million. We attributed this mismatch issue to a lack of coordination between Ginnie Mae’s
Office of Enterprise Risk, which is responsible for modeling the loan loss, and Office of Finance,
which is responsible for booking the loan loss in its accounting system, in interpreting the
modeling output results.
Concerns Over Ginnie Mae’s Accounting Policies Related to the Allowance for Loans
In fiscal year 2016, Ginnie Mae made significant efforts in updating all of its accounting policies
and procedures. While these efforts are steps in the right direction, we have some concerns
regarding Ginnie Mae’s draft accounting policies related to the allowance for loans.

Ginnie Mae lacked clarity regarding its accounting policies on the categorization of loans held
for investment for loan impairment purposes. With the implementation of a new allowance
model, for the first time in fiscal year 2016, Ginnie Mae categorized its loans held for investment
into three groups for loan impairment purposes: (1) purchase, noncredit impaired (PNCI),15 (2)
troubled debt restructuring (TDR),16 and purchase credit impaired (PCI).17 However, Ginnie
Mae’s criteria for loan categorization are not defined in the accounting policy, but they are found
in its modeling documentation. Ginnie Mae’s policy should drive the modeling of the allowance
13
     The other indebtedness includes other receivables that FHA expects to collect from the insuring agency, such as
     the foreclosure and maintenance costs. As noted in finding 2, Ginnie Mae accounts for these costs as expenses
     rather than an asset.
14
     When Ginnie Mae is modeling the loan impairments on MHI account, the total indebtedness is comprised of the
     unpaid principal balance, interest, and other indebtedness.
15
     A loan that is not determined to be individually impaired, for which it is probable that there would be an
     incurred loss as of the reporting period, is considered PNCI.
16
     A loan is considered to be a TDR when the creditor for economic or legal reasons grants a concession to a
     debtor that it would not otherwise consider due to the debtor’s financial difficulty. Modified loans that are
     modified after being acquired by Ginnie Mae are classified as TDR.
17
     A loan is considered a PCI loan when there is evidence of credit deterioration after the loan’s origination and it
     is probable, at acquisition, that Ginnie Mae will be unable to collect all contractually required payments
     receivable.
                                                           19
for loan losses, and it is where we would expect to see management’s basis for the grouping of
the loans.

Additionally, we questioned Ginnie Mae’s categorization of FHA loans as PNCI. In accordance
with Accounting Standards Codification 310-10-35-16, a loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to collect all amounts
due (that is, both principal and interest) according to the contract terms of the loan agreement,
and insignificant amount of shortfall need not be considered. When a borrower defaults on an
FHA-insured loan, Ginnie Mae is made whole on the principal, while only partial reimbursement
is made on the interest. For this reason, we believe that loans that meet the loan impairment
criteria should be categorized as PCI. Ginnie Mae stated that classifying FHA loans as PNCI
was a management decision. It also stated that there were insignificant shortfalls on FHA’s
accrued interest but could not provide an analysis to OIG to support its position.
Concerns Regarding the Reasonableness of Ginnie Mae’s Loan Loss Allowance Model
Methodology
We also had concerns regarding the reasonableness of Ginnie Mae’s loan loss model
methodology, specifically, (1) the TDR model formula used to calculate the loan loss on
modified FHA-insured loans, (2) Ginnie Mae’s decision to combine the PCI with the TDR loan
impairment bucket, and (3) the methodology for estimating the market value of Ginnie Mae’s
uninsured real estate-owned properties.

        We had concerns regarding the reasonableness of Ginnie Mae’s TDR model allowance
         formula, specifically FHA-insured modified loans in which Ginnie Mae uses the lower of
         the two variables18 in determining the expected cash flows for purposes of calculating the
         loan impairments. We do not believe that it is reasonable and appropriate for Ginnie Mae
         to use the lower of the two variables because this will result in unnecessary provisioning
         of an allowance for loan impairments, given FHA’s 100 percent loan guarantee on unpaid
         principal balance. For example, assume Ginnie Mae has a modified FHA-insured loan
         with $100,000 unpaid principal balance (indebtedness), its present value of expected
         principal and interest collections on this loan was $80,000, and the recovery amount from
         insurance claims was $100,000. Using Ginnie Mae’s TDR model formula, Ginnie Mae’s
         loan impairment allowance would be $20,000.19 Under this scenario, it does not make
         sense for Ginnie Mae to establish a $20,000 loan impairment because under FHA’s loan
         guarantee program, Ginnie Mae is insured for the full amount of the unpaid principal
         balance of the loan. Therefore, provisioning the $20,000 allowance on a fully insured
         loan is not reasonable and appropriate.

         As noted earlier, Ginnie Mae categorized its loans into three groups for purposes of
         calculating loan impairments. However, in Ginnie Mae’s loan loss allowance model, the
         loan impairments for the PCI and TDR loans are combined, and the loan impairments on

18
     The two variables are (1) the present value of expected principal and interest collections and (2) the recovery
     from insurance claims from the indebtedness.
19
     To calculate the $20,000 allowance, the expected cash flows (which is the lesser of $80,000 present value of
     principal and interest and $100,000 insurance recovery) is subtracted from the $100,000 indebtedness.
                                                           20
         both are calculated the same way even though the severity of the loan impairments on
         PCI and TDR loans are different according to Ginnie Mae accounting policies.
         According to Ginnie Mae, the PCI loans are combined with TDR loans because of a lack
         of historical data from which to base the PCI loan impairments. However, no analysis
         has been provided to OIG to support Ginnie Mae’s position.

        Ginnie Mae’s approach in estimating the market value of the uninsured real estate-owned
         properties needs improvement. In accordance with ASC 310-10-35-22, if a loan is
         collateral dependent,20 loan impairments should be measured based on the loan’s
         observable market price or the fair value of the collateral. In estimating the fair value of
         the collateral, Ginnie Mae estimates the appraised value of the property at origination
         based on the loan-to-value ratio and then applies house price changes to the derived
         appraised value at origination. We had concerns with Ginnie Mae’s approach of applying
         a global house price index on all of its properties as it does not take into account location-
         specific variability. We believe using the most recent appraisal (or broker price opinion)
         would provide a more reasonable estimation of the value of the uninsured real estate-
         owned properties.
Conclusion
The allowance for loan loss account represents Ginnie Mae management’s best estimates of
receivables that are expected to be uncollectible. However, we do not believe that Ginnie Mae’s
allowance for loan loss accounts reported in its financial statements fairly represents the amount
of receivables that are expected to be uncollectible. This condition is due to a combination of
accounting issues as cited in this report. Therefore, Ginnie Mae needs to take actions to
remediate this problem.
Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer

         3A.      Adjust the reimbursable costs out of the allowance accounts as appropriate.

         3B.      Exclude the loan impairment allowance on other indebtedness appropriately
                  instead of reporting it as part of loan impairment allowance on MHI account.

         3C.      Document Ginnie Mae’s analysis and support for the categorization of its loans
                  for loan impairment purposes and update accounting policies and procedures
                  based on this analysis.

         3D.      Modify, as appropriate, the TDR allowance model to ensure production of
                  reasonable and appropriate loss estimates, including allowance estimates on FHA-
                  insured loans.




20
     A loan for which the repayment is expected to be provided solely by the underlying collateral.
                                                          21
Material Weakness

Finding 4: Progress Had Been Made To Address Ginnie Mae’s
Financial Management Governance Problems

In fiscal year 2016, Ginnie Mae’s executive management began to address the financial
management governance problems cited in our fiscal years 2015 and 2014 audit reports. While
progress was made this year, more work is needed to fully address the issues cited in our report.21
Specifically, these problems included issues in (1) keeping Ginnie Mae OCFO’s operations fully
functional; (2) ensuring that emerging risks affecting its financial management operations were
identified, analyzed, and responded to appropriately and in a timely manner; (3) establishing
adequate and appropriate accounting policies and procedures and accounting systems; and (4)
implementing an effective entitywide governance of the models that are used to generate
accounting estimates for financial reporting. These conditions continued because the
implementation of the corrective action plans required more time than anticipated. These issues
again contributed to Ginnie Mae’s inability to produce auditable financial statements for the third
consecutive fiscal year.
Ginnie Mae’s Executive Management Began to Address Governance Problems
In fiscal year 2015, we reported how Ginnie Mae’s executive management’s failures in
governance adversely impacted its ability to produce auditable financial statements. In fiscal
year 2016, we noted that Ginnie Mae had made significant efforts to address some of these
issues, but more work is needed for Ginnie Mae to produce auditable financial statements. For
example, for the third consecutive year, Ginnie Mae’s nonpooled loans assets (NPA) were not
yet ready for audit. Ginnie Mae acknowledged that the NPA balances would not be supportable
or in accordance with GAAP until the completion of one of the following two remediation
efforts; the loan level transaction data or the HUD and Ginnie Mae estimation process. The
development of an accounting system to track nonpooled loan assets at the loan level transaction
is a multiyear effort. In February, Ginnie Mae was pursuing the subledger database (SLDB)
solution to capture loan level events and record related accounting entries to address the material
weaknesses related to NPA.22 Thereafter, Ginnie Mae faced delays in the development of the
SLDB due to a lapse in the contract from May through June 2016. Since the timeline for the
SLDB was expected to go beyond fiscal year 2016, in April 2016, Ginnie Mae and HUD OCFO
changed course and decided to pursue a statistical estimation approach attempting to have the
NPA balances ready for audit in fiscal year 2016. Specifically, HUD OCFO indicated that the
contract would be awarded in June, the contractor would develop and validate the estimation
methodology in July, and the information would be submitted for our review in August.

21
     In fiscal year 2016, Ginnie Mae took actions to (1) fill key positions in Ginnie Mae OCFO, but some employees
     were hired too late in the fiscal year to make a significant impact; (2) develop accounting policies, but most
     were not finalized; and (3) finalize and implement a model risk management policy, but a key component of the
     policy will not become effective until 2017.
22
     Ginnie Mae engaged a contractor to develop this loan accounting system.
                                                         22
However, HUD OCFO experienced delays in the procurement process, which resulted in the
awarding of the contract in late August, 2 months late. HUD OCFO was not transparent in
communicating the delays in the procurement process or providing information related to the
estimation methodology. There were occasions when HUD OCFO did not provide any updates,
despite multiple inquiries having been sent. HUD’s failure to carry out its estimation work on
time was a factor in the NPA balances not being ready for audit this fiscal year. Recently,
Ginnie Mae informed OIG that it had reengaged its financial reporting and audit readiness
contractor to assist in developing its loan level accounting system and related infrastructure
concurrent with the development of the statistical estimation approach (finding 1).

In July 2016, Ginnie Mae backfilled its executive vice president position, which had been vacant
since January 2016. The new executive vice president has more than 25 years of financial
services and mortgage industry experience, to include holding executive positions at various
financial advisory and mortgage corporations. We believe that placing a person with extensive
mortgage industry knowledge and experience in this key position will enable Ginnie Mae to
better address governance problems cited in our report.
Ginnie Mae’s Office of the Chief Financial Officer Not Fully Functional and Still at Risk of
Not Effectively Managing Its Financial Management Operations
Although Ginnie Mae backfilled many of its vacant key positions in fiscal year 2016, it needs
time for some of these actions to materialize and to assess their impact on its financial
management operations. In fiscal year 2015, we reported that Ginnie Mae failed to hire
sufficient personnel to permanently backfill key positions and other vacancies. At the end of
fiscal year 2015, there were 12 vacant positions within Ginnie Mae’s OCFO. Ginnie Mae had
made significant improvements in filling its vacant positions. Specifically, of 12 vacant
positions at the beginning of fiscal year 2016, 10 were filled on a rolling basis, 1 was canceled,
and 1 remained unfilled in fiscal year 2016. Also, during the fiscal year, Ginnie Mae
reorganized its OCFO, which expanded the number of employees from 23 to 28. Of those 28
positions, 4 were vacant23 at the end of fiscal year 2016, and 1 of the 4 vacancies was the
supervisory accountant for financial reporting position.

Although Ginnie Mae was able to fill many of its vacancies, some of the positions were filled too
late to make a significant impact in fiscal year 2016. These were the (1) vice president of
accounting policy and financial reporting, (2) supervisory accountant for accounting system, (3)
supervisory accountant for financial reporting, and (4) internal control accountants. For
example, the vice president of accounting policy and financial reporting started in April 2016,
and the supervisory accountants started in August 2016; however, these individuals were not
fully engaged in their roles as there were other competing priorities, such as the time it took to
gain access to Ginnie Mae’s systems and get acclimated to Ginnie Mae’s complex financial
management challenges. In addition, the internal control accountants were hired in March and
April 2016 to perform OMB Circular A-123 review among other duties. However, Ginnie Mae
decided to outsource the review to a contractor as these individuals did not come onboard early


23
     Of those 4 vacancies, 1 vacancy is the carryover from fiscal year 2015, and 3 vacancies are attributable to
     Ginnie Mae’s reorganization in fiscal year 2016.
                                                           23
enough to conduct the review in-house. Due to procurement issues, Ginnie Mae encountered
significant delays in the initiation and timely completion of the A-123 review.

Additionally, while progress was made related to the increase in the number of employees in the
OCFO, Ginnie Mae’s current staffing level is still significantly lower than its corresponding
industry counterparts.24 Based on the staffing study conducted in fiscal year 2016, Ginnie Mae’s
staffing level for OCFO should be 118 employees, 86 Federal employees and 32 contractors. To
fill the gap in staffing capabilities, Ginnie Mae once again relied on its contractors to perform
many core functions, which typically should be performed by Federal employees, to include
financial reporting, loan reporting, A-123 review, accounting for fixed assets, economic
modeling, and issuer oversight and compliance.

Ginnie Mae Still Vulnerable to the Risk of Changes in Its Business Environment
In fiscal year 2015, we reported that Ginnie Mae was vulnerable to the risk of changes in its
business environment. In fiscal year 2016, the vulnerability remained as Ginnie Mae was not
able to respond appropriately to several unusual events or mitigate new risks, to include
accounting for repurchase agreements, potential issuer defaults, and the writeoff of advances
against defaulted MBS pools. This condition was caused by the lack of dedicated and
experienced Ginnie Mae OCFO staff to manage these responsibilities. Even though Ginnie Mae
hired a vice president for accounting policy and financial reporting, there was no permanent staff
dedicated to assist this individual.25 Without adequate support staff, Ginnie Mae will not be able
to research and apply appropriate accounting policies to produce accurate and timely financial
statements.

In addition, Ginnie Mae lacked the formal process and protocol to identify, monitor, analyze and
evaluate, and respond to issuer defaults. This process gap can lead to Ginnie Mae’s failing to
properly capture the loss contingencies measured under the MBS program guaranty (reserve for
loss) financial statements line item. According to GAAP, Ginnie Mae is required to book a
reserve for loss related to potential issuer defaults that are probable and estimable.
Appropriate Accounting Policies and Procedures and Accounting Systems Not in Place To
Manage and Control Loan Accounting and Processing of Activities Related to Defaulted
Issuers’ Portfolio
In fiscal year 2015, we reported that Ginnie Mae did not have appropriate accounting policies
and procedures in place even though it hired an audit readiness contractor to review and update
all of its accounting policies to ensure that they complied with GAAP. In fiscal year 2016,
Ginnie Mae made some progress in updating its accounting policies; however, only 5 of 20
accounting policies were finalized at the end of September 2016. The remaining 15 were in
various stages of development: Ginnie Mae management review, audit readiness contractor
review, and HUD OCFO final review. Additionally, we take exception to some of Ginnie Mae’s
accounting policies. Specifically, the following accounting policies were not GAAP compliant:


24
     In fiscal year 2016, Ginnie Mae hired a contractor to conduct an analysis of its staffing level.
25
     An audit readiness contractor was hired to assist the vice president in drafting and finalizing key accounting
     policies.
                                                           24
        Escrow and other custodial funds: Although Ginnie Mae had updated its escrow
         accounting policies, we continue to disagree on this issue. It is Ginnie Mae’s position
         that escrow amounts should only be disclosed in the notes to the financial statements. In
         contrast, GAAP requires the presentation of escrow on the face of the financial
         statements.

        Investment: Ginnie Mae classifies U.S. Government securities as held-to-maturity
         securities. Currently, Ginnie Mae only invests in overnight U.S. Government Securities.
         GAAP requires that short-term, highly liquid investments be classified as cash and cash
         equivalents. As a result, Ginnie Mae’s accounting policy is not in accordance with
         GAAP.
In addition, while some accounting policies were consistent with GAAP guidance, Ginnie Mae
failed to implement them accordingly. Specifically, we identified the following issues:

        Allowance for loan losses: While it is a requirement for Ginnie Mae to capitalize FHA
         reimbursable costs, it is Ginnie Mae’s practice to expense all FHA reimbursable costs
         instead of booking them as receivables.

        Loan held for investment: Ginnie Mae made an accounting policy election to place all
         PNCI loans on nonaccrual status when either interest or principal is delinquent for 90
         days or more.26 In addition, Ginnie Mae does not restore a loan from nonaccrual to
         accrual status. This policy had not been implemented as Ginnie Mae continues to accrue
         interest on PNCI loans that are more than 90 days delinquent.

        Foreclosures: Ginnie Mae applies the practical expedient27 in determining the value of its
         real estate owned properties, while its policy requires it to use the most recent home
         appraisal performed within the last 6 months.

        Purchased credit impaired loans: Despite having an accounting policy for PCI loans,
         Ginnie Mae does not follow the requirements. This deficiency is due to the lack of
         infrastructure and historical data.
The above issues are attributable to (1) delays in filling the vice president for accounting policy
and financial reporting and (2) Ginnie Mae’s inability to develop standard operating procedures
(SOP) to go along with the updated accounting policies. The vice president for accounting
policy and financial reporting position was not filled until April 2016, which was too late to
make a significant impact in fiscal year 2016. In addition, SOP documents are critical as they
provide guidance and instructions for performing specific accounting processes and procedures.
However, in fiscal year 2016, Ginnie Mae was able to develop only one SOP, which was not
finalized until August 2016, despite receiving assistance from an audit readiness contractor.

26
     FHA insured loans are considered PNCI loans.
27
     Ginnie Mae estimates the value of its real estate owned properties using the following data elements: (1) unpaid
     principal balance, (2) original loan-to-value ratio, (3) home price index at origination, and (4) home price index
     at recovery.
                                                           25
In fiscal year 2015, we reported that Ginnie Mae did not have an accounting system to track, at a
loan level, all of the accounting transactions and events related to its defaulted issuers’ portfolio.
This system is essential to validate the proper accounting and servicing of all the loans, which
includes payments, modifications, foreclosures, and insurance claims with the Federal insuring
agencies. In fiscal year 2016, Ginnie Mae began to take actions to address this problem.
Specifically, in February 2016, it engaged a contractor to develop a SLDB to capture loan level
events and record related accounting entries. Progress was made until the contract expired in
April 2016. In July 2016, Ginnie Mae reengaged its financial reporting and audit readiness
contractor to assist in developing its loan level accounting system and related infrastructure. No
progress was made during the lapse of the contract. Although efforts were made in fiscal year
2016, Ginnie Mae was unable to develop and implement an accounting system that could
perform loan level accounting.

Effective Monitoring of the Service Organization Engaged to Perform Operational
Processes and Accounting for Ginnie Mae Not in Place
In fiscal year 2015, we reported that Ginnie Mae was not able to complete the majority of its
corrective action plans to address the deficiency related to the ineffective monitoring and
oversight of its MSSs as a service organization. Ginnie Mae’s plans included actions to (1)
develop a policy for the appropriate oversight of the MSSs, (2) perform periodic compliance
reviews, (3) customize the scope and timing of the Statements on Standards for Attestation
Engagement number 16 to better align with Ginnie Mae’s processes, (4) develop analytics
around the review of the accounting reports, and (5) augment OCFO to assist in performing
oversight of the MSSs. In fiscal year 2016, Ginnie Mae continued to face challenges to fully
implement all of its action plans. In addition, although Ginnie Mae performed compliance
reviews, the review procedures were determined to be inadequate. Specifically, the procedures
lacked testing steps to evaluate the following areas: (1) reconciliation of mortgage collateral to
securities outstanding, (2) fixed installment control, (3) custodial accounts, (4) collection
clearing accounts, (5) escrow disbursement, and (6) loan buyouts. We consider this finding to be
an open issue because it was still under remediation at the end of fiscal year 2016.
Ginnie Mae’s Entitywide Governance of the Models Not Fully Implemented
In fiscal year 2015, we reported that Ginnie Mae’s executive management failed to establish
robust processes and controls to ensure that the models produced reasonably accurate accounting
estimates for use in its financial statements. In fiscal year 2016, Ginnie Mae established a model
risk management policy, which included a framework for model risk governance in response to
our recommendation.28 Ginnie Mae’s model risk governance has three components: (1) model
owners, (2) independent control, and (3) a model risk management framework. While Ginnie
Mae had made significant progress in developing its model risk management framework, two
key areas under the third component of this framework have not been implemented. These are
(1) developer testing and (2) independent validation. Their full implementation is not expected
until September 2016 and July 2017, respectively. In the absence of full implementation of these
two key components, Ginnie Mae cannot verify the accuracy, robustness, and stability of its

28
     Ginnie Mae’s model risk management policy was developed in accordance with industry leading practices and
     regulatory guidance from the Board of Governors of the Federal Reserve System, U.S. Department of the
     Treasury, Office of the Comptroller of the Currency, and Federal Housing Finance Agency.
                                                        26
model before its deployment. Recently, Ginnie Mae detected an assumption error in its issuer
buyout model used in the calculation of the guaranty asset and guaranty obligation. This model
error resulted in Ginnie Mae restating its 2015 financial statements in its 2016 third quarter
financial statements. The restatement included a decrease in the guaranty asset of $274 million,
a decrease in the guaranty liability of $90 million, and a net decrease in the investment of the
U.S. Government of $184 million.
These deficiencies occurred because Ginnie Mae had not implemented the developer testing and
independent validation components. At its current stage, Ginnie Mae’s model risk management
process cannot verify whether a model is performing as intended. Developer test results must be
made available to entities responsible for the model validation process and include relevant
internal testing conducted as part of the model development process. Ginnie Mae is in the
process of procuring an independent model validation contractor.
Conclusion
Ginnie Mae had made progress in addressing many of the financial management problems that
we identified in fiscal years 2015 and 2014; however, more work is needed to produce auditable
financial statements. Many conditions we cited in the report continued in fiscal year 2016
because more time will be needed to fully implement the corrective action plans. Ginnie Mae
acknowledged that it would require a significant investment in technology, infrastructure, and
people spanning multiple years to make its financial statements auditable. As a result, we will
continue to monitor Ginnie Mae’s progress in resolving these financial management governance
deficiencies in fiscal year 2017.
Recommendations
We recommend that Ginnie Mae’s Office of Issuer and Portfolio Management, Office of
Enterprise Risk, and Office of Chief Financial Officer
       4A.     Develop and document an issuer default governance framework that includes the
               identification, monitoring, analysis, evaluation, and response to potential issuer
               defaults. This process includes an assessment to maximize defaulted issuer assets
               and minimize losses to Ginnie Mae.




                                                27
Significant Deficiency

Finding 5: Ginnie Mae Did Not Provide Adequate Oversight Over
the Business Process Controls for the Integrated Pool Management
System
Ginnie Mae did not provide adequate oversight of its pool processing agent for IPMS to ensure
that adequate controls over business processes complied with Federal regulations and guidance.
Specifically, IPMS does not have (1) adequate logging controls that automatically track and log
the use of overrides in the system and (2) automated controls to prevent a pool processor from
making changes to the master29 data without prior approval. Additionally, the manual
reconciliation procedures do not detect changes to master data, and Ginnie Mae lacked adequate
policies and procedures for data management. These conditions occurred because Ginnie Mae
did not have (1) a policy for the logging, tracking, and monitoring of overrides and IPMS does
not sufficiently track the use of overrides or generate an override log or (2) a policy for ongoing
monitoring of change activity and IPMS does not generate a change report that captures data
changes. Also, management believes that its manual controls are adequate, and ownership of the
data in Ginnie Mae’s system is unclear and not well defined. Further, there were inadequate
oversight and delineation of responsibility for developing policies and procedures to ensure that
controls over Ginnie Mae’s data existed and were properly documented. As a result, Ginnie
Mae’s data were susceptible to an increased risk of improper use of authority, which could cause
financial harm to Ginnie Mae by attaching the Ginnie Mae guarantee to mortgage-backed
securities. The absence of mitigating controls increases the risk of tampering with data when
preventive measures are lacking or do not exist to deter changes. Additionally, undocumented
policies and procedures threaten the internal controls of an organization and lead to
inconsistencies and uncertainty that can hinder Ginnie Mae’s ability to identify gaps in its control
systems.

Additionally, Ginnie Mae had a contractor to assess the financial management systems to
determine whether they complied with section 803(a) of the Federal Financial Management
Improvement Act (FFMIA) and OMB Circular A-123, appendix A. The assessment was based
on guidance issued by OMB. It stated that six domains30 were included in the assessment of
information technology general controls across Ginnie Mae’s financially significant and mixed



29
     Master data are considered critical data that are used consistently throughout the organization, which would
     include but is not limited to names, addresses, Social Security numbers, account numbers, loan balances, issuer
     IDs, custodian IDs, etc.
30
     These internal control areas are as follows: entitywide security program and management, access control,
     application software development and change control, system software, service continuity, and information
     technology segregation of duties.


                                                          28
use systems.31 Ginnie Mae noted two material weaknesses, one in the access controls area and
the other in the application software development and change control area.  
No Adequate System Tracking and Monitoring of Override Use
IPMS does not have adequate logging controls to automatically track and log the use of
overrides. The manual process and IPMS’ limitations make it difficult to properly and
adequately monitor the use of overrides. Specifically, when the failed pool submissions32 are
overridden, the pool processor personnel manually notate the override on the failed edit report
and then file the report with the rest of the daily reports. Additionally, logging controls to
automatically track and log the use of overrides and show who made the override, what was
overridden, and why the override was made do not exist in IPMS. Also, a system-generated
override report is not one of the daily reports printed for review because pertinent override
information is not captured and tracked in IPMS. The Federal Information System Controls
Audit Manual (FISCAM) states that an organization’s procedures should provide for the
automatic logging of all edit overrides or bypasses and include subsequent routine analysis of
these logs to assess their appropriateness and correctness by entity management.33

The condition existed because Ginnie Mae did not have a policy covering the logging, tracking,
and monitoring of overrides and IPMS does not sufficiently track the use of overrides or generate
an override log. As a result, the failure to adequately track and monitor the use of overrides may
present opportunities for improper use of authority that can cause financial harm to Ginnie Mae,
such as obligating Ginnie Mae for potentially bad or faulty mortgage-backed securities. The
potential risk to MBS pool information also increases when mitigating controls are lacking or do
not exist.
No Ongoing Monitoring of Master Data Changes
IPMS does not have automated controls to prevent a pool processor from making changes to the
master data without prior approval. Additionally, the manual reconciliation procedures do not
detect changes to master data. The new pool processing procedures outline the process for
making changes to errors that are identified and emphasize the requirement to obtain prior
approval before changing the master data. However, this process is a manual one that a
processor can potentially bypass. Processing reports are printed and reviewed daily, and manual
reconciliations are made by comparing the source system (GinnieNet) with physical copies of
source data used for manual inputs and the processing system (IPMS). However, the focus of
these reports is on verifying total pools submitted, processed, or released and reviewing
exceptions or failure reports. The manual reconciliations do not include the review of a change
report that accounts for changes to master data. Specifically, the process does not include a
detailed review of the information submitted to ensure that the data input is reconciled with the
data processed as well as the data output that is released to the Federal Reserve Bank of New

31
     GSS, GNET, GMEP, RFS, UFS, and IPMS.
32
     New pools that fail to process correctly in IPMS appear on the failed edits report. The report is reviewed, the
     failure is researched, and action to either delete or override the pool is taken. The New Pool Processing
     department’s manager may perform a forced release or override either because of a waiver of a Ginnie Mae
     requirement or a loan modification.
33
     FISCAM – Critical Element BP-4 Master Data Setup and Maintenance is Adequately Controlled


                                                           29
York. National Institute of Standards and Technology Special Publication 800-53 states that
organizations should regularly analyze audit records for indications of inappropriate or unusual
activity.34

These conditions exist because there is no policy for the ongoing monitoring of change activity.
Additionally, IPMS does not generate a change report that captures data changes because
management believes that current manual controls are adequate. This control deficiency
increases the risk of tampering with data when preventive measures are lacking or do not exist to
deter certain behaviors, especially when perpetrators may be aware of the control gaps.
Unauthorized changes, such as loan amount, interest rate, or maturity date of an issuer’s
information, could cause delay or harm to issuers or Ginnie Mae by obligating them for
potentially faulty mortgage-backed securities.
Adequate Policies and Procedures Over Data Management Lacking
Ginnie Mae did not have internal policies and or procedures to address (1) data management
specifically related to data strategy, design, definition, quality standard, ownership, and
monitoring; (2) reporting strategies that include content and availability consistent with end
user’s needs, sensitivity and confidentiality of data, and adherence to laws and regulation; (3) the
collection of issuers’ data and the replication and reporting of issuers’ data published for public
viewing and outlines the process for reporting the information to the public; (4) master data
configuration, to include required and related fields that are excluded from changes; (5) making
changes to the master data design, configuration, and those responsible for authorizing and
making the changes; and (6) periodic review and scrubbing of stale master data, including how
duplicated master data entry is resolved and how unused master records in IPMS are handled.
FISCAM requires that policies and procedures for master data be established to ensure that they
are appropriately controlled and valid.

These conditions existed because ownership of the data in Ginnie Mae’s system is not well
defined. In addition, oversight and delineation of responsibility for developing policies and
procedures to ensure that controls over Ginnie Mae’s data existed and were properly documented
was inadequate. The lack of documented controls over operations and processes could hinder
Ginnie Mae’s ability to identify gaps. An absence of documented policies and procedures
threatens the internal controls of an organization and leads to inconsistencies and uncertainty.
Conclusion
Ginnie Mae needs to ensure that its supporting contractor for IPMS has (1) adequate logging
controls that automatically track and log the use of overrides in the system, (2) effective controls
to prevent a pool processor from making changes to the master data without prior approval, and
(3) documented policies and procedures that govern data management. These measures will
ensure that proper business process controls are in place and a compliant level of internal
controls that govern financial reporting has been implemented.


34
     National Institute of Standards and Technology Special Publication 800-53, REV-4, Security and Privacy
     Controls for Federal Information Systems and Organizations, Section AU-6 Audit Review, Analysis, and
     Reporting
                                                        30
Recommendations
We recommend that Ginnie Mae’s Chief Financial Officer, in conjunction with the Senior Vice
President of the Office of Securities Operations, direct its servicing contractor for IPMS to

       5A.    Develop an audit tracking tool in IPMS that automatically tracks and logs (1) the
              type of override used, (2) who performed the override, and (3) the reason for the
              override. In addition, Ginnie Mae should establish policies and procedures to
              govern and monitor the use of overrides, which include the timely submission of
              override reports to Ginnie Mae for review and verification.

       5B.    Establish policies and procedures for monitoring changes to master data, to
              include creating and reviewing a change report and establishing controls within
              IPMS to inform managers of changes to master data. In addition, Ginnie Mae
              should automate the reconciliation process between IPMS and other interfacing
              applications or systems to ensure that all pool-level details are compared and that
              changes are captured and reported in a timely manner.

       5C.    Develop written policies and procedures for master data and ensure that those
              policies and procedures are available to all staff. In addition, Ginnie Mae should
              revise policies and procedures, as needed, to reflect the changes in business
              processes to ensure that policies and procedures are accurate, complete, and
              current at all times. This should include when new systems are developed and
              implemented or other organizational changes occur. Ginnie Mae should also
              ensure that significant changes to the policies and procedures are properly
              communicated to all individuals responsible for handling Ginnie Mae’s data.




                                                31
Compliance with Laws and Regulations

Finding 6: Ginnie Mae Did Not Comply with the Debt Collection
Improvement Act of 1996
In fiscal year 2016, Ginnie Mae’s noncompliance with the Debt Collection Improvement Act
(DCIA) of 1996 continued. Specifically, as reported in fiscal year 2015, Ginnie Mae had not
remediated its practice of ensuring that all debt collection tools allowed by law had been
considered before deciding to discharge certain uninsured mortgage debts owed to Ginnie Mae.
This condition occurred because Ginnie Mae’s management continued to take the position that
DCIA did not apply to Ginnie Mae; therefore, it did not need to comply with DCIA
requirements.35 As a result, Ginnie Mae may have missed opportunities to collect millions of
dollars in debts related to losses in its MBS program.
Continued Noncompliance With DCIA
In fiscal year 2015, we determined that Ginnie Mae did not properly analyze the collectability of
uninsured mortgage debts owed to it from the MBS program activities. Specifically, Ginnie Mae
failed to use debt collection tools allowed by law before deciding to writeoff these debts.36
Under Ginnie Mae’s MBS program, a claim of the U.S. Government for money against the
borrower is established when there is a deficiency between the price obtained by Ginnie Mae on
the sale of the property and the amount owed on the uninsured mortgage. However, it had been
Ginnie Mae’s practice to automatically writeoff its claim for the mortgage debt deficiency37
without proper consideration of whether it was appropriate to do so.

In fiscal year 2016, Ginnie Mae again took the same position that the DCIA requirements did not
apply to it. For this reason, Ginnie Mae also did not take any action on OIG’s audit
recommendation to obtain a legal opinion from the implementing agency, the U.S. Treasury, for
a determination of whether Ginnie Mae is required to comply with DCIA. Due to an impasse,
this matter was elevated to the next level for a resolution.38 While it continued to challenge
DCIA’s applicability to Ginnie Mae, it appeared Ginnie Mae was receptive to OIG’s idea of
ensuring that the collectability of mortgage debt deficiency is properly analyzed before writing it
off. According to Ginnie Mae, it developed a debt collections and writeoffs operational policy

35
     HUD is subject to DCIA. As a component entity, Ginnie Mae reports to HUD.
36
     According to 31 U.S.C. (United States Code) 3701(b)(1)(A), the term claim or debt is defined as any amount of
     funds or property that has been determined by an appropriate official of the Federal Government to be owed to
     the United States by a person, organization, or entity other than another Federal agency. A claim includes,
     without limitation, funds owed on account of loans made, insured, or guaranteed by the government, including
     any deficiency or any difference between the price obtained by the government in the sale of a property and the
     amount owed to the government on a mortgage on the property.
37
     A mortgage deficiency occurs when a mortgage foreclosure sale is less than the price Ginnie Mae paid to
     purchase the loan out of the pool.
38
     OIG submitted its referral memorandum to Ginnie Mae’s President on April 21, 2016. As of October 31, 2016,
     our referral is still under review, and we are awaiting a response.
                                                          32
and submitted it to HUD OCFO in October 2015 for review. This policy is intended to provide
guidance to its MSSs in performing loss mitigation and debt collections owed to Ginnie Mae
from the borrowers to the extent possible, which is the spirit of what OIG is requesting Ginnie
Mae to do. Ginnie Mae explained that HUD OCFO made substantial changes to include DCIA
requirements in the policy. As this draft policy was still under review as of October 2016,
Ginnie Mae was not able to share this draft policy with OIG for review.

Conclusion
Since we reported this issue in 2015, Ginnie Mae has not established controls to ensure that the
collectability of mortgage debt deficiency is properly analyzed before writing it off, which is not
only a DCIA requirement, but also a good business practice. For this reason, Ginnie Mae may
have forgone the opportunity to recover its claims on many of these debts for at least 2 years.
While drafting a debt collections policy is a step in right direction, Ginnie Mae needs to do a
better job next year in ensuring that its debt collections and writeoffs operational policy is
finalized and properly implemented starting in fiscal year 2017 to mitigate any further foregoing
of its claims on these debts.

Recommendation
Because we are not making further recommendations on this finding this year, the audit
recommendation made in fiscal year 2015, which was still open, is not repeated in this report.




                                                 33
Scope and Methodology
In accordance with the Government Corporation Control Act, as amended, OIG is responsible
for conducting the annual financial statements audit of Ginnie Mae. The scope of this work
includes the audit of Ginnie Mae’s balance sheets as of September 30, 2016 and 2015 (restated),
and the related statements of revenues and expenses and changes in the investment of the U.S.
Government and cash flows for the years then ended and the related notes of the financial
statements. We conducted the audit in accordance with generally accepted government auditing
standards and OMB Bulletin 15-02, as amended, Audit Requirements for Federal Financial
Statements.

In fiscal years 2016 and 2015, we were unable to express an opinion on the accompanying
financial statements as a result 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 audit report. As reported in fiscal year 2015, these ongoing unresolved matters
continued to restrict our ability to obtain sufficient, appropriate audit evidence to form an
opinion. Accordingly, we do not express an opinion on the financial statements and notes.




                                                  34
Followup on Prior Audits
Listed below are 30 open recommendations made in previous years’ audits and their current
status at the end of fiscal year 2016.
Government National Mortgage Association Fiscal Year 2015 and 2014 Financial
Statements Audit, 2016-FO-0001
Of 11 audit recommendations in OIG audit report 2016-FO-0001, we concurred on the action
plans for eight (two closed and six under remediation) audit recommendations. We referred the
remaining three audit recommendations to the departmental audit resolution official because we
were not in agreement with Ginnie Mae’s management on the actions necessary to correct the
deficiencies identified in our report. Our assessment of the current status of the recommendations
is presented below.   
Government National Mortgage Association Fiscal Year 2014 and 2013 Financial
Statements Audit, 2015-FO-0003
Of 19 audit recommendations in OIG audit report 2015-FO-0003, we concurred on the action
plans for 13 (seven closed and six under remediation) audit recommendations. We referred the
remaining six audit recommendations to the departmental audit resolution official because of a
disagreement with Ginnie Mae’s management on the actions necessary to correct the deficiencies
identified in our report. Our assessment of the current status of the recommendations is presented
below.  

              Fiscal year 2015
            recommendations                Classification        Fiscal year 2016 status
   2A. Prepare an analysis of all            Material        Under remediation – Full
   outstanding REMIC deals to              weakness 2015     implementation of the
   determine the cumulative effect of        Finding 2       corrective action remains
   misstatements and make the                                unknown. See material
   appropriate adjustments to the                            weakness 2016 – finding 2.
   financial statements.
   2B. Update the accounting policies        Material        Under remediation. See
   and procedures related to revenue       weakness 2015     material weakness 2016 –
   recognition to reasonably ensure          Finding 2       finding 2.
   compliance with GAAP.
   2C. Establish and implement               Material        Under remediation – Full
   policies and procedures to ensure       weakness 2015     implementation of the
   that asset balances in Ginnie Mae’s       Finding 2       corrective action remains
   books are appropriately adjusted to                       unknown. See material
   account for the timing differences in                     weakness 2016 – finding 2.
   the collection and remittance of
   cash from its mastersubservicers.


                                                35
           Fiscal year 2015
          recommendations               Classification       Fiscal year 2016 status
2D. Appropriately disclose                Material       Closed.
restricted cash in its financial        weakness 2015
statements.                               Finding 2
2E. Provide additional justification      Material       Closed.
to support the reasonableness of the    weakness 2015
delinquency and foreclosure rates         Finding 2
assumptions or create projections
for this assumption that are better
supported by best practices.
We recommend that Ginnie Mae’s
President
4A. Ensure that the systems and           Material       Under remediation – Full
processes for servicing and financial   weakness 2015    implementation of the
reporting on Ginnie Mae’s defaulted       Finding 4      corrective action plan was not
issuers’ portfolio are ready and                         expected until fiscal year 2017.
capable of handling loan level                           See material weakness 2016 –
accounting.                                              finding 4.

We recommend that the Acting
Chief Financial Officer, in
coordination with the Chief Risk
Officer
4B. Establish and implement               Material       Under remediation – Full
entitywide policies and procedures      weakness 2015    implementation of the
for an effective model risk               Finding 4      corrective action plan was not
management. At a minimum, it                             expected until fiscal year 2017.
should include the following                             See material weakness 2016 –
elements:                                                finding 4.
     Controls over model
        development,
        implementation and use;
     Controls over model
        validation;
     Controls over model
        documentation;
     Controls over evaluation for
        fitness, selection and
        validation of third party
        models; and
     Establish adequate structure
        of responsibilities for model
        oversight, including
        evaluation of model data
                                            36
           Fiscal year 2015
          recommendations               Classification      Fiscal year 2016 status
        inputs, assumptions and
        methodology.
5A. Segregate duties between             Significant     We did not reach a management
individuals collecting, recording,       Deficiency      decision. Referred to
depositing, and reconciling cash,           2015         departmental audit resolution
and periodically review the controls     Finding 5       official. See significant
over the cash process to ensure                          deficiency 2016 – finding 5.
proper implementation of
compatible functions in its cash
operations department.
5B. Conduct ongoing monitoring of        Significant     Under remediation –
change reports to ensure that            Deficiency      implementation date remains
unauthorized changes are not made           2015         unknown as we await an update
to Ginnie Mae's data, and establish a    Finding 5       from Ginnie Mae. See
policy regarding ongoing                                 significant deficiency 2016 –
monitoring of change activity that                       finding 5.
requires performing periodic
reviews of change reports.
5C. Automate the approval process        Significant     We did not reach a management
to include restricting the capability    Deficiency      decision. Referred to
to make unauthorized changes                2015         departmental audit resolution
unless evidence of approval is           Finding 5       official. See significant
present or increase the scope of the                     deficiency 2016 – finding 5.
“Admin Adjustments Report” to
include all exceptions and
adjustments.
Additionally, the contractor review
the report for changes, verify that
the changes identified in the report
coincide with evidence of proper
authorization, and ensure changes
that are not properly supported are
investigated and resolved
accordingly.
We recommend that Ginnie Mae’s
Acting Chief Financial Officer
6.A Request a legal opinion from         Compliance      We did not reach a management
the implementing agency, the U.S.       with Laws and    decision. Referred to
Treasury, for a determination of         Regulations     departmental audit resolution
whether Ginnie Mae is required to            2015        official. See compliance with
comply with DCIA.                         Finding 6      laws and regulations 2016 –
                                                         finding 6.


                                            37
  Fiscal year 2014 recommendations         Classification        Fiscal year 2016 status
1A. Establish and implement policies        Material        Under remediation – Full
and procedures to demonstrate how           Weakness        implementation of the corrective
Ginnie Mae provides appropriate               2014          action plan was not expected
accounting and financial reporting          Finding 1       until fiscal year 2017. See
oversight of the mastersubservicers                         material weakness 2016 –
to ensure that the mastersubservicers                       finding 1.
are capable of producing accurate
and reliable accounting records and
reports.

1B. Establish and implement policies        Material        Under remediation –Full
and procedures to properly account          Weakness        implementation of the corrective
for and track at a loan level all of the      2014          action plan was not expected
accounting transactions and events in       Finding 1       until fiscal year 2017. See
the life cycle of the loans. This                           material weakness 2016 –
measure is intended to compensate                           finding 1.
for the servicing system’s inability to
perform loan level transaction
accounting.
2A. Establish and implement policies        Material        Under remediation – Full
and procedures to ensure that               Weakness        implementation of the corrective
reimbursable costs are tracked and            2014          action plan was not expected
accounted for at the loan level.            Finding 2       until fiscal year 2017. See
                                                            material weakness 2016 –
                                                            finding 2.
2B. Determine the amount of                 Material        Under remediation – Full
reimbursable costs incurred by              Weakness        implementation of the corrective
Ginnie Mae per loan, report the               2014          action plan was not expected
reimbursable costs incurred as              Finding 2       until fiscal year 2017. See
receivables rather than expensing                           material weakness 2016 –
them, and adjust them out of the                            finding 2.
mortgage-backed securities loss
liability account as appropriate.
2C. Restate fiscal year 2013 financial      Material        We did not reach a
statements to correct the impact of         Weakness        management decision.
the accounting errors determined in           2014          Referred to departmental audit
recommendation 2B.                          Finding 2       resolution official. See
                                                            material weakness 2016 –
                                                            finding 2.
2D. Review and recalculate the              Material        Under remediation – Full
appropriate amount of interest              Weakness        implementation of the corrective
accrued on the loans and adjust the           2014          action plan was not expected
accrued interest receivable balances        Finding 2       until fiscal year 2017. See
reported as appropriate.
                                               38
  Fiscal year 2014 recommendations        Classification        Fiscal year 2016 status
                                                           material weakness 2016 –
                                                           finding 2.
2E. Report the escrow fund balances        Material        We did not reach a
on the face of the financial               Weakness        management decision.
statements, including additional             2014          Referred to departmental audit
disclosure information in the notes,       Finding 2       resolution official. See
in accordance with generally                               material weakness 2016 –
accepted accounting principles.                            finding 2.
2F. Restate fiscal year 2013 financial     Material        We did not reach a
statements to show escrow fund             Weakness        management decision.
balances omitted on the face of the          2014          Referred to departmental audit
financial statements.                      Finding 2       resolution official. See
                                                           material weakness 2016 –
                                                           finding 2.
2H. Comply with generally accepted         Material        Closed.
accounting principles by (1)               Weakness
presenting investing cash inflows            2014
separately from investing cash             Finding 2
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.
3A. Establish and implement policies       Material        Under remediation – Full
and procedures for the                     Weakness        implementation of the corrective
documentation and validation of              2014          action plan was not expected
Ginnie Mae management                      Finding 3       until fiscal year 2017. See
assumptions, including foreclosure                         material weakness 2016 –
costs and re-default rates, used in the                    finding 3.
loss reserve model going forward.
3B. Reevaluate the reasonableness of       Material        Closed.
foreclosure costs and re-default rate      Weakness
management assumptions used in               2014
fiscal year 2014, considering the          Finding 3
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.


                                              39
  Fiscal year 2014 recommendations       Classification        Fiscal year 2016 status
3C. Determine Ginnie Mae’s                Material        Closed.
foreclosure cost reimbursement rate       Weakness
and take this information into              2014
account when developing its               Finding 3
foreclosure cost management
assumptions.
3D. Perform a validation of the FHA       Material        Closed.
foreclosure cost assumption amount        Weakness
used in fiscal year 2014, document          2014
the results of the validation, and        Finding 3
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        Material        Closed.
loss estimate analysis on                 Weakness
reperforming nonpooled loans and,           2014
based on the results of this analysis,    Finding 3
establish separate loss reserve
estimates on reperforming nonpooled
loans.
We recommend that Ginnie Mae’s            Material
President                                 Weakness
                                            2014
4A. Work with HUD’s Chief                 Material        Closed.
Financial Officer to ensure that          Weakness
Ginnie Mae has a sufficient number          2014
of appropriately skilled and              Finding 4
experienced staff in place to perform
the required financial management
duties by filling the vacancies of key
personnel that oversee the work in
OCFO.
4B. Work with HUD’s Chief                 Material        We did not reach a
Financial Officer to design and           Weakness        management decision.
implement a compliant financial             2014          Referred to departmental audit
management governance structure.          Finding 4       resolution official. See
                                                          material weakness 2016 –
                                                          finding 4.
4C. Review and update Ginnie Mae’s        Material        Closed.
bylaws and delegations of authority       Weakness
to correspond to the current                2014
                                          Finding 4

                                             40
 Fiscal year 2014 recommendations        Classification        Fiscal year 2016 status
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
4D. Overseeing a comprehensive risk       Material        We did not reach a
assessment of Ginnie Mae’s financial      Weakness        management decision.
management governance.                      2014          Referred to departmental audit
                                          Finding 4       resolution official. See
                                                          material weakness 2016 –
                                                          finding 4.
4E. Preparing and implementing a          Material        We did not reach a management
plan, based on the results of the risk    Weakness        decision. Referred to
assessment in recommendation 4D,            2014          departmental audit resolution
that                                      Finding 4       official. See material weakness
4E.i) Demonstrates HUD OCFO                               2016 – finding 4.
oversight of Ginnie Mae’s, as a HUD
component, financial management
activities;
4E.ii) Ensures that Ginnie Mae
updates its financial management
polices to reflect conclusions reached
in the financial management risk
assessment;
4E.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
4E.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.


                                             41
Appendixes
Appendix A


                      Schedule of Funds To Be Put to Better Use
                      Recommendation         Funds to be put to
                          number                better use 1/
                              2F                   $248,016,624

                            Totals                 $248,016,624



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.




                                            42
Appendix B
             Auditee Comments and OIG’s Evaluation


Ref to OIG   Auditee Comments
Evaluation




 Comment 1


 Comment 2



 Comment 3




                                43
                              OIG Evaluation of Auditee Comments

Comments 1 and 2   Ginnie Mae agreed with the OIG audit findings. In addition, Ginnie Mae
                   acknowledged its commitment to remediate all OIG audit issues. We recognized
                   Ginnie Mae’s efforts toward its multi-year effort to remediate audit issues in a
                   challenging environment. We will continue to work with Ginnie Mae in
                   resolving these matters in fiscal year 2017. We would like to thank Ginnie Mae
                   for the cooperation and assistance extended to us during the audit.

Comment 3          OIG believes that Ginnie Mae’s legal counsel is responsible for and
                   knowledgeable about all known actual or possible litigation, claims, and
                   assessments related to Ginnie Mae. Therefore, without Ginnie Mae’s legal
                   counsel acknowledgement on the correctness of the matters included in the legal
                   representations provided to OIG in the management representation letter raises
                   significant concerns and constitutes a scope limitation in our audit work.




                                                  44
Appendix C
  Ginnie Mae’s Fiscal Years 2016 and 2015 (Restated) Financial Statements and Notes




                                          45
                                                                Balance Sheets

                                                                                 September 30, 2016      September 30, 2015
                                                                                                            As Restated*
                                                                                           (Dollars in thousands)
Assets:
Cash and cash equivalents                                                        $       16,846,100 $           14,680,600
Restricted cash and cash equivalents                                                        546,600                432,800
Accrued fees and other receivables                                                           87,000                 92,100
Claims receivable, net*                                                                     709,400                814,200
Advances, net                                                                                20,900                118,800
Mortgage loans held for investment, net*                                                  3,470,000              4,352,600
Accrued interest receivable, net*                                                            18,600                 47,700
Acquired property, net*                                                                      41,200                 30,300
Fixed assets, net                                                                            82,900                 62,300
Mortgage servicing rights                                                                       -                   29,600
Guaranty asset                                                                            6,397,600              6,742,200
Other assets                                                                                    200                    400
Total Assets                                                                     $       28,220,500 $           27,403,600

Liabilities and Investment of U.S. Government:

Liabilities:
Accounts payable and accrued liabilities                                         $          114,800 $              135,800
Deferred liabilities and deposits                                                               300                    300
Deferred revenue                                                                            312,200                319,700
Liability for loss on mortgage-backed securities program guaranty                             1,000                    -
Liability for representations and warranties                                                  1,500                    -
Guaranty liability                                                                        6,198,400              5,661,300
Total Liabilities                                                                $        6,628,200 $            6,117,100

Commitments and Contingencies                                                    $              -     $                 -

Investment of U.S. Government                                                    $       21,592,300 $           21,286,500
Total Liabilities and Investment of U.S. Government                              $       28,220,500 $           27,403,600

* See Note 2 (Restatement) discussion
The accompanying notes are an integral part of these financial statements.




                                                                                                                               
 
                                                                      46
                            Statements of Revenues and Expenses and Changes in Investment of U.S. Government

                                                                                         For the year ended,      For the year ended,
                                                                                         September 30, 2016       September 30, 2015
                                                                                                                     As Restated*
                                                                                                    (Dollars in thousands)
    Revenues:
    Interest Income
         Interest income on mortgage loans held for investment*                          $           340,900 $               300,100
         Other interest income                                                                        84,100                 128,200
    Income on guaranty obligation                                                                  1,252,000               1,031,700
    Mortgage-backed securities guaranty fees                                                       1,052,500                 977,700
    Commitment fees                                                                                  101,100                  85,900
    Multiclass fees                                                                                   33,200                  32,300
    Mortgage-backed securities program and other income                                               10,100                  29,700
    Total Revenues                                                                       $         2,873,900 $             2,585,600

    Expenses:
    Administrative expenses                                                              $           (27,000) $              (21,500)
    Fixed asset amortization                                                                         (15,700)                (13,900)
    Mortgage-backed securities program and other expenses                                           (289,100)               (321,700)
    Total Expenses                                                                       $          (331,800) $             (357,100)

    Recapture (provision):
    Recapture (provision) for mortgage loans held for investment*                        $            99,500 $               690,200
    Recapture (provision) for mortgage-backed program guaranty                                         (1,000)                    -
    Recapture (provision) for claims receivable*                                                     (75,500)                 (27,500)
    Recapture (provision) for loss on uncollectible advances                                         (88,500)                 (45,300)
    Recapture (provision) for acquired property*                                                     (32,200)                 (28,500)
    Total Recapture (Provision)                                                          $           (97,700) $              588,900

    Gain (Loss):
    Gain (Loss) on guaranty asset                                                        $        (2,133,600) $             (814,500)
    Gain (Loss) on mortgage servicing rights                                                           (4,100)               (15,000)
    Gain (Loss) other                                                                                    (900)                (1,100)
    Total Other Gains / (Losses)                                                         $        (2,138,600) $             (830,600)

    Results of Operations                                                                $           305,800 $             1,986,800

    Investment of U.S. Government at Beginning of Year                                            21,286,500              19,301,800
    Adjustment to Investment of U.S. Government                                                          -                    (2,100)
    Investment of U.S. Government at Beginning of Year, Restated*                                 21,286,500              19,299,700
    Investment of U.S. Government at End of Year                                         $        21,592,300   $          21,286,500

* See Note 2 (Restatement) discussion
The accompanying notes are an integral part of these financial statements.




                                                                                                                                          
 
                                                                      47
                                                                    Statements of Cash Flows

                                                                                                           For the year ended,      For the year ended,
                                                                                                           September 30, 2016       September 30, 2015
                                                                                                                                       As Restated*
                                                                                                                      (Dollars in thousands)
Cash Flow from Operating Activities
 Results of Operations                                                                                     $           305,800 $             1,986,800
 Adjustments to reconcile Results of Operations to Net Cash (used for) provided by Operating Activities:
   Amortization expense                                                                                                 15,700                  13,900
   Recapture (provision) for mortgage loans held for investment*                                                       (99,500)               (690,200)
   Recapture (provision) for mortgage-backed program guaranty                                                            1,000                     -
   Recapture (provision) for claims receivable*                                                                         75,500                  27,500
   Recapture (provision) for loss on uncollectible advances                                                             88,500                  45,300
   Recapture (provision) for acquired property*                                                                         32,200                  28,500
   Other expenses                                                                                                        3,500                     -
 Changes in operating assets and liabilities:
   Restricted cash and cash equivalents                                                                               (113,800)               (137,400)
   Accrued fees and other receivables                                                                                    (4,700)                 (4,200)
   Claims receivable, net*                                                                                             687,500                 (30,800)
   Advances, net                                                                                                       213,200                 345,100
   Accrued interest receivable, net*                                                                                  (148,900)               (128,700)
   Bank of America settlement receivable                                                                                    -                  200,000
   Mortgage servicing rights                                                                                             29,600                 15,000
   Guaranty asset                                                                                                      344,500                (779,100)
   Other assets                                                                                                             200                    (300)
   Accounts payable and accrued liabilities                                                                             (20,700)                26,600
   Deferred revenue                                                                                                      (7,500)                17,500
   Ocala Funding settlement liability                                                                                       -                  (14,900)
   Liability for representations and warranties                                                                           1,500                     -
   Guaranty liability                                                                                                  537,000                 568,900
Net cash (used for) provided by operating activities                                                       $         1,940,600 $             1,489,500

Cash Flow from Investing Activities
   Proceeds from repayments and sales of loans acquired as held for investment*                            $           281,100 $               223,100
   Proceeds from the dispositions of acquired property and preforeclosure sales*                                        47,800                  46,500
   Purchases of loans held for investment                                                                              (67,700)               (418,100)
   Purchases of fixed assets                                                                                           (36,300)                (26,100)
Net cash (used for) provided by investing activities                                                       $           224,900 $              (174,600)

Cash Flow from Financing Activities

Net cash (used for) provided by financing activities                                                       $               -      $                -

Net change in Cash and cash equivalents                                                                              2,165,500               1,314,900
Cash and cash equivalents, beginning of the year                                                                    14,680,600              13,365,700
Cash and cash equivalents, end of the year                                                                 $        16,846,100 $            14,680,600

Supplemental Disclosure of Non-Cash Activities
   Transfers from mortgage loans held for investment to claims receivable, net; accrued
   interest, net; and advances, net                                                                                    689,700                 542,800
   Transfers from mortgage loans held for investments to acquired properties                                            90,200                 102,300
   Disposal of acquired properties                                                                                       9,800                  (9,800)

* See Note 2 (Restatement) discussion
The accompanying notes are an integral part of these financial statements.

 



                                                                                                                                                            
 
                                                                                  48
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 wholly owned 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 from worldwide investors. By providing mortgage capital for the MBS program,
Ginnie Mae supports the growing demographic of citizens who most need Ginnie Mae’s help: lower-
income households who rent due to economic need; young professionals with unestablished credit
histories; hardworking families who struggle to come up with a down payment; and senior citizens
who need a wide range of housing and support services. Although loans underlying securities may be
concentrated in specific areas, Ginnie Mae has provided home ownership opportunities in every U.S.
state and territory.

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, used as
collateral, are insured or guaranteed by the U.S. Federal Housing Administration (FHA), another
government entity within HUD, the U.S. Department of Agriculture (USDA), the Department of
Veterans Affairs (VA), or the Office of Public and Indian Housing (PIH). These mortgage loans 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 and payment dates.

Ginnie Mae I MBS are modified pass-through mortgage-backed securities on which registered holders
receive separate principal and interest payments on each of their certificates. Ginnie Mae I MBS are
based on single-family pools and are Ginnie Mae’s most heavily-traded MBS product. The underlying
mortgages generally have the same or similar maturities and the same interest rate on the mortgages.

Ginnie Mae II MBS are modified pass-through mortgage-backed securities for which registered
holders receive an aggregate principal and interest payment from a central paying agent. Ginnie Mae
II MBS provide more liquidity and greater flexibility with respect to loan characteristics. Multiple-
issuer as well as single-issuer pools are permitted under the program. The Ginnie Mae II MBS allows
small issuers who do not meet the dollar requirements of the Ginnie Mae I MBS program to participate
in the secondary mortgage market. In addition, the Ginnie Mae II MBS permits the securitization of
adjustable rate mortgages (ARMs).

                                                                                                           
 
                                                   49
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 used to purchase, construct, or renovate single family homes predominantly
        originated through FHA and VA loan insurance programs.
       Multifamily Program – Ginnie Mae insures securities backed by FHA and USDA insured
        loans for the purchase, construction, and renovation of apartment buildings, hospitals, nursing
        homes, and assisted living facilities.
       Home Equity Conversion Mortgage (HECM) MBS (HMBS) Program – Ginnie Mae’s
        HECM securities program provides a MBS platform available for lenders to raise capital and
        liquidity for FHA-insured reverse mortgages. HECM loans are securitized separately from
        regular single family mortgages due to their unique cash flow and fee structure. HECM loans
        can be pooled into 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: Restatement

Restatement of Prior Financial Statements: Ginnie Mae has revised its previously issued financial
statements for the year ended September 30, 2015 (referred to as “the restatement”). The financial
information contained in the 2016 financial statements supersedes the previously issued financial
statements for 2015. The previous financial statements and corresponding information should no
longer be relied upon.

Following Ginnie Mae’s issuance of the 2015 annual report, the Office of the Inspector General (OIG)
issued Management Letters and Notifications of Finding and Recommendation recommending
adjustments of certain financial statement line items and citing internal control weaknesses over Fixed
Assets, the Guaranty Asset and Guaranty Liability model, Multiclass Fees, as well as amounts disclosed
for Escrow funds balances and MBS commitment outstanding. As a result, Ginnie Mae performed an
internal accounting assessment, reviewing the current accounting practices and subsequently identified
additional areas where U.S. Generally Accepted Accounting Principles (U.S. GAAP) were misapplied
as noted below.

The overall impact of Ginnie Mae’s restatements on the financial statements as of and for the year
ended September 30, 2015, was a total decrease in “Investment of U.S. Government at End of Year”
of $190 million. This amount includes the following:

       $188 million prior period adjustment, resulting in a net decrease in the 2015 “Results of
        Operations”; and



                                                                                                          
 
                                                  50
       $2 million prior period adjustment, resulting in a net decrease in the 2015 beginning balance
        of “Investment of U.S. Government”.

Ginnie Mae has classified the restatement adjustments into nine primary categories. The effects of
these adjustments on the previously issued financial statements for the year ended September 30, 2015,
are listed in the “Impact of Restatement on Financial Statements” section of this note. Three out of
the nine restatement categories have an impact on the Investment of U.S. Government in 2015.

Restatements that impact “Investment of U.S. Government”:

    Guaranty Asset and Guaranty Liability: Ginnie Mae identified accounting errors associated
    with a modeling input (“issuer buyout”) used to measure the guaranty asset and guaranty
    liability. Issuer buyout constitutes the removal of a loan out of the pool due to loan
    delinquency, foreclosure with claim payment, or loss mitigation. Ginnie Mae incorrectly
    used an issuer buyout timeline that was not reflective of actual issuer buyout behavior. The
    guaranty asset and guaranty liability were restated to reflect enhancements to the issuer
    buyout assumption. The impact of correcting this error resulted in:

           A decrease in “Guaranty assets” of $274.3 million as of September 30, 2015;
           A decrease in “Guaranty obligation” of $90.3 million as of September 30, 2015; and
           A net decrease in “Results of Operations” of $184.0 million for the year ended
            September 30, 2015.
    Multiclass Fees and Deferred Revenue: Ginnie Mae identified accounting errors associated
    with the recognition of multiclass fees and related accruals. Ginnie Mae incorrectly included
    expenses not associated with the specific Real Estate Mortgage Investment Conduits (REMICs)
    issuances to determine certain up-front costs, which resulted in Ginnie Mae overstating multiclass
    fee earned and understating deferred fees upon issuance. In addition, Deposits in Transit for
    multiclass fees paid to Ginnie Mae’s agents but not yet deposited to Ginnie Mae’s account at the
    U.S. Treasury, were not recognized as of September 30, 2015. The impact of correcting these
    errors resulted in:

           An increase in “Cash and cash equivalents” of $3.9 million as of September 30, 2015;
           A decrease in “Accrued fees and other receivables” of $0.8 million as of September 30,
            2015;
           An increase of “Deferred Revenue” of $13.8 million as of September 30, 2015;
           A net decrease in “Results of Operations” of $1.0 million for the year ended September 30,
            2015; and
           A net decrease in the 2015 “Investment in U.S. Government at Beginning of Year” of
            $9.7 million.
    Fixed Assets, net: Ginnie Mae identified accounting errors associated with its accounting
    treatment of internally developed software, hardware/software purchases, leases, software

                                                                                                      
 
                                                 51
    licenses, and decommissioned assets. For internally developed software and hardware/software
    purchases, certain expenditures that did not meet the capitalization criteria per Ginnie Mae’s
    accounting policy were capitalized in error. For leases, a lease agreement was improperly treated
    as an operating lease instead of a capital lease. For software licenses, the cost of a licensing
    arrangement was incorrectly applied as an expense instead of a fixed asset. For decommissioned
    assets, the carrying value of the assets was not removed from the “Fixed Assets, net” balance.
    Given that fixed assets are shown net of depreciation, the effect of this last error has no impact
    on the financial statements. The cumulative impact of correcting these errors resulted in:

           An increase in “Fixed assets” of $5.8 million; and an increase in “Accumulated
            amortization” of $1.1 million; resulting in an increase to “Fixed Assets, net” of $4.7 million
            as of September 30, 2015;
           A net decrease in “Results of Operations” of $2.9 million for the year ended September 30,
            2015; and
           A net increase in the 2015 “Investment in U.S. Government at Beginning of Year” of
            $7.6 million.

Restatements that do not impact “Investment of U.S. Government”:

    Outstanding MBS Commitments: Ginnie Mae identified an error in the off-balance sheet
    disclosure of outstanding MBS commitments. Ginnie Mae used an incorrect report to determine
    the cumulative outstanding MBS commitment balance. As a result, the disclosure for outstanding
    MBS commitments balance at September 30, 2015 was understated by $31 billion.

    This error has no impact on the “Investment of U.S Government” ending balance as of
    September 30, 2015.

    Cash and Cash Equivalents: Ginnie Mae implemented OIG’s recommendation to merge
    “Funds with U.S. Treasury” and “Cash and other monetary assets” and change the financial
    statement captions to “Cash and cash equivalents.”

    Additionally, Ginnie Mae implemented the OIG’s recommendation regarding the presentation of
    its overnight securities as “Cash and cash equivalents” instead of “U.S. Government
    securities.” Accordingly, Ginnie Mae has elected to change its accounting policy to present its
    investments in overnight certificates as cash equivalents. Ginnie Mae believes the presentation of
    cash equivalents is preferable given the highly liquid nature of these securities. The impact of this
    change resulted in:

           An increase in “Cash and cash equivalents” of $12.9 billion as of September 30, 2015;
           A decrease in “U.S. Government securities” of $12.9 billion as of September 30, 2015.
    The cumulative effect of these changes has no impact on the “Investment of U.S. Government”
    ending balance as of September 30, 2015.

                                                                                                          
 
                                                   52
    Recapture (provision) for mortgage loans held for investment and Recapture (provision)
    for claims receivable: Ginnie Mae identified accounting errors associated with the classification
    of certain expenses, which were improperly included in the recapture (provision) accounts for
    mortgage loans held for investment and claims receivable. The impact of correcting this error
    resulted in:

          A decrease in “Provision for mortgage loans held for investment” of $140.9 million for
           the year ended September 30, 2015;
          A decrease in “Provision for claims receivable” of $4.3 million for the year ended
           September 30, 2015; and
          An increase in “Mortgage-backed securities program and other expenses” of $145.2
           million for the year ended September 30, 2015.
    This error has no impact on the “Investment of U.S Government” ending balance as of
    September 30, 2015.

    Restricted Cash and Cash Equivalents: Ginnie Mae enhanced its presentation of principal and
    interest payments that were not received or cashed by security holders (unclaimed funds) as
    “Restricted cash and cash equivalents” instead of “Cash and cash equivalents”. The impact of this
    change resulted in:

          A decrease in “Cash and cash equivalents” of $23.4 million as of September 30, 2015; and
          An increase in “Restricted cash and cash equivalents” of $23.4 million as of September 30,
           2015.
    This change has no impact on the “Investment of U.S Government” ending balance as of
    September 30, 2015.

    Escrow Funds (Held in Trust for Investors or Mortgagors): Ginnie Mae identified an error
    in the disclosure of off-balance sheet escrow funds. Certain funds held in trust for the borrower
    were improperly omitted. As a result, escrow funds disclosed as of September 30, 2015 was
    understated by $14.9 million.

    This error has no impact on the “Investment of U.S Government” ending balance as of
    September 30, 2015.

    Commitment Fees: Ginnie Mae identified accounting errors associated with the recognition of
    funds returned to the General Fund of the U.S. Treasury as a result of canceled spending authority.
    Ginnie Mae incorrectly recorded the cancelation of these funds against commitment fee revenue
    instead of other gain (loss) in the 2015 Statement of Revenues and Expenses and Changes in
    Investment of U.S. Government. The impact of correcting this error resulted in:

          An increase in “Commitment Fees” of $1.1 million for the year ended September 30, 2015;
           and

                                                                                                       
 
                                                  53
          An increase in “Gain (Loss) other” of $1.1 million for the year ended September 30, 2015.
    This error has no impact on the “Investment of U.S Government” ending balance as of
    September 30, 2015.

    Impact of Restatement on Financial Statements: The following tables show the impact of the
    restatement on each individual line item presented in the Balance Sheets and the Statements of
    Revenues and Expenses and Changes in Investment of U.S. Government for 2015. Restatement
    adjustment amounts in the following table may differ from above slightly due to rounding.




                                                                                                    
 
                                                54
IMPACT OF RESTATEMENT ON FINANCIAL STATEMENTS:

                                                    Balance Sheet
                                                                           For the Year Ended
                                                                             September 30,
                                                                                                        2015
                                                             2015               Adjustment           As Restated
Assets:
Cash and cash equivalents                               $         1,777,100 $       12,903,500 $         14,680,600
Restricted cash and cash equivalents                                409,400             23,400              432,800
U.S. Government securities                                       12,922,900        (12,922,900)                 -
Accrued fees and other receivables                                   92,900               (800)              92,100
Claims receivable, net*                                             814,200                -                814,200
Advances, net                                                       118,800                -                118,800
Mortgage loans held for investment, net*                          4,352,600                -              4,352,600
Accrued interest receivable, net*                                    47,700                -                 47,700
Acquired property, net*                                              30,300                -                 30,300
Fixed assets, net                                                    57,600              4,700               62,300
Mortgage servicing rights                                            29,600                -                 29,600
Guaranty asset                                                    7,016,500           (274,300)           6,742,200
Other assets                                                            600               (200)                 400

Total Assets                                            $        27,670,200 $         (266,600) $        27,403,600

Liabilities and Investment of U.S. Government:

Liabilities:
Accounts payable and accrued liabilities                $           135,700 $              100 $            135,800
Deferred liabilities and deposits                                       300                -                    300
Deferred revenue                                                    305,900             13,800              319,700
Guaranty Liability                                                5,751,600            (90,300)           5,661,300

Total Liabilities                                       $         6,193,500 $          (76,400) $         6,117,100

Commitments and Contingencies                           $              -    $                -   $                 -

Investment of U.S. Government                           $        21,476,700 $         (190,200) $        21,286,500
Total Liabilities and Investment of U.S.
Government                                              $        27,670,200 $         (266,600) $        27,403,600

* See Note 2: Restatement–Non-pooled loans discussion




                                                                                                                        
 
                                                            55
                                     Statement of Revenues and Expenses and Changes in Investment of U.S. Government
                                                                                                              For the Year Ended
                                                                                                                September 30,
                                                                                                                                           2015
                                                                                                2015                 Adjustment         As Restated

    Revenues:
    Interest Income
         Interest income on mortgage loans held for investment*                          $            300,100 $                -    $           300,100
         Other interest income                                                                        128,200                  -                128,200
    Income on guaranty obligation                                                                   1,031,700                  -              1,031,700
    Mortgage-backed securities guaranty fees                                                          977,700                  -                977,700
    Commitment fees                                                                                    84,900                1,000               85,900
    Multiclass fees                                                                                    33,300               (1,000)              32,300
    Mortgage-backed securities program and other income                                                29,700                  -                 29,700
    Total Revenues                                                                       $          2,585,600 $                -    $         2,585,600

    Expenses:
    Administrative expenses                                                              $              (21,600) $             100 $            (21,500)
    Fixed asset amortization                                                                            (11,700)            (2,200)             (13,900)
    Mortgage-backed securities program and other expenses                                              (175,700)          (146,000)            (321,700)
    Total Expenses                                                                       $             (209,000) $        (148,100) $          (357,100)

    Recapture (provision):
    Recapture (provision) for mortgage loans held for investment*                        $             549,300 $          140,900 $            690,200
    Recapture (provision) for mortgage-backed program guaranty                                             -                  -                    -
    Recapture (provision) for claims receivable*                                                       (31,800)             4,300              (27,500)
    Recapture (provision) for loss on uncollectible advances                                           (45,300)               -                (45,300)
    Recapture (provision) on acquired property*                                                        (28,500)               -                (28,500)
    Total Recapture (Provision)                                                          $             443,700 $          145,200 $            588,900

    Gain (Loss):
    Gain (Loss) on guaranty asset                                                        $             (630,400) $        (184,100) $          (814,500)
    Gain (Loss) on mortgage servicing rights                                                            (15,000)               -                (15,000)
    Gain (Loss) other                                                                                       -               (1,100)              (1,100)
    Total Other Gains / (Losses)                                                         $             (645,400) $        (185,200) $          (830,600)

    Results of Operations                                                                $          2,174,900 $           (188,100) $         1,986,800

    Investment of U.S. Government at Beginning of Year                                            19,301,800                   -             19,301,800
    Adjustment to Investment of U.S. Government                                                          -                  (2,100)              (2,100)
    Investment of U.S. Government at Beginning of Year, Restated*                                 19,301,800                (2,100)          19,299,700
    Investment of U.S. Government at End of Year                                         $         21,476,700    $        (190,200) $        21,286,500


* See Note 2: Restatement–Non-pooled loans discussion




                                                                                                                                                            
 
                                                                          56
Non-pooled Loans: In 2015, the OIG issued a disclaimer of opinion on Ginnie Mae’s financial
statements. The OIG’s audit results focused primarily on Ginnie Mae’s non-pooled loans portfolio
that were acquired from defaulted Issuers, which totaled $4.2 billion and $5.2 billion, net, as of
September 30, 2016 and 2015, respectively. As mortgage servicing is not a core activity for Ginnie
Mae, Ginnie Mae contracts with master sub-servicers (MSS) to provide the servicing of defaulted
Issuers’ mortgage loans. Ginnie Mae informed the OIG that these non-pooled loan portfolio balances
were un-auditable for the 2015 Financial Statements and that it would require a significant investment
in technology, infrastructure, and people spanning multiple years.

Ginnie Mae is continuing its remediation activities to refine loan-level transaction reporting to comply
with U.S. GAAP for the non-pooled loan portfolio to be auditable. These efforts include, but are not
limited to: (i) engaging necessary advisory counterparts to support the development of Ginnie Mae’s
infrastructure; (ii) bolstering staff in the Office of the Chief Financial Officer (OCFO); (iii) working
with third-party servicers to develop standardized loan-level reporting detail; (iv) establishing
accounting policies compliant with U.S. GAAP; (v) performing assessments for every financial
statement line item to assess departures from U.S. GAAP; (vi) resolving exceptions, which may entail
investing in new technologies in order to track and account for the non-pooled loans portfolio; (vii)
developing standard operating procedures to comply with Ginnie Mae’s new accounting policies
within OCFO; and (viii) enhancing the internal controls over financial reporting. Refer to Note 3:
Summary of Significant Accounting Policies for U.S. GAAP requirements.

As noted above, the remediation process continues to require extensive and complex work, including
both employees and external consultants. However, Ginnie Mae is confident in its ability to show
continued progress through fiscal year 2017 in addressing the shortcomings identified by both
management and OIG.

The non-pooled loan portfolio balances, however, remain un-auditable for the 2016 Financial
Statements. As a result of data limitations and non-compliance with certain U.S. GAAP guidance,
Ginnie Mae was not able to comply with certain disclosure requirements. Refer to the respective
notes for the non-pooled loans (and related financial statement line items) listed below for departures
from U.S. GAAP and omitted disclosures. Management will assess these financial statement line items
and related disclosures in fiscal year 2017 for restatement:

Balance Sheets:

       Claims receivable, net
       Mortgage loans held for investment, net
       Accrued interest receivable, net
       Acquired property, net

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

       Interest income on mortgage loans held for investment
                                                                                                        
 
                                                  57
       Recapture (provision) for mortgage loans held for investment
       Recapture (provision) for claims receivable
       Recapture (provision) for acquired property

Statements of Cash Flows:

       Provision (recapture) for mortgage loans held for investment
       Provision (recapture) for claims receivable
       Provision (recapture) for acquired property
       Change in claims receivable, net
       Change in accrued interest receivable, net
       Proceeds from repayments and sales of loans acquired as held for investment
       Proceeds from the dispositions of acquired property and pre-foreclosure sales
       Purchases of loans held for investment
       Transfers from mortgage loans held for investment to claims receivable, net; accrued interest,
        net; and advances against defaulted mortgage-backed security pools, net
       Transfers from mortgage loans held for investment to acquired properties
       Disposal of acquired properties

Other

       Reimbursable costs receivable, net

Note 3: Summary of Significant Accounting Policies

The following disclosures pertain to current practices followed by Ginnie Mae in accordance with its
accounting policies, except as otherwise indicated.

Basis of Presentation: The accompanying financial statements have been prepared in accordance
with U.S. GAAP established by the Financial Accounting Standards Board (FASB), except as
otherwise disclosed.

Reclassification: Certain reclassifications have been made to the 2015 financial statements to
conform to the 2016 presentation.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect: (a) the reported amounts of assets and
liabilities at the date of the financial statements, (b) the reported amounts of revenues and expenses
during the reporting periods, and (c) the 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, assets (such as mortgage servicing rights (MSR), acquired property, allowance
for mortgage loans held for investment (HFI), and guaranty assets), and liabilities (such as guaranty

                                                                                                        
 
                                                  58
obligations and the liability for loss on mortgage-backed securities program guaranty). Actual results
could differ from those estimates.

Fair Value Measurement: Ginnie Mae uses fair value measurements for the initial recording of
certain assets and liabilities, periodic re-measurement of certain assets on a recurring and non-recurring
basis, and certain disclosures. Fair value is defined 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 bases its fair value measurements on an exit price that maximizes the
use of observable inputs and minimizes the use of unobservable inputs.

In determining fair value, Ginnie Mae uses various valuation techniques. The inputs to the valuation
technique are categorized into a three-level hierarchy, as described below:

    Level 1     Quoted prices in active markets for identical assets or liabilities that are accessible
                at the measurement date.
    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 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.

Cash and Cash Equivalents: Ginnie Mae’s cash and cash equivalents consists of cash held by the
U.S. Treasury Department (Funds with U.S. Treasury), cash that is held by the MSS, and Trustee and
Administrator of securities on Ginnie Mae’s behalf but has not yet been transferred to Ginnie Mae
(Deposits in Transit), as well as U.S. Treasury short-term investments (securities issued with an original
maturity date of three months or less). Cash receipts, disbursements, and investment activities are
processed by Treasury. All cash not classified as restricted cash is accessible in the event of an Issuer
default (defined as any failure or inability of the issuer to perform its responsibilities under the Ginnie
Mae MBS programs).

Funds with U.S. Treasury represent the available budget spending authority of Ginnie Mae according
to the U.S Treasury Department and is the aggregate amount of Ginnie Mae’s accounts with the U.S.
Treasury Department.

Deposits in Transit include principal, interest, and other payments held by the MSS and Trustee and
Administrator of securities, in custodial accounts that have not yet been received by Ginnie Mae at
the end of the reporting period.

Ginnie Mae’s investments consist of one-day overnight certificates that are issued with a stated rate
of interest to be applied to their par value with a maturity date of the next business day. These


                                                                                                            
 
                                                    59
overnight certificates are measured at cost, which approximates fair value. Interest income on such
securities is presented within Other interest income in the Statements of Revenues and Expenses and
Changes in Investment of U.S. Government.

Restricted Cash and Cash Equivalents: Cash and cash equivalents that are restricted as to
withdrawal or use under the terms of certain contractual agreement, regulatory requirement, or unless
approved by Congress are recorded as restricted cash and cash equivalents. Ginnie Mae received
approval from The Office of Management and Budget (OMB) to invest restricted cash in U.S.
Treasury securities and Ginnie Mae is entitled to the interest income earned on these investments.
Restricted cash also includes principal and interest payments that were not cashed by security holders
and unclassified funds.

Escrow Funds (Held in Trust for Investors or Mortgagors): Escrow funds are held in trust for
underpayments and overpayments of principal and interest, and payments of mortgagors’ taxes,
insurance and related items, or other fiduciary funds. These amounts were estimated to be $49.3
million and $103.4 million as of September 30, 2016 and 2015, respectively. Escrow funds are not
owned by Ginnie Mae and are therefore not included in total assets or total liabilities on Ginnie Mae’s
Balance Sheet.

Reimbursable Costs Receivable: As detailed above, escrow funds are held in trust for payments of
mortgagors’ taxes and insurance for pooled loans and non-pooled loans. Where insufficient funds are
available to make scheduled tax and insurance payments, Ginnie Mae is required to advance funds to
cover the shortfall to preserve a first lien position in the property. In addition, Ginnie Mae may
advance funds to cover foreclosure costs and other expenses in order to preserve the value of the
underlying asset during the foreclosure process. For costs incurred on both pooled and non-pooled
loans that are expected to be reimbursed, a receivable should be recorded. The receivable for
reimbursable costs is reported net of an allowance to the extent that management believes that they
will not be collected. The allowance is estimated based on historical loss experience of future
collections from the borrowers, proceeds from the sale of the property, or recoveries from third-party
insurers such as FHA, USDA, VA, and PIH.

Due to lack of data availability as of September 30, 2016, Ginnie Mae was unable to reclassify such
costs as a receivable. These costs have been previously expensed. Management will assess for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Accrued Fees and Other Receivables: Ginnie Mae’s accrued fees and other receivables include
accrued guaranty fees, accrued interest on uninvested funds, and miscellaneous program receivables.
The accrued guarantee fees are discussed in the Financial Guarantees section.

Claims Receivable, net: Claims receivable represents receivables from conveyed properties and
payments owed to Ginnie Mae from insuring agencies (FHA, VA, USDA and PIH). These receivables
consist of three components:


                                                                                                       
 
                                                  60
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 fully pay off the mortgage. Ginnie Mae’s MSS analyze mortgage loans (HFI) for factors
such as delinquency, appraised value of the property collateralizing the loan and market locale of the
underlying property to identify loans that may be short sale eligible. For uninsured loans, these
transactions are analyzed and approved by the Office of Issuer and Portfolio Management (OIPM) at
Ginnie Mae. For FHA insured loans, for which the underlying property was sold in a short sale, the
FHA, which is the largest insurer for Ginnie Mae, typically pays Ginnie Mae the difference between
the proceeds received from the sale and the total contractual amount of the mortgage loan and
delinquent interest payments at the debenture rate (less the first two months of delinquent month’s
interest). 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 full collection
is not probable, Ginnie Mae records an allowance for short sales claims receivable. This allowance
represents the incurred loss within the portfolio and incorporates expected recovery based on the
underlying insuring agency guidelines and historical loss experience. The short sales receivable less the
allowance for short sales receivable is the amount that Ginnie Mae determines to be collectible. Once
the submitted claim is processed by the insuring agency, U.S. GAAP requires Ginnie Mae to record a
charge-off to the allowance for claims receivable for any shortfall between the claim receivable and
recovered amounts from the insurer.

Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability as of September 30, 2016, Ginnie Mae was unable to obtain updated claims receivable
balances from the MSS as of period end. Refer to Note 10: Claims Receivable for details on Ginnie
Mae’s current practice.

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Foreclosed Property: Ginnie Mae records foreclosed property when the MSS receives title to a
property that has completed the foreclosure process in its respective legal jurisdiction, or the borrower
conveys all interest in the residential real estate property to the MSS to satisfy the loan through
completion of a deed in lieu of foreclosure process or similar legal agreement. These properties differ
from Acquired Properties as Ginnie Mae intends to convey the property to an insuring agency, instead
of marketing and selling the properties through the MSS. At conveyance, the asset is measured based
on the amount of the loan outstanding (principal and interest) expected to be recovered from the
guarantor. Once the claims receivable is established, Ginnie Mae periodically assesses its collectability
by utilizing statistical models and Ginnie Mae’s most recent historical loss experience. Ginnie Mae
records an allowance for foreclosed property that represents the incurred losses within the portfolio.
The aggregate of the foreclosed property and the allowance for foreclosed property is the amount that
Ginnie Mae determines to be collectible.



                                                                                                          
 
                                                   61
Once the submitted claim is processed by the insuring agency, U.S. GAAP requires Ginnie Mae to
record a charge-off to the allowance for claims receivable for any shortfall between the claim
receivable and recovered amounts from the insurer.

Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability as of September 30, 2016, Ginnie Mae was unable to obtain updated foreclosed
properties balances from the MSS as of period end. Refer to Note 10: Claims Receivable for details
on Ginnie Mae’s current practice.

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Insurance Claims Receivable: Ginnie Mae records a receivable for insurance claims that 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 receivable backed by the full faith of the U.S. government, which represents settled
claims and approved future collection of cash from the insuring agency, Ginnie Mae expects full
reimbursement. As a result, no allowance is calculated on this receivable.

Advances, net: Advances represent loan pass-through payments made to fulfill Ginnie Mae’s
guaranty of timely principal and interest payments to MBS security holders. Per U.S. GAAP, Ginnie
Mae is required to report advances net of an allowance to the extent that management believes that
they will not be collected. The allowance is estimated based on historical loss experience of future
collections from the borrowers, proceeds from the sale of the property, or recoveries from third-party
insurers such as FHA, USDA, VA, and PIH.

Once Ginnie Mae purchases the loans from the pools, the associated advances are reclassified to the
appropriate asset class.

Mortgage Loans Held for Investment, net: 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. Ginnie Mae utilizes MSS to service these portfolios. There are
currently two MSS for Single Family defaulted Issuers that service of the defaulted Issuer portfolio (of
pooled and non-pooled loans). For the years ended September 30, 2016 and 2015, there were no
Manufactured Housing or Multifamily loans being serviced by the MSS.

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. Ginnie Mae must purchase mortgage loans out
of the MBS pool when the mortgage loans are ineligible for insurance by the FHA, USDA, VA, or
PIH. Ginnie Mae has the option to purchase mortgage loans out of the MBS pool when the mortgage
loans are insured but are delinquent for more than 90 days for manufactured housing and single family



                                                                                                        
 
                                                  62
loans. Ginnie Mae has historically elected to buy loans out at 120 days delinquent for operational
purposes.

Ginnie Mae has the ability and the intent to hold these acquired loans for the foreseeable future or
until maturity. Therefore, the mortgage loans are classified as HFI and reported on the balance sheets
at their unpaid principal balance (UPB), net of charge-offs, and net of allowance for loan losses, as
required by U.S. GAAP. Ginnie Mae is developing the capability to potentially sell certain loans
currently recognized on Ginnie Mae’s Balance Sheets. Once the loans are clearly identified for sale,
Ginnie Mae will reclassify the applicable loans from HFI to held for sale (HFS). For loans which
Ginnie Mae initially classifies as HFI and subsequently transfers to HFS, those loans would be
recognized at the lower of cost or fair value until sold, with any related cash flows classified as
operating activities. As of September 30, 2016 and 2015, Ginnie Mae has no loans classified as HFS.

Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability as of September 30, 2016, Ginnie Mae was unable to obtain updated HFI loans
balances from the MSS as of period end. Refer to Note 9: Mortgage Loans for details on Ginnie Mae’s
current practice.  

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Purchased Credit-Impaired (PCI) Loans: 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. Per U.S. GAAP, Ginnie Mae is required to record realized losses
on loans purchased when, upon purchase, the fair value is less than the acquisition cost of the loan.
Additionally, U.S. GAAP requires Ginnie Mae to accrue and recognize the difference between the
initial investment of the loan and the undiscounted expected cash flows (accretable yield) as interest
income on a level-yield basis over the expected life of the loan.

For the loans insured by FHA, which is Ginnie Mae’s largest insurer, Ginnie Mae expects to collect
the full amount of the UPB 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 Accounting Standards Codification (ASC) 310-20, Receivables –
Nonrefundable Fees and Other Costs. In accordance with ASC 310-20-30-5, these loans are recorded
at the UPB plus accrued interest, which is the amount Ginnie Mae pays to repurchase these loans.
Accordingly, Ginnie Mae recognizes interest income on these loans on an accrual basis less an
allowance to arrive at the debenture rate for the number of months allowed under the insuring agency’s
timeline.


                                                                                                              
 
                                                     63
Ginnie Mae is unable to comply the U.S. GAAP requirements for PCI loans as it has not historically
applied PCI guidance due to the lack of fair value measurements of PCI loans upon acquisition.
Additionally, due to the lack of data availability as of September 30, 2016, Ginnie Mae was unable to
obtain updated HFI loans balances from the MSS as of period end. Refer to Note 9: Mortgage Loans
for details on Ginnie Mae’s current practice.

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Allowance for Loan Losses: Ginnie Mae performs periodic and systematic reviews of its loan
portfolios to identify credit risks and assess the overall collectability of the portfolios to determine the
estimated uncollectible portion of the recorded investment on the loans when (1) available
information as of each balance sheet date indicates that it is probable a loss has occurred and (2) the
amount of the loss can be reasonably estimated.

For large groups of homogeneous loans that are collectively evaluated (ASC 450-20), Ginnie Mae
establishes the allowance for loan losses on the HFI loan portfolio for both principal and interest
payments similar to loss contingencies. When Ginnie Mae determines that it is probable a credit loss
will occur and that loss can be reasonably estimated, Ginnie Mae recognizes the estimable amount of
the incurred loss in the allowance for loan losses. Ginnie Mae aggregates its mortgage loans based on
common risk characteristics, primarily by the type of insurance (FHA, VA, USDA, and uninsured)
backing the loan, as each has a different recovery rate. The allowance for loan losses estimate is
calculated using statistical models that are based on historical charge offs and insurance recoveries and
includes qualitative and environmental factors, where applicable.

This 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 is netted against the recorded
investment on mortgage loans HFI.

Ginnie Mae considers a loan to be impaired when, based on current information, it is probable that
amounts due, including interest, will not be received in accordance with the contractual terms of the
loan agreement. Ginnie Mae measures impairment based on the present value of expected future cash
flows.

Per U.S. GAAP, Ginnie Mae is required to measure impairment based on the fair value of the
underlying collateral less cost to sell when Ginnie Mae determines that foreclosure is probable or if
the repayment of the loan is expected to be provided solely by the sale of underlying collateral
(e.g.uninsured loans).

Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability as of September 30, 2016, Ginnie Mae was unable to obtain updated HFI loans
balances from the MSS as of period end.  Refer to Note 9: Mortgage Loans for further details.

                                                                                                            
 
                                                    64
Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.
Charge-Off: U.S. GAAP requires Ginnie Mae to have a policy that determines when a charge-off is
recorded for the losses that 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, or other liquidation (such as deed-in-lieu of foreclosure).

Due to lack of data availability, Ginnie Mae was unable to fully comply with the U.S. GAAP
requirements outlined above. Refer to Note 9: Mortgage Loans for details on Ginnie Mae’s current
practice.
Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Troubled Debt Restructuring (TDR): To avoid foreclosure, the MSS on behalf of Ginnie Mae,
may modify loans to help borrowers who have fallen into financial difficulties with their mortgages.
Methods of modifying loans may include offering concessions and restructuring the terms of the loan
to alleviate the burden of the borrower. Various concessions may be provided including:

       A trial period where the expected permanent modification will change amounts due at the
        original contract rate;
       A delay in payment that is more than insignificant;
       A reduction in the contractual interest rate;
       Interest forbearance for a period of time for uncollected interest amounts, that is more than
        insignificant;
       Principal forbearance that is more than insignificant; and
       Discharge of the borrower’s obligation due to filing of Chapter 7 bankruptcy.

Ginnie Mae considers these modifications a concession to borrowers experiencing financial difficulties
and therefore classifies these loans as TDRs consistent with ASC 310-40, Troubled Debt Restructuring by
Creditors. Ginnie Mae measures the impairment on these loans restructured in a TDR based on the
excess of the recorded investment in the loan over the present value of the expected future cash flows
discounted at the loan’s original effective interest rate. Per U.S. GAAP, if foreclosure is probable,
Ginnie Mae is required to measure the impairment as the difference between the loan’s recorded
investment and the fair value of the underlying property, less cost to sell, and adjust for estimated
insurance or other proceeds that Ginnie Mae would expect to receive, consistent with the
measurement of impairment on impaired loans per ASC 310-10 as noted above.




                                                                                                        
 
                                                  65
Due to lack of data availability as of September 30, 2016, Ginnie Mae is unable to fully comply with
U.S. GAAP requirements outlined above. Refer to the Note 9: Mortgage Loans for further details on
Ginnie Mae’s current practice.

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Accrued Interest Receivable, net: U.S. GAAP requires Ginnie Mae to have a policy that establishes
when a loan is placed on nonaccrual status, the method of recording payments received while a loan
is on nonaccrual and criteria for resuming accrual of interest.
Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability, Ginnie Mae is unable to fully comply with the U.S. GAAP requirements outlined
above. Refer to Note 9: Mortgage Loans for details on Ginnie Mae’s current practice.
Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Acquired Property, net: Ginnie Mae recognizes acquired property when Ginnie Mae obtains
marketable title to the underlying property that has completed the foreclosure process or the borrower
conveys all interest in the residential real estate property to Ginnie Mae to satisfy the loan through a
completion of a deed in lieu of foreclosure or through similar legal agreement. These assets differ
from “foreclosed property” as they are not conveyed to the insuring agencies and Ginnie Mae will
hold the title while the properties are being marketed for sale by the MSS.

U.S. GAAP requires acquired property to be initially measured at its fair value, net of estimated costs
to sell. At acquisition, a loss is required to be charged-off against the Allowance for loan loss when
the recorded investment in the loan exceeds the fair value, net of estimated costs to sell, of the acquired
property. Conversely, any excess recovery of the fair value less estimated costs to sell over the recorded
investments in the loan is required to be recognized first to recover any forgone, contractually due
principal and interest, then to Recapture Income (Expense) on Acquired Property in the Statements
of Revenue and Expenses and Changes in Investment of the U.S. Government.

U.S. GAAP requires acquired property to be subsequently measured at the lower of its carrying value
or fair value, net of estimated costs to sell. Any subsequent write-downs to fair value, net of estimated
costs to sell, from its carrying value, i.e., holding period write-downs, should be recognized through a
valuation allowance with an offsetting charge to Income (expense) on Acquired Property. Any
subsequent increase in fair value, net of estimated costs to sell, above the carrying value, i.e., holding
period gains, are required to be recognized in Income (expense) on Acquired Property in the
Statements of Revenue and Expenses and Changes in Investment of the U.S. Government up to the
cumulative loss previously recognized through the valuation allowance.


                                                                                                           
 
                                                    66
U.S. GAAP requires Ginnie Mae to record gains and losses on sales of acquired property as the
difference between the net sales proceeds of the sale of the property and the carrying value of the
property and to recognize those through Gain (Loss) other on the Statements of Revenues and
Expenses and Changes in Investment of the U.S. Government.

U.S. GAAP requires material development and improvement costs for acquired property to be
capitalized into the balance. Other post-foreclosure costs are required to be expensed as incurred to
Other Expenses on the Statements of Revenues and Expenses and Changes in Investment of the U.S.
Government.

Ginnie Mae is unable to fully comply with U.S. GAAP requirements outlined above. Due to lack of
data availability as of September 30, 2016, Ginnie Mae was unable to obtain updated acquired property
balances from the MSS as of period end. Refer to the Note 11: Acquired Property for details on Ginnie
Mae’s current practices.

Management will assess the information presented within this footnote for restatement in fiscal year
2017. Please refer to Note 2: Restatement-Non-pooled Loans.

Fixed Assets, net: Ginnie Mae’s fixed assets consist of leases and computer systems hardware and
software that are used to accomplish its mission. Ginnie Mae capitalizes costs based on guidance in
ASC 840 Leases, ASC 350-40 Intangibles—Goodwill and Other—Internal-Use Software, and ASC 360 Property,
Plant and Equipment. Ginnie Mae amortizes the capitalized costs over a three to five-year period
beginning from the project’s completion on a straight-line basis. Expenditures for improvements that
significantly enhance the life of an asset are capitalized. Expenditures for ordinary repairs and
maintenance are charged to expense as incurred.

Fair Value Option: The fair value option allows certain financial assets, such as acquired loans, to be
reported at fair value (with unrealized gains and losses reported in the Statements of Revenues and
Expenses and Changes in Investment of U.S. Government and related cash flows classified as
operating activities). The fair value option was elected by Ginnie Mae for the Guaranty Asset, please
refer to “Guaranty Asset and Guaranty Liability” above. The fair value option was not elected by
Ginnie Mae for any recognized loans on its Balance Sheets for 2016 and 2015. Ginnie Mae reserves
the right to elect the fair value option for newly acquired loans in future periods.

Mortgage Servicing Rights: Mortgage Servicing Rights represent Ginnie Mae’s rights and
obligations to service mortgage loans underlying a defaulted Issuer’s entire Ginnie Mae guaranteed
pooled-loan portfolio. Ginnie Mae contracts with multiple MSS to provide the servicing of its pooled
mortgage loans. The servicing functions typically performed by Ginnie Mae’s MSS 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 monthly servicing fee based on the remaining outstanding principal balances


                                                                                                          
 
                                                  67
of the loans. These servicing fees are included in and collected from payments made by the borrowers.
Ginnie Mae pays a sub-servicing expense to the MSS 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 pooled-loan portfolio. The balance of the MSR represents the benefits of servicing
that are expected to be more (or less) than adequate compensation to a sub-servicer for performing
the servicing. The determination of adequate compensation is a market notion and is made
independent to Ginnie Mae’s cost of servicing. Accordingly, Ginnie Mae’s determination of adequate
compensation is based on compensation demanded in the marketplace. Typically, the benefits of
servicing are expected to be more than adequate compensation for performing the servicing, and the
contract results in a servicing asset. However, if the benefits of servicing are not expected to adequately
compensate for performing the servicing, the contract results in a servicing liability.

Ginnie Mae reports MSR at fair value 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 as Ginnie Mae does not intend to hold its MSR assets long term. To determine the fair value
of the MSR, 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
prepayment rates, cost to service a loan, contractual servicing fee income, ancillary income, escrow
account earnings, and the discount rate. In addition, the MSR also takes into account future expected
cash flows for loans underlying the defaulted Issuers’ portfolio including credit losses. The discount
rate is used to estimate the present value of the projected cash flows in order to estimate the fair value
of the MSR. 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 MSR at fair value and subsequently re-measures the MSR assets or liabilities with changes
in the fair value recorded in the Statements of Revenues and Expenses and Changes in Investment of
U.S. Government. During 2016, Ginnie Mae implemented a strategy to sell agency MSR asset with
the intent of reducing exposure to interest rate movements and credit losses.

Ginnie Mae may enter into business transactions and agreements, which provide certain
representations and warranties associated with the underlying loan portfolios. If there is a breach of
these contractual obligations, Ginnie Mae may be required to repurchase certain loans. For those
instances, Ginnie Mae will assess the risk of loss for such claims and record a liability if the loss is
probable and estimable. 
Compensated Absences: Under the Accrued Unfunded Leave and Federal Employees
Compensation Act (FECA), annual leave and compensatory time are accrued as earned and the liability
is reduced as leave is taken. The liability at year-end reflects cumulative leave earned but not taken,
priced at current wage rates. Earned leave deferred to future periods is to be funded by future
appropriations. To the extent that current or prior year appropriations are not available to fund annual
leave earned but not taken, funding will be obtained from future financing sources. Sick leave and


                                                                                                           
 
                                                    68
other types of leave are expensed as taken. Compensated absences are included with accounts payable
and accrued liabilities.

Financial Guarantees: Ginnie Mae’s guarantee obligates Ginnie Mae to stand ready, over the term
of the guarantee, to advance funds to cover any shortfall of principal and interest to the MBS holders
in the event of an Issuer default.

Ginnie Mae, as guarantor, follows the guidance in ASC 460, Guarantees, for its accounting and
disclosure of its guarantees. At inception of the guaranty, Ginnie Mae recognizes a liability, the
“guarantee obligation” at fair value. Ginnie Mae applies the practical expedient in ASC 460, which
allows for the guaranty obligation 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. The fair value of the guarantee obligation is calculated as the discounted cash
flows of the expected future premiums from guarantee fees over the expected life of the mortgage
pools. The estimated fair value included certain assumptions such as future UPB, prepayment speeds
and default rates.

Additionally, as the guaranty is issued in a standalone transaction for a premium, Ginnie Mae records
a guaranty asset as the offsetting entry for the guaranty liability. Thus, there is no net impact from the
initial recording of the guaranty obligation and asset on the net financial position of Ginnie Mae.

Ginnie Mae subsequently amortizes the guarantee obligations using a systematic and rational
amortization method. Ginnie Mae’s amortization is adjusted on a quarterly basis as the UPB of the
guaranteed MBSs outstanding in the non-defaulted issuer portfolio declines. In addition, the guarantee
assets are recorded at fair value subsequent to initial measurement with changes in fair value recorded
through the Statement of Revenues and Expenses and Changes in Investment of U.S. Government.

Liability for Loss on Mortgage-Backed Securities Program Guaranty: Liability for loss on
mortgage-backed securities program guaranty is a loss contingency that arises from the guaranty
obligation that Ginnie Mae has to the MBS holders as a result of a probable Issuer default. The Issuers
have the obligation to make timely principal and interest payments to investors, however, in the event
whereby the Issuer defaults, Ginnie Mae steps in and continues to make the contractual payments to
investors. The contingent aspect of the guarantee obligation is measured initially and in subsequent
periods under ASC 450-20, Contingencies – Loss Contingencies.
Ginnie Mae’s Office of Enterprise Risk (OER) utilizes the Issuer Risk Grade model to assist in the
analysis of potential defaults. The Issuer Risk Grade model 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. As the
risk grade rating approaches an elevated probability of default, Ginnie Mae further evaluates the
financial condition of the Issuer and considers whether an accrual of the loss contingency is required.

                                                                                                          
 
                                                   69
Recognition of Revenues and Expenses: Ginnie Mae recognizes revenue from the following
sources:

       Interest income on mortgage loans HFI – Ginnie Mae accrues interest income for performing
        loans at the note rate of the underlying mortgage. Interest income on mortgage loans HFI
        includes the effect of the allowance for interest income that is deemed uncollectible.
       Other interest income – Ginnie Mae earns interest income on U.S. Government Securities
        related to U.S. Treasury overnight certificates. In addition Ginnie Mae earns interest on the
        uninvested funds, held in the Financing Fund, which is based on the 20-year Consumer Price
        Index rate for the year.
       Income on guaranty obligation – Ginnie Mae amortizes its guarantee obligation into revenues
        based on the change in the UPB of loans relative to their original liability.
       Mortgage-backed securities guaranty fees – Ginnie Mae receives monthly guaranty fees for
        each MBS mortgage pool, based on a percentage of the pool’s outstanding balance. Fees
        received for Ginnie Mae’s guaranty of MBS are recognized as earned.
       Commitment fees – Ginnie Mae receives commitment fees as Issuers request commitment
        authority to issue Ginnie Mae MBS. Commitment fees related to approved commitment
        authority are recognized in income as Issuers use their commitment authority, with the
        remaining balance deferred until earned or expired, whichever occurs first. Fees from expired
        commitment authority are recognized as income and are not returned to Issuers.
       Multiclass fees – Ginnie Mae receives one-time upfront fees related to the issuance of
        multiclass products. Multiclass products include REMICs and Platinum Certificates. A portion
        of the fees associated with REMICs are recognized as revenue at inception based on the
        proportion of upfront costs incurred in relation to the total cost expected to be incurred over
        the contractual life of the security. Remaining fees associated with REMICs are deferred and
        amortized into income evenly over the contractual life of the security, in conjunction with the
        recognition of servicing fees paid to the third-party administrator. Fees associated with
        Platinum securities are recognized as revenue over the service period on a straight line basis
        as Ginnie Mae does not incur upfront cost for restructuring these securities.
       MBS program and other income – Ginnie Mae recognizes income through fees related to New
        Issuer Applications, Transfers of Issuer Responsibilities and Mortgage Servicing Fees.

Ginnie Mae’s expenses are classified into three groups: MBS program and other expenses,
administrative expenses, and fixed asset amortization. The main components of the MBS program
and other expense line item are multiclass expenses, MBS information systems and compliance
expenses, sub-servicing expenses, asset management expenses, and pool processing and central paying
agent expenses.

Securitization and Guarantee Activities: Ginnie Mae’s primary business activity is to guarantee the
timely payment of principal and interest on securities backed by pools of mortgages issued by private
institutions. Unlike substantially all of the securitization market, the issuance of Ginnie Mae MBS is


                                                                                                       
 
                                                  70
not completed through a trust vehicle. Also, Ginnie Mae is not the legal issuer. Rather Ginnie Mae
approves issuers to pool loans, assign rights to the loans to Ginnie Mae through a pool custodian, and
issue Ginnie Mae MBS. Federal charters grant Ginnie Mae the ability to isolate pools of mortgage
loans without the use of a trust or legal entity. Additionally, for federal income tax purposes, the
Ginnie Mae pool is considered to be a grantor trust. As such each of these “virtual trusts” are
considered individual legal entities for consolidation purposes and are considered VIEs.

Variable Interest Entities (VIE) Model

For entities in which Ginnie Mae has a variable interest, Ginnie Mae determines whether, if by design,
(i) the entity has equity investors who, as a group, lack the characteristics of a controlling financial
interest, (ii) the entity does not have sufficient equity at risk to finance its expected activities without
additional subordinated financial support from other parties or (iii) the entity is structured with non-
substantive voting rights. If an entity has at least one of these characteristics, it is considered a VIE,
and is consolidated by its primary beneficiary. The primary beneficiary is the party that (i) has the
power to direct the activities of the entity that most significantly impact the entity’s economic
performance; and (ii) has the obligation to absorb losses or the right to receive benefits from the entity
that could potentially be significant to the entity. Only one reporting entity, if any, is expected to be
identified as the primary beneficiary of a VIE. Ginnie Mae reassesses its initial evaluation of whether
an entity is a VIE upon occurrence of certain reconsideration events.

Ginnie Mae’s involvement with legal entities that are VIEs is limited to providing a guarantee on
principal and interest returns to MBS holders of the Ginnie Mae virtual trusts. Ginnie Mae is not the
primary beneficiary of the Ginnie Mae virtual trusts as it does not have the power to control the
significant activities of the trusts. Other than its guarantee, Ginnie Mae does not provide, nor is it
required to provide, any type of financial or other support to these entities. The guaranty fee receivable
represents 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 Issuers’ default.

The following table represents the amounts of the assets and liabilities that relate to Ginnie Mae’s
interest in VIEs as of September 30, 2016, and 2015:

                                  September 30,
(Dollars in thousands)         2016           2015
Guaranty Asset             $    6,397,600 $     6,742,200
Guaranty Fee Receivable    $       87,000 $        81,000
Total                      $    6,484,600 $     6,823,200

Guaranty Liability         $     6,198,400 $     5,661,300
Total                      $     6,198,400 $     5,661,300

Maximum exposure to loss   $1,728,000,000   $1,609,000,000



                                                                                                            
 
                                                    71
Refer to Note 6: Financial Guarantees and Financial Instruments with Off-Balance Sheet Risk for
further details.

Recently Adopted Accounting Guidance: The following provides a brief description of recently
adopted accounting pronouncements and their effect on Ginnie Mae’s financial statements:

                                                                     Effective Date     Effect on the
                                                                     and/or Date of     financial
    Standard           Description                                   Adoption           statements
    Accounting         The FASB issued guidance to clarify that      Effective for      U.S. GAAP
    Standards          a creditor should reclassify a mortgage       annual periods     requires an entity
    Update (ASU)       loan to acquired property when it             beginning after    to reclassify a
    2014-04,           obtains legal title or completes a deed in    December 15,       mortgage loan to
    Reclassification   lieu of foreclosure or similar legal          2014 and interim   acquired property
    of Residential     agreement. Additionally, creditors will be    periods within     when it obtains
    Real Estate        required to disclose the amount of            annual periods     legal title or
    Collateralized     foreclosed residential real estate property   beginning after    completes a deed
    Consumer           they hold and the recorded investment         December 15,       in lieu of
    Mortgage Loans     in loans collateralized by residential        2015.              foreclosure or
    upon               property that is in the process of                               similar legal
    Foreclosure        foreclosure.                                                     agreement. The
                                                                     Date of
    (Topic 310)                                                                         property should
                                                                     Adoption:
                                                                                        be recorded based
                                                                     Ginnie Mae is
                                                                                        on its fair value
                                                                     undergoing
                                                                                        less costs to sell.
                                                                     remediation
                                                                     related to its
                                                                     accounting for     Current Ginnie
                                                                     loans. Date of     Mae’s approach is
                                                                     adoption will be   not in compliance
                                                                     determined         with U.S. GAAP
                                                                     based on the       (refer to Note 11:
                                                                     results.           Acquired
                                                                                        Property).

                                                                                        Ginnie Mae is
                                                                                        evaluating the
                                                                                        impact of the
                                                                                        adoption of this
                                                                                        amendment on its
                                                                                        financial
                                                                                        statements.




                                                                                                           
 
                                                    72
Recent Accounting Guidance: The following provides a brief description of recent accounting
pronouncements that could affect Ginnie Mae’s financial statements:

                                                                          Effective Date     Effect on the
                                                                          and/or Date of     financial
    Standard             Description                                      Adoption           statements
    ASU 2014-09,         The amendment requires entities to               Effective for      Ginnie Mae is
    Revenue from         recognize revenue to depict the transfer         annual periods     evaluating the
    Contracts with       of promised goods or services to                 beginning after    impact that the
    Customers            customers in amounts that reflect the            December 15,       adoption of this
    (Topic 606)          consideration to which the entity expects        2018 and interim   amendment will
    ASU 2015-14,         to be entitled in exchange for those             periods            have on its
    ASU 2016-08,         goods or services. ASU 2015-14 defers            beginning after    financial
    ASU 2016-10, ,       the effective date of ASU 2014-09 for all        December 15,       statements.
    and ASU 2016-        entities by one-year. ASU 2016-08                2018.
    12                   discusses principal versus agent
                         considerations (reporting revenue gross
                         versus net). ASU 2016-10 discusses
                         identification of performance obligations
                         and licensing. ASU 2016-11 discusses
                         the rescission of Securities and
                         Exchange Commission (SEC) guidance.
                         ASU 2016-12 discusses narrow scope
                         improvements and practical expedients.
    ASU 2015-02,         The amendment removes the specialized            Effective for      Ginnie Mae is
    Amendments to        consolidation model relating to limited          annual periods     evaluating the
    the                  partnerships and similar entities. The           ending after       impact that the
    Consolidation        amendment also eliminates certain of the         December 15,       adoption of this
    Analysis (Topic      conditions for evaluating whether fees           2016 and interim   standard will have
    810)                 paid to a decision maker or service              periods            on its financial
                         provider represent a variable interest.          beginning after    statements.
                                                                          December 15,
                                                                          2016.
    ASU 2016-01,         The FASB issued guidance which makes             Effective for      Ginnie Mae is
    Recognition and      certain amendments to the recognition,           annual periods     evaluating the
    Measurement of       measurement, and presentation of                 beginning after    impact that the
    Financial Assets     financial assets and financial liabilities, as   December 15,       adoption of this
    and Financial        well as amendments to certain disclosure         2018 and interim   amendment will
    Liabilities (Topic   requirements relating to the fair value of       periods            have on its
    825-10)              financial instruments.                           beginning after    financial
                                                                          December 15,       statements.
                                                                          2018.




                                                                                                                 
 
                                                         73
                                                                      Effective Date     Effect on the
                                                                      and/or Date of     financial
    Standard           Description                                    Adoption           statements
    ASU 2016-02,       The FASB issued clarified guidance             Effective for      Ginnie Mae is
    Leases (Topic      surrounding the definition of a lease and      annual periods     evaluating the
    842)               recognition of lease assets and lease          beginning after    impact that the
                       liabilities by lessees for those leases        December 15,       adoption of this
                       classified as operating leases.                2018 and interim   standard will have
                                                                      periods            on its financial
                                                                      beginning after    statements.
                                                                      December 15,
                                                                      2018.
    ASU 2016-13,       The FASB issued a new credit loss              Effective for      Ginnie Mae is
    Measurement of     standard that changes the impairment           annual periods     evaluating the
    Credit Losses on   model for most financial assets and            beginning after    impact that the
    Financial          certain other instruments. The standard        December 15,       adoption of this
    Instruments        adds an impairment model (known as             2020 and interim   standard will have
    (Topic 326)        the current expected credit loss (CECL)        periods within     on its financial
                       model) that is based on expected losses        annual periods     statements.
                       rather than incurred losses. The standard      beginning after
                       requires an entity to estimate its lifetime    December 15,
                       “expected credit loss” and record an           2021.
                       allowance that, when deducted from the
                       amortized cost basis of the financial
                       asset, presents the net amount expected
                       to be collected on the financial asset.
                       The allowance represents the portion of
                       the amortized cost basis the entity
                       doesn’t expect to collect. The standard
                       also eliminates the current accounting
                       model for purchased credit impaired
                       loans and debt securities. Instead,
                       entities will gross up the initial amortized
                       cost for purchased financial assets with
                       credit deterioration based on the
                       purchase price and estimated credit
                       losses.
Other recent accounting pronouncements have been deemed not applicable or not material to the
financial statements as presented.

Note 4: Cash and cash equivalents

Cash and cash equivalents consist of funds held by Treasury, funds held by the MSS, funds held by
Trustee and Administrator of securities, and U.S. Treasury short-term investments. Cash and cash
equivalents – unrestricted and restricted – include the following at September 30, 2016 and 2015:

                                                                                                           
 
                                                     74
                                                                              As of September 30, 2016
(Dollars in thousands)                                     Unrestricted              Restricted                      Total

Cash and cash equivalents held by Treasury(1) $                      856,300 $                  523,000 $                1,379,300
Cash and cash equivalents held by MSS(2)                              51,500                        -                       51,500
Cash and cash equivalents held by Trustee
and administrator of securities(3)                                    8,200                         -                       8,200
U.S. Treasury short-term investments(4)                          15,930,100                      23,600 $              15,953,700
Total                                         $                  16,846,100 $                   546,600 $              17,392,700

                                                                        As of September 30, 2015
(Dollars in thousands)                                     Unrestricted        Restricted                            Total

Cash and cash equivalents held by Treasury(1) $                    1,732,600 $                  409,400 $               2,142,000
Cash and cash equivalents held by MSS(2)                              44,500                          -                    44,500
Cash and cash equivalents held by Trustee
and administrator of securities(3)                                    3,900                            -                    3,900
U.S. Treasury short-term investments(4)                          12,899,600                      23,400                12,923,000
Total                                         $                  14,680,600 $                   432,800 $              15,113,400
(1)
    This amount represents Ginnie Mae’s account balance with the U.S. Treasury. It includes cash and cash equivalents that are restricted by
Congress, which Ginnie Mae cannot spend without approval from Congress, as well as cash and cash equivalents that are restricted temporarily,
until Ginnie Mae determines the appropriate allocation for cash received.
(2)
    This amount represents cash collected by the MSS for Ginnie Mae but not yet received by Ginnie Mae (Deposits in transit).
(3)
    This amount represents cash collected by Trustee for Ginnie Mae but not yet received by Ginnie Mae (Deposits in transit).
(4)
    This amount represents investments in overnight certificates. It includes restricted cash and cash equivalents owed to MBS certificate holders
that cannot be located by the administrator of the securities. There is no statute of limitations stating when the investor can claim this cash.


Cash held by Treasury: Ginnie Mae’s cash receipts and disbursements are processed by Treasury.
Cash held by Treasury represents the available budget spending authority of Ginnie Mae (obligated
and unobligated balances available to finance allowable expenditures). The restricted balances
represent amounts restricted for use by Ginnie Mae to certain activities.

Cash held by the MSS: There may be a time lag between when the MSS receives cash collections on
behalf of Ginnie Mae such as principal, interest, and insurance claims proceeds, and when cash
collections are transferred to Ginnie Mae. Ginnie Mae records an increase in cash and cash equivalents
for receipts collected by the MSS, but not yet received by Ginnie Mae at the end of the reporting
period.




                                                                                                                                                  
 
                                                                       75
Cash held by Trustee and Administrator of securities: There may be a time lag between when the
Trustee and Administrator of securities receives cash collections for commitment fees and multiclass
fees, respectively, on behalf of Ginnie Mae, and when cash collections are transferred to Ginnie Mae.
Ginnie Mae records an increase in cash and cash equivalents for receipts collected by the Trustee, but
not yet received by Ginnie Mae at the end of the reporting period.
U.S. Treasury short term investments: The U.S. Treasury Securities 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 has approval from the OMB to establish a Capital Reserve Fund, which
has the ability to invest in overnight U.S. Government Securities. As a result of the OMB approval,
Ginnie Mae invested the full balance of the Capital Reserve Fund approximately $15.8 billion and
$12.8 billion, and the Liquidating fund approximately, $151.2 million and $150.7 million, as of
September 30, 2016 and 2015, respectively, in overnight U.S. Government securities. As of September
30, 2016 and 2015, Ginnie Mae only holds overnight certificates. The U.S. Treasury short-term
investments balance includes $23.6 million and $23.4 million of restricted cash related to unclaimed
MBS security holder payments, as of September 30, 2016 and 2015, respectively. The U.S. Treasury
Securities are carried at cost, which approximates its fair value.

Note 5: Restricted Cash and cash equivalents

Restricted cash and cash equivalents represents monies that are restricted to the withdrawal or usage
of certain activities. The restricted cash balance consists of the following:

          Unclaimed security holder payments: Money owed to MBS certificate holders that cannot be
           located by the administrator of the Ginnie Mae MBS securities.
          Unapplied deposits-non-government: Cash received by Ginnie Mae held in a suspense account
           until the appropriate application is determined. These amounts while in the suspense account
           are not a part of Ginnie Mae’s available cash balance.
          Collections precluded from obligation: Unobligated money within the Programs Fund balance
           that is restricted by Congress and cannot be utilized unless there is approval by Congress.

The balance of restricted cash and cash equivalents as of September 30, 2016 and 2015 were as
follows:
                                                 September 30,
    (Dollars in thousands)                    2016          2015
    Unclaimed security holder payments    $      23,600 $       23,400
    Unapplied deposits-non-government               300            300
    Collections precluded from obligation       522,700        409,100
    Total                                 $     546,600 $     432,800




                                                                                                       
 
                                                        76
Note 6: Financial Guarantees and Financial Instruments with Off-Balance Sheet
Risk (As Restated)

Ginnie Mae receives a guaranty fee from Issuers, which is calculated based on the UPB of outstanding
MBS in the defaulted and non-defaulted Issuers’ pooled portfolio. This guaranty fee represents
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 Issuers’ default. Ginnie Mae only guarantees securities created
by approved Issuers and backed by mortgages insured by other federal programs. The underlying
source of loans for the Ginnie Mae I MBS and Ginnie Mae II MBS comes from Ginnie Mae’s four
main MBS programs, the Single Family, Multifamily, HMBS and Manufactured Housing Programs,
which serve a variety of loan financing needs and different issuer origination capabilities. Please see
Note 1: Entity and Mission for more information on each program.

Ginnie Mae recognizes a guaranty asset upon issuance of a guaranty for the expected present value of
these guaranty fees. The guaranty asset recognized on the Balance Sheets is $6.4 billion and $6.7 billion
as of September 30, 2016 and 2015, respectively. The guaranty obligation represents the
non-contingent guaranty obligation for Ginnie Mae’s obligation to stand ready to perform on the
guaranty. The guaranty obligation recognized on the Balance Sheets is $6.2 billion and $5.7 billion as
of September 30, 2016 and 2015, respectively. After the initial measurement, the guaranty asset is
recorded at fair value and the guarantee obligation is amortized based on the remaining UPB of the
MBS pools. The difference in accounting for the guaranty asset and guaranty obligation subsequent
to initial recognition may cause volatility in reported earnings due to different measurement attributes
in reporting related financial asset (using projected economic exposures such as interest rate and
prepayment speeds) and financial liability (using actual payoffs and paydowns). Refer to Note 12: Fair
Value Measurement for discussion surrounding the volatility reflected in the Statements of Revenues
and Expenses and Changes in Investment of U.S. Government as a result of changes in assumptions
used in estimating the fair value of the guaranty asset.

For the guaranty asset and guaranty obligation recognized on the Balance Sheets, Ginnie Mae’s
maximum potential exposure under these guarantees is primarily comprised of the amount of MBS
securities outstanding. At September 30, 2016 and 2015, the amount of securities outstanding, which
is guaranteed by Ginnie Mae, was $1.7 trillion and $1.6 trillion, respectively. However, Ginnie Mae’s
potential loss is considerably less due to 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 curtailments are also passed through to security holders. As a result of the
security’s structure, Ginnie Mae bears no interest rate risk. Ginnie Mae’s exposure to credit loss is
contingent on the nonperformance of Ginnie Mae Issuers. Other than those Issuers considered in the
Liability for loss on mortgage-backed securities program guaranty on the Balance Sheet, Ginnie Mae


                                                                                                            
 
                                                    77
does not anticipate nonperformance by its other counterparties. Generally, terms of the guarantee
range from 15 to 30 years, with a maximum term capped at 40 years.

Ginnie Mae is also subject to credit risk for its outstanding commitments to guarantee MBS, which
are not reflected on its Balance Sheets. 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 guarantee future MBS. The commitment ends when
the securities are issued or the commitment period expires, which is 12 months from its receipt for
single family Issuers and 24 months from its receipt for multifamily Issuers. 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)                 2016                   2015
    Outstanding MBS                $             1,728 $                1,609
    Outstanding MBS Commitments                     96                    160
    Total                          $             1,824 $                1,769

If all outstanding MBS commitments were utilized, Ginnie Mae’s corresponding guaranty liability at
fair value, its obligation to stand ready to perform on these securities, would not exceed $352.8 million
and $630.7 million as of September 30, 2016 and 2015, respectively.

The Ginnie Mae MBS serves as the underlying collateral for multiclass products, such as REMICs,
Callable Trusts, Platinum Certificates, and Stripped MBS (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.

For fiscal years ended September 30, 2016 and 2015, multiclass security program issuances totaled
$102.5 billion and $93.1 billion, respectively. The estimated outstanding balance of multiclass securities
included in the outstanding MBS balance was $473.2 billion and $472.7 billion as of September 30,
2016 and 2015, respectively. These guaranteed securities do not subject Ginnie Mae to additional
credit risk beyond that assumed under the MBS program.

 




                                                                                                          
 
                                                   78
Note 7: Mortgage Servicing Rights

The following table presents activity for MSR for the years ended September 30, 2016 and 2015:

                                                                 September 30,
(Dollars in thousands)                                        2016              2015
Balance, October 1, 2015                                 $       29,600 $           44,600
Additions                                                              -                  -
Dispositions                                                    (25,500)                  -
Loss on Disposition of MSR                                         (300)                  -
Changes in fair value due to:
   Changes in valuation inputs or assumptions                    (3,800)
   used in valuation model                                                          (15,000)
   Other changes in fair value                                                            -
Balance, September 30, 2016(1)                           $             -   $        29,600
(1)
      The September 30, 2016 balance of $35 thousand is not shown due to rounding

During 2016, Ginnie Mae entered into agreements to sell all of its MSR to their MSS. Under the
purchase and sale agreement, Ginnie Mae sold, transferred, conveyed, and assigned to the purchasers
all servicing rights, advances, custodial funds and escrow funds. The purchasers assumed all
contractual duties, obligations and liabilities of Ginnie Mae. Ginnie Mae provided representations and
warranties under the MSR purchase and sale agreements that may require Ginnie Mae to repurchase
uninsured FHA, VA, USDA and PIH mortgage loans identified by the purchaser as of and after the
sale date. As of September 30, 2016, there was no liability for representations and warranties related
to the MSR sale.

The transaction was accounted for as a sale of non-financial assets as substantially all risks and rewards
of ownership have irrevocably passed to the purchaser. Total cash proceeds of the sale amounted to
$25.5 million, which resulted in a loss of $0.3 million. As of September 30, 2016 and 2015, the UPB
of the MSR for the total portfolio was $15.2 million and $4.3 billion, respectively.

Subsequent to the sale of all the MSRs during the fiscal year, another Issuer of Ginnie Mae securities
defaulted. This resulted in Ginnie Mae assuming the servicing rights and obligations of the defaulted
Issuer and recorded an MSR asset valued at approximately $35 thousand as of September 30, 2016.

The following table presents the components of servicing income for the years ended September 30,
2016 and 2015:

                                                   September 30,
(Dollars in thousands)                          2016          2015
Servicing fee income                       $        3,700 $       23,600
Sub-servicing expenses                            (30,600)       (39,400)
Net servicing loss                         $     (26,900) $     (15,800)   


                                                                                                          
 
                                                                  79
Note 8: Advances, net

When a Ginnie Mae Issuer defaults, Ginnie Mae is contractually required to step into the role of Issuer.
In this role, Ginnie Mae assumes the rights and obligations of the defaulted Issuer’s entire Ginnie Mae
guaranteed pooled-loan portfolio and is responsible for making timely principal and interest payments
to the MBS holders.

To facilitate servicing of the pooled-loan portfolio, Ginnie Mae utilizes two MSS to service the loans
associated with the defaulted portfolios and has provided advances to these MSS to ensure that the
portfolio can cover investor payments on the appropriate dates. When the full amount of principal
and interest due to MBS security holders is not paid by the borrowers by the required payment date,
Ginnie Mae will advance the funds to the MSS to cover the shortfall or for loan purchases if mortgages
need to be purchased out of the pool. These advances are reported net of an allowance based on
management’s expectations of future collections of the advances from the borrowers, proceeds from
the sale of the property, or recoveries from third-party insurers such as FHA, USDA, VA, and PIH.

Effective January 1, 2016, Ginnie Mae sold the MSR of its defaulted issuer pooled portfolios for
approximately $4 billion in UPB, to its currently approved MSS. As part of the MSR sale, Ginnie Mae
received a cash payment from the MSS in March 2016 as a settlement of outstanding advance balances.
The rights and responsibilities of future collections of principal and interest and other expenses for
these pooled loans transferred to the MSS upon the completion of the sale. As such, all remaining
balances in the Advance, including allowances, were removed. Refer to Note 7: MSR for further
discussion on MSR sale.

Subsequent to the MSR sale, another Ginnie Mae Issuer defaulted and Ginnie Mae assumed the
servicing rights and obligations of the Issuer’s entire Ginnie Mae portfolio. Concurrently, Ginnie Mae
executed a Purchase and Sales Agreement (PSA) with an approved Issuer to sell the assumed MSR.
Concurrent to the sale of MSR, the defaulted Issuer had a custodial fund balance of $20.9 million that
was designated to fund the pass-through payment to the MBS holders which, due to pending
bankruptcy proceedings, has not been released. To ensure timely pass-through payments due to the
MBS security holders, Ginnie Mae made an advance payment to the new Issuer in the amount of the
unreleased custodial fund balance. Ginnie Mae is currently working with the Bankruptcy Trustee to
obtain release of the custodial funds. Once bankruptcy proceedings have concluded, Ginnie Mae
expects to collect the full amount of the advance payment and therefore, no allowance was deemed
necessary as of September 30, 2016. The net carrying value of advances balance is $20.9 million as of
September 30, 2016, and $118.8 million as of September 30, 2015, as follows:

                                                              September 30,
    (Dollars in thousands)                             2016                   2015
    Advances                                  $               20,900 $            272,500
    Allowance for Uncollectible Advances                            -            (153,700)
    Advances, net                             $               20,900 $            118,800



                                                                                                        
 
                                                  80
The following table displays changes in Ginnie Mae’s allowance for advances for the year ended
September 30, 2016 and 2015:

                                                                                September 30,
    (Dollars in thousands)                                              2016                    2015
       Beginning balance                                       $               (153,700) $          (110,700)
       Provision (recapture) for credit losses                                  (88,500)             (45,300)
       Charge-offs                                                              243,100                3,000
       Recoveries                                                                  (900)                (700)
       Ending balance                                          $                      - $           (153,700)

Note 9: Mortgage Loans

Upon Ginnie Mae Issuers default, Ginnie Mae steps into the role of the Issuer and makes payments
of Principle and Interest (P&I) to its investors, and subsequently, assumes the servicing rights and
obligations of the defaulted Issuer’s entire, guaranteed, pooled loan portfolio. If a borrower is
delinquent for more than 90 days, Ginnie Mae may purchase the delinquent loan out of the pool.
Ginnie Mae’s historical business practice is to purchase loans out of the pool after they are delinquent
for 120 days or more. Additionally, Ginnie Mae must purchase loans out of the pool if they are
uninsured by the FHA, USDA, VA, or PIH1.

Upon acquisition, Ginnie Mae classifies a loan as either HFS or HFI. As of September 30, 2016 and
2015, Ginnie Mae’s loan portfolio did not include any loans HFS. The HFI portfolio consists of loans
purchased from defaulted Issuers pools, reported at their outstanding UPB, net of allowance.
Historically, Ginnie Mae’s HFI portfolio contained single family, multifamily, manufactured housing
and HECM loans. However, as of September 30, 2016 and 2015, the HFI portfolio included only
single family loans.

Ginnie Mae measures HFI loans using amortized cost. The loans are periodically evaluated for
impairment in accordance with guidance in ASC 450-20, or ASC 310-10-35. Ginnie Mae’s credit risk
on the mortgage loans HFI is limited by the underlying insurance on loans, which may include FHA,
USDA, VA and PIH.

 




                                                            
1
  Ginnie Mae did not have any mortgage loans insured by PIH as of September 30, 2016 and 2015. However, PIH-
insured mortgage loans may exist within MBS pools.

                                                                                                                 
 
                                                                   81
The tables below present the recorded investment2 in mortgage loans and related allowance for loan
losses balance broken down by underlying insurance agencies as of September 30, 2016 and 2015:
                                                                                                  As of September 30, 2016
(Dollars in thousands)                                                Conventional          FHA                VA              USDA               Total
Total unpaid principal balance                                    $             220,900 $     3,356,100 $          222,500 $           83,700 $    3,883,200
Allowance for loan losses on mortgage loans held for investment                 (48,400)       (299,400)           (37,100)           (28,300)      (413,200)
Total Mortgage Loans, net                                         $             172,500 $     3,056,700 $          185,400 $           55,400 $    3,470,000


                                                                                                  As of September 30, 2015
(Dollars in thousands)                                                Conventional          FHA                VA              USDA               Total
Total unpaid principal balance                                    $             261,200 $     4,199,300 $          301,000 $       102,000 $       4,863,500
Allowance for loan losses on mortgage loans held for investment                 (54,600)       (394,100)           (35,900)         (26,300)        (510,900)
Total Mortgage Loans, net                                         $             206,600 $     3,805,200 $          265,100 $         75,700 $      4,352,600



For the years ended September 30, 2016 and 2015, Ginnie Mae purchased $67.7 million and $418.1
million, respectively, of mortgage loans in MBS pools from defaulted Issuers that were classified as
HFI.

Additionally, during fiscal year 2016, Ginnie Mae repurchased 77 uninsured loans for approximately
$10.9 million, with an aggregate UPB of approximately $10.7 million, as a part of an indemnification
agreement. The repurchased loans were recorded in Mortgages HFI, net of related allowance.

Due to the data limitation, Ginnie Mae is unable to identify the correct HFI loan population, and thus
is not compliant with U.S. GAAP. Refer to Note 3: Summary of Significant Accounting Policies for
U.S. GAAP requirements.

Accrued Interest Receivable

Ginnie Mae’s current practice is to recognize interest income at the contractual rate and to record an
allowance to the extent that it is probable that interest will not be received, regardless of the
delinquency status of a loan. Ginnie Mae does not comply with U.S. GAAP requirements for interest
income recognition. Refer to Note 3: Summary of Significant Accounting Policies for U.S. GAAP
requirements.

The following table displays accrued interest and related allowance as of September 30, 2016 and 2015:

                                                                                     September 30,
(Dollars in thousands)                                                      2016                          2015
Accrued interest on mortgage loans         $                                       207,200 $                      370,300
Allowance for accrued interest on mortgage
loans held for investment                                                         (188,500)                      (322,600)
Accrued interest receivable, net           $                                        18,600 $                       47,700




                                                            
2
  Recorded investment is a dollar amount of a loan recorded on Ginnie Mae’s consolidated balance sheets, excluding any
allowance, such as the allowance for loan losses. Recorded investment excludes accrued interest.

                                                                                                                                                                 
 
                                                                                82
The following table displays changes in Ginnie Mae’s allowance for accrued interest for the year ended
September 30, 2016 and 2015:

                                                                                       September 30,
(Dollars in thousands)                                                         2016                     2015
Beginning balance                                                     $            (322,600) $                 (360,200)
Recapture (Provision) for credit losses                                             134,300                      37,600
Charge-offs                                                                            3,200                      2,000
Recoveries                                                                            (3,400)                    (2,000)
Ending balance                                                        $            (188,500) $                 (322,600)


Credit Quality Indicators

When estimating defaults, prepayments and recovery, Ginnie Mae looks at a number of credit quality
indicators. This includes an estimated current loan-to-value (LTV) ratio in the models using a Home
Price Index (HPI) based methodology. Every loan in the allowance population has its original loan-
to-value ratio, its UPB and its original principal balance (OPB). HPI information is collected regionally
from the Federal Housing Finance Agency (FHFA) HPI quarterly data which is published in March,
June, September and December of each year. This information is then used to generate an estimated
original home value. The current home value is estimated based on the estimated original home value
and HPI. The current loan-to-value ratio is estimated based on the UPB and the estimated current
home value in each quarter. In addition to LTV ratios, Ginnie Mae considers other loan
characteristics, such as the current delinquency status and recent payment history over the past twelve
months.

The following tables display recorded investment in mortgage loans by estimated current LTV3 ratio
as of September 30, 2016 and 2015, respectively:


                                                                                            As of September 30, 2016
                                                                                         Estimated Current LTV Ratio
(Dollars in thousands)                                             Less than 80%           80-100%        greater than 100%      Total
   Conventional                                                $               154,600 $           56,300 $           10,000 $        220,900
   FHA                                                                       1,790,300          1,248,300            317,500        3,356,100
   VA                                                                          110,700             83,900             27,900          222,500
   USDA                                                                         37,300             38,500              7,900           83,700
Total recorded investment in loans HFI                         $             2,092,900 $        1,427,000 $          363,300 $      3,883,200




                                                            
3
 LTV ratio is based on the UPB of the loans as of September 30, 2016 and 2015 divided by the estimated current value
of the property

                                                                                                                                                 
 
                                                                                  83
                                                                       As of September 30, 2015
                                                                    Estimated Current LTV Ratio
(Dollars in thousands)                        Less than 80%           80-100%        greater than 100%           Total
   Conventional                          $                167,300 $           83,300 $           10,600 $              261,200
   FHA                                                  2,066,800          1,865,000            267,500              4,199,300
   VA                                                     136,600            135,500             28,900                301,000
   USDA                                                    32,700             62,100              7,200                102,000
Total recorded investment in loans HFI   $              2,403,400 $        2,145,900 $          314,200 $            4,863,500


Impaired Loans

Ginnie Mae considers a loan to be impaired when, based on current information, it is probable that
amounts due, including interest, will not be received in accordance with the contractual terms of the
loan agreement. Ginnie Mae assesses its portfolios based on the delinquency status of the mortgage
loans held in each portfolio. Ginnie Mae’s impaired loans include the following categories:

           Loans modified in troubled debt restructure (TDR)
           PCI Loans

For the impaired loans, Ginnie Mae measures impairment based on the present value of expected
future cash flows. Due to data limitation, Ginnie Mae is unable to identify the correct TDR loan
population, and thus is not compliant with U.S. GAAP. For PCI loans, impairment measurement
methodology followed by Ginnie Mae is not in compliance with U.S. GAAP. Refer to Note 3:
Summary of Significant Accounting Policies for U.S. GAAP requirements.

The table below displays the recorded investment and the UPB of impaired mortgage loans as of
September 30, 2016 and 2015:

                                                                       As of September 30, 2016
                                                                      Recorded                              Unpaid Principal
                                             Number of Loans                         Related Allowance
(Dollars in thousands)                                               Investment                                Balance
   Conventional                                             785 $            115,200 $           44,900   $            115,200
   FHA                                                   17,070            2,347,900            247,500              2,347,900
   VA                                                     1,305              222,500             37,100                222,500
   USDA                                                     757               83,700             28,300                 83,700
Total                                                    19,917 $          2,769,300 $          357,800   $          2,769,300
                                                                       As of September 30, 2015
                                                                      Recorded                              Unpaid Principal
                                             Number of Loans                         Related Allowance
(Dollars in thousands)                                               Investment                                Balance
   Conventional                                             782 $            115,200 $           37,700   $            115,200
   FHA                                                   18,016            2,566,400            285,500              2,566,400
   VA                                                     1,752              302,000             35,900                302,000
   USDA                                                     949              102,000             26,300                102,000
Total                                                    21,499 $          3,085,600 $          385,400   $          3,085,600


Due to the data limitations, Ginnie Mae is unable to disclose the average carrying value, interest
income and interest income recognized using a cash-basis method of accounting for impaired
mortgage loans, as required by U.S. GAAP.

                                                                                                                                  
 
                                                               84
Troubled Debt Restructuring (TDR)

A restructuring of a debt constitutes a TDR if Ginnie Mae for economic or legal reasons related to
the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.

The substantial majority of the loan modifications that Ginnie Mae completes result in term
extensions, interest rate reductions (lower than what the borrower would receive in the market at the
time of the modification) or a combination of both. Ginnie Mae considers these modifications a
concession to borrowers experiencing financial difficulties and therefore classifies these loans as
TDRs.

Currently, Ginnie Mae classifies loans as TDRs (based on the definition above) when the borrower
enters into a permanent modification. For these loans, Ginnie Mae measures impairment based on
the present value of expected future cash flows.

Due to data limitation, Ginnie Mae is unable to identify the correct TDR loan population, and thus is
not compliant with U.S. GAAP. Refer to Note 3: Summary of Significant Accounting Policies for U.S.
GAAP requirements.

The following table displays recorded investment in loans restructured in a TDR for the years ended
September 30, 2016 and 2015:

                                                             As of September 30, 2016
                                                             Recorded                               Unpaid Principal
                                     Number of Loans                       Related Allowance
(Dollars in thousands)                                      Investment                                 Balance
   Conventional                                     383 $           59,800 $             22,400 $               59,800
   FHA                                           17,070          2,347,900              247,500              2,347,900
   VA                                               627            113,100               16,100                113,100
   USDA                                             258             32,200                9,200                 32,200
Total TDR's                                      18,338 $        2,553,000 $            295,200 $            2,553,000

                                                             As of September 30, 2015
                                                             Recorded                               Unpaid Principal
                                     Number of Loans                       Related Allowance
(Dollars in thousands)                                      Investment                                 Balance
   Conventional                                     475 $           71,600 $             21,500 $               71,600
   FHA                                           18,016          2,566,400              285,500              2,566,400
   VA                                               733            138,900               13,800                138,900
   USDA                                             130             16,100                3,700                 16,100
Total TDR's                                      19,354 $        2,793,000 $            324,500 $            2,793,000


Due to the data limitations, Ginnie Mae is unable to disclose quantitative information about
modifications (i.e. pre-modification vs. post-modification recorded investment) for the loans modified
in a TDR, as required by U.S.GAAP.

 




                                                                                                                          
 
                                                       85
The table below shows the total recorded investment and the UPB as of September 30, 2016 and 2015
for the loans that entered a TDR in the preceding 12 months:

                                         As of September 30, 2016                As of September 30, 2015
                                                             Recorded
                                    Number of Loans                        Number of Loans Recorded Investment
(Dollars in thousands)                                      Investment
   Conventional                                     86 $            15,700               90 $              14,300
   FHA                                           2,911             424,200            1,635               233,600
   VA                                              121              24,200               96                20,000
   USDA                                             71               9,700               15                 2,200
Total                                            3,189 $           473,800            1,836 $             270,100


The table below shows the total recorded investment and the UPB as of September 30, 2016 and 2015
for the loans that entered a TDR in the preceding 12 months and subsequently defaulted:

                                         As of September 30, 2016                 As of September 30, 2015
                                                              Recorded
                                    Number of Loans                         Number of Loans Recorded Investment
(Dollars in thousands)                                      Investment
   Conventional                                      14 $             3,000               17 $              3,100
   FHA                                              452 $           68,000               247               36,200
   VA                                                23 $            4,900                21                4,500
   USDA                                              11 $            1,600                 2                  200
Total                                               500 $           77,500               287 $             44,000


Purchased Credit-Impaired Loans

When a mortgage loan is purchased out of the pool, it is considered credit impaired at acquisition, if
there is evidence of credit deterioration subsequent to the loan’s purchase and it is probable that
Ginnie Mae will be unable to collect all contractually required payments receivable (ignoring
insignificant delays in contractual payments).

Upon acquisition, if the purchased loan is delinquent and uninsured or insured by VA or USDA,
Ginnie Mae determines that it is probable that they will be unable to collect all contractually required
payments receivable. Accordingly, these loans are considered to be PCI mortgage loans. Historically,
Ginnie Mae has not applied the PCI guidance to its non-FHA loans purchased with evidence of credit
deterioration. Ginnie Mae measures these loans based on the present value of expected future cash
flows, which is a departure from U.S. GAAP. Refer to Note 3: Summary of Significant Accounting
Policies for U.S. GAAP requirements.

Ginnie Mae does not consider delinquent FHA insured acquired loans as PCI because the UPB and a
portion of the delinquent, accrued interest are deemed collectible due to the FHA insurance
reimbursement guidelines. The FHA insurance is inseparable from the underlying loan and travels
with the loan.

Since Ginnie Mae has historically never fully applied the PCI guidance to its non-FHA mortgage loans
purchased with evidence of credit deterioration, limited data was available for disclosures required by



                                                                                                                     
 
                                                    86
U.S. GAAP. Thus Ginnie Mae is not fully compliant with U.S. GAAP disclosure requirements for
PCI disclosures.

The table below displays the recorded investment and the UPB of PCI mortgage loans as of
September 30, 2016 and 2015:

                                                             As of September 30, 2016
                                                             Recorded                              Unpaid Principal
                                  Number of Loans                          Related Allowance
(Dollars in Thousands)                                      Investment                                Balance
   Conventional                                  402 $              55,400 $            22,500 $               55,400
   VA                                            678               109,400              21,000                109,400
   USDA                                          499                51,500              19,000                 51,500
Total                                          1,579 $             216,300              62,500 $              216,300


                                                             As of September 30, 2015
                                                             Recorded                              Unpaid Principal
                                  Number of Loans                          Related Allowance
(Dollars in Thousands)                                      Investment                                Balance
   Conventional                                  307 $             43,500 $             16,200 $              43,500
   VA                                          1,019              163,100               22,200               163,100
   USDA                                          819               86,000               22,600                86,000
Total                                          2,145 $            292,600 $             61,000 $             292,600


The following table presents the recorded investment and the UPB of PCI loans acquired during 12
month ended September 30, 2016 and 2015:

                                                             As of September 30, 2016
                                                             Recorded                              Unpaid Principal
                                  Number of Loans                          Related Allowance
(Dollars in thousands)                                      Investment                                Balance
   Conventional                                       3 $              200 $              100 $                   200
   VA                                                16              1,700                300                   1,700
   USDA                                             -                   -                 -                       -
Total PCI                                            19 $            1,900 $              400 $                 1,900


                                                             As of September 30, 2015
                                                             Recorded                              Unpaid Principal
                                  Number of Loans                          Related Allowance
(Dollars in thousands)                                      Investment                                Balance
   Conventional                                  12 $                1,500 $              500 $                 1,500
   VA                                           183                 25,700              2,500                  25,700
   USDA                                         157                 14,500              4,600                  14,500
Total PCI                                       352 $               41,700 $            7,600 $                41,700


Due to its current approach, Ginnie Mae does not have the data to disclose the accretable yield for
PCI mortgage loans. Additionally, Ginnie Mae does not have the data to disclose the contractually
required payments receivable, cash flows expected to be collected, and fair value at the acquisition
date for the loans acquired during the period.




                                                                                                                         
 
                                                    87
Non-accrual Loans
Ginnie Mae’s current practice is to recognize interest income at the full contractual rate on all mortgage
loans regardless of delinquency status. Ginnie Mae records an allowance if it is probable that the
interest will not be fully collectible. Therefore, a process for placing loans on non-accrual does not
currently exist.
Ginnie Mae does not comply with U.S. GAAP requirements for placing loans on non-accrual. Refer
to Note 3: Summary of Significant Accounting Policies for U.S. GAAP requirements.
The following tables display an aging analysis of the total recorded investment in Ginnie Mae’s HFI
mortgage loans:
                                                                                   As of September 30, 2016

                                                                                                                                                             Loans Over 90
                             One Month           Two Months         Three Months   Four Months or More          Total                                       Days Delinquent
                                                                                                                               Current         Total
                             Delinquent           Delinquent         Delinquent         Delinquent            Delinquent                                     and Accruing
                                                                                                                                                                Interest
(Dollars in thousands)
  Conventional           $            19,000 $            5,600 $            3,300 $              38,300 $          66,200 $       154,700 $      220,900 $           41,600
  FHA                                415,100            113,800             57,600               980,500         1,567,000       1,789,100      3,356,100          1,038,100
  VA                                  21,900              8,400              4,000               101,600           135,900          86,600        222,500            105,600
  USDA                                10,800              2,800              2,900                34,000            50,500          33,200         83,700             36,900
Total                    $           466,800 $          130,600 $           67,800 $           1,154,400 $       1,819,600 $     2,063,600 $    3,883,200 $        1,222,200


                                                                                   As of September 30, 2015
                                                                                                                                                             Loans Over 90
                             One Month           Two Months         Three Months   Four Months or More          Total                                       Days Delinquent
                                                                                                                               Current         Total
                             Delinquent           Delinquent         Delinquent         Delinquent            Delinquent                                      and Accruing
(Dollars in thousands)                                                                                                                                          Interest
   Conventional          $            21,400 $            7,900 $            2,600 $              63,200 $          95,100 $       166,100 $      261,200   $         65,800
   FHA                               354,400            164,000             81,200             1,925,400         2,525,000       1,674,300      4,199,300          2,006,600
   VA                                 17,400             10,600              5,600               183,400           217,000          84,000        301,000            189,000
   USDA                                5,900              3,700              2,000                69,600            81,200          20,800        102,000             71,600
Total                    $           399,100 $          186,200 $           91,400 $           2,241,600 $       2,918,300 $     1,945,200 $    4,863,500   $      2,333,000




Foreclosures in Process
In January 2014, the FASB issued ASU 2014-04, Receivables- Troubled Debt Restructurings by Creditors
(Subtopic 310-40). The objective of the amendments in this update was to reduce diversity in practice
by clarifying when an in substance repossession or foreclosure occurs. Under ASU 2014-04, physical
possession of residential real estate property is achieved when either the creditor obtains legal title to
the residential real estate property upon completion of a foreclosure or the borrower conveys all
interest in the residential real estate property through completion of a deed in lieu of foreclosure in
order to satisfy that loan.
The guidance set forth in ASU 2014-04 is consistent with the Ginnie Mae’s current practice for
reclassifying residential mortgage loans from “Foreclosure in Process” to a receivable. ASU 2014-04
requires additional disclosure for the recorded investment in mortgage loans collateralized by
residential real estate that are in the process of foreclosure.
Ginnie Mae accounts for the mortgage loans as Foreclosure in Process if the foreclosure has been
filed but not completed (typically, loans are foreclosed subsequent to Ginnie Mae purchasing the loans
out of the pool). Although foreclosure has been filed, the foreclosure process has not been completed
and Ginnie Mae has not received physical possession of the underlying property, and accordingly,



                                                                                                                                                                                
 
                                                                         88
Foreclosure in Process Loans are accounted for similar to mortgage loans HFI and are reported as a
part of the HFI portfolio.
Ginnie Mae does not record impairment based on the fair value of the underlying collateral less cost
to sell when determined that foreclosure is probable for uninsured loans and thus, does not comply
with U.S. GAAP requirements. Refer to Note 3: Summary of Significant Accounting Policies for U.S.
GAAP requirements.
The table below displays the recorded investment of mortgage loans secured by real estate for which
formal foreclosure proceedings are in process as of September 30, 2016 and 2015:
                                                                                   As of September 30, 2015
                                                                                                                                                             Loans Over 90
                             One Month           Two Months         Three Months   Four Months or More          Total                                       Days Delinquent
                                                                                                                               Current         Total
                             Delinquent           Delinquent         Delinquent         Delinquent            Delinquent                                      and Accruing
(Dollars in thousands)                                                                                                                                          Interest
   Conventional          $            21,400 $            7,900 $            2,600 $              63,200 $          95,100 $       166,100 $      261,200   $         65,800
   FHA                               354,400            164,000             81,200             1,925,400         2,525,000       1,674,300      4,199,300          2,006,600
   VA                                 17,400             10,600              5,600               183,400           217,000          84,000        301,000            189,000
   USDA                                5,900              3,700              2,000                69,600            81,200          20,800        102,000             71,600
Total                    $           399,100 $          186,200 $           91,400 $           2,241,600 $       2,918,300 $     1,945,200 $    4,863,500   $      2,333,000



Allowance for Loan Loss

Ginnie Mae maintains an allowance for probable losses incurred related to mortgage loans classified
as HFI.
The collective allowance for loan losses is established on mortgage loans HFI portfolio for both
interest and principal payments. Ginnie Mae relies on reports received from its MSS to obtain
information about borrowers’ ability to pay. Ginnie Mae considers that information as well as current
economic environment and potential recovery amounts including credit enhancements related to
insurance guarantees from different government agencies when determining the amount of loss that
can be reasonably estimated. The calculation uses statistical models that evaluate a variety of factors
affecting collectability. The homogeneous pools of single-family loans are determined based on
common loan characteristics such as LTV ratios, loan product type, insurance type, and geographic
region.
The projections are built based on actual loan performance data, current business practices, and
management judgment. Ginnie Mae monitors their projections of claim recoveries regularly to validate
reasonableness. Ginnie Mae validate and update their models and assumptions to capture changes in
our servicing experience and changes in government policies and programs. In determining Ginnie
Mae’s loan loss reserves, they also consider macroeconomic and other factors that affect the quality
of the loans in their portfolio, including regional housing trends, applicable home price indices, and
unemployment trends.

In fiscal year 2015, Ginnie Mae developed new methodology to estimate losses net of insurance
coverage for the non-pooled assets, enhancing loan performance modeling for Ginnie Mae loans. The
probability of default and probability of prepayment models employ logistic regressions to calculate
dynamic default and prepayment probabilities based on actual loan performance data for the Ginnie
Mae loan population and macroeconomic conditions. 

                                                                                                                                                                                
 
                                                                         89
The allowance for loan loss involves significant management judgment and estimates of credit losses
inherent in the mortgage loan portfolio. The allowance for loan losses is intended to adjust the carrying
value of Ginnie Mae’s mortgage loan assets to reflect probable credit losses embedded in the loan
portfolio as of the balance sheet date.

For impaired loans (TDR and PCI loans), Ginnie Mae measures impairment based on the present
value of expected future cash flows. Ginnie Mae’s expectation of future cash flows incorporates,
among other items, estimated probabilities of default and prepayment based on a number of economic
factors as well as the characteristics of a loan. Additionally, Ginnie Mae considers the value of the
collateral, as reduced by estimated disposition costs, and estimated proceeds from insurance and
similar sources, if applicable.

The following table displays the allowance for loan losses and recorded investment in the HFI
mortgage loan portfolio by impairment or reserve methodology, as of September 30, 2016 and 2015.

                                                         September 30,
(Dollars in Thousands)                            2016                   2015
Recorded investment:
   Collectively evaluated                     $          1,113,900 $        1,777,900
   Individually evaluated                                2,553,000          2,793,000
   Purchase credit impaired                                216,300            292,600
        Total recorded investment in loans    $          3,883,200 $        4,863,500
Ending balance of the allowance for loan losses
   Collectively evaluated                     $             55,500 $         125,400
   Individually evaluated                                  295,200           324,500
   Purchase credit impaired                                 62,500            61,000
        Total allowance for loan losses       $            413,200 $         510,900
Net Investment in mortgage loans HFI          $          3,470,000 $       4,352,600

The following table displays changes in Ginnie Mae’s allowance for loan losses during the year
ended September 30, 2016 and 2015:

                                                         September 30,
(Dollars in thousands)                            2016                   2015
   Beginning balance                         $            510,900 $         1,204,500
   Provision (recapture) for credit losses                (99,500)           (690,200)
   Charge-offs                                             (6,400)             (4,100)
   Recoveries                                               8,200                 700
   Ending balance                            $            413,200 $           510,900


Ginnie Mae’s charge offs may include write downs recorded when the receivables are transferred to a
different asset class. Ginnie Mae’s recoveries may include miscellaneous adjustments and charge offs
reversals. Ginnie Mae does not have a consistent methodology for recording charge offs and
recoveries. As such, Ginnie Mae’s current practice is not in compliance with U.S. GAAP. Refer to
Note 3: Summary of Significant Accounting Policies for U.S. GAAP requirements.

                                                                                                         
 
                                                   90
Ginnie Mae is in the process of refining its loan-level transaction reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans for the non-
pooled assets list of out of scope line items.

Note 10: Claims Receivable

The detail of Ginnie Mae’s claims receivable balance from insuring agencies is shown in the table
below:

                                                                       As of September 30, 2016

                                             Foreclosed Property          Short Sale           Insurance
                                                                                                                        Total
                                                  Claims(1)               Claims(2)             Claims(3)
(Dollars in thousands)
Claims Receivable                        $                 679,100 $            129,500 $               6,900 $            815,500
Allowance for Claims Receivable                             (83,400)            (22,700)                     -            (106,100)
Claims Receivable, net                   $                 595,700 $            106,800 $               6,900 $            709,400

(1) Foreclosed property claims receivable represents reimbursements owed to Ginnie Mae by insuring agencies (which may include FHA, VA,
   USDA, and PIH). Properties have been conveyed, except for USDA insured loans, as the USDA requires that the properties are sold
   before filing a claim for the shortfall.
(2) Short sale claims receivable consists of repayments owed to Ginnie Mae by insuring agencies (which may include FHA, VA, USDA, and
   PIH).
(3) Insurance claims are approved claims from the FHA.


                                                                         As of September 30, 2015
                                             Foreclosed Property            Short Sale           Insurance
                                                           (1)                       (2)                                  Total
(Dollars in thousands)                             Claims              Claims        Claims(3)
Claims Receivable                         $                  836,400 $      80,500 $         200                    $         917,100
Allowance for Claims Receivable                              (67,100)      (35,800)            -                             (102,900)
Claims Receivable, net                       $               769,300 $      44,700 $         200                    $         814,200

(1) Foreclosed property claims receivable represents reimbursements owed to Ginnie Mae by insuring agencies (which may include FHA, VA,
   USDA, and PIH). Properties have been conveyed, except for USDA insured loans, as the USDA requires that the properties are sold
   before filing a claim for the shortfall.
(2) Short sale claims receivable consists of repayments owed to Ginnie Mae by insuring agencies (which may include FHA, VA, USDA, and
PIH).
(3) Insurance claims are approved claims from the FHA.

On a monthly basis, Ginnie Mae obtains claims receivable balances from the MSSs that service the
loans. The foreclosed property claims and short sale claims allowance balances are estimated based on
expected recoveries from insuring agencies. For the years ended September 30, 2016 and 2015, the
outstanding foreclosed property and short sale claims receivable balances include claims on single
family loan properties only. There is no allowance on insurance claims receivable because it represents
settled claims and approved future collections of cash from FHA.

                                                                                                                                       
 
                                                                 91
Ginnie Mae’s charge offs may include write downs recorded when the receivables are transferred to a
different asset class. Ginnie Mae’s recoveries may include miscellaneous adjustments and charge offs
reversals. Ginnie Mae does not have a consistent methodology for recording charge offs and
recoveries. As such, Ginnie Mae’s current practice for reporting claims receivable is not in compliance
with U.S. GAAP. Refer to Note 3: Summary of Significant Accounting Policies for U.S. GAAP
requirements.

The following table displays changes in Ginnie Mae’s allowance for claims receivable for the year
ended September 30, 2016 and 2015:

                                                              As of September 30, 2016                           As of September 30, 2015
                                                                                                         Foreclosed
                                                  Foreclosed Property       Short Sale                                  Short Sale
                                                                                             Total        Property                      Total
                                                        Claims               Claims                                      Claims
(Dollars in thousands)                                                                                    Claims
     Beginning balance                        $                (67,100) $       (35,800) $    (102,900) $    (38,500) $     (27,700) $    (66,200)
     Provision (recapture) for credit losse                    (71,200)           (4,300)      (75,500)       (6,500)      (21,000)       (27,500)
     Charge-offs                                                62,900           20,600         83,500       (22,100)       17,900         (4,200)
     Recoveries                                                 (8,000)           (3,200)      (11,200)          -          (5,000)        (5,000)
     Ending balance                           $                (83,400) $       (22,700) $    (106,100) $    (67,100) $    (35,800) $    (102,900)


Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans for the non-
pooled assets list of out of scope line items.

Note 11: Acquired Property

Ginnie Mae records acquired property when the MSS obtains marketable title to the underlying
property that has completed the foreclosure process in the respective state. The acquired properties
are typically either USDA insured or uninsured conventional loans. FHA and VA insured loans are
usually classified as foreclosed property and are conveyed to the insuring agency. Upon acquisition of
the acquired property through foreclosure, the acquired properties are classified as held for sale (HFS)
as Ginnie Mae intends to sell those properties and is actively marketing those properties for sale shortly
thereafter through the MSS.

Ginnie Mae does not obtain fair values for acquired properties or calculate the estimated cost to sell
or expected recoveries from credit enhancements upon initial recognition or in subsequent periods.

Ginnie Mae initially recognizes acquired property at UPB plus accrued interest and is presented net of
a valuation allowance on the Balance Sheet. The valuation allowance is adjusted through the Provision
(Recapture) of Acquired Property in the Statements of Revenue and Expenses and Changes in
Investment of the U.S. Government. The valuation allowance is designed to approximate the expected
cash flows that Ginnie Mae will not receive upon sale of the property.




                                                                                                                                                      
 
                                                                             92
The net acquired property balance is adjusted via changes in the valuation allowance as of the end of
each reporting period.

Ginnie Mae expenses all post-foreclosure expenses in the period incurred in Other Expenses in the
Statements of Revenue and Expenses and Changes in Investment of the U.S. Government.

Upon disposition of an acquired property, Ginnie Mae charges off against the acquired property
valuation allowance the difference between the property sales proceeds and the carrying value of the
acquired property.

Balances and activity for acquired properties are presented in the table below:
                                                                   September 30,
    (Dollars in thousands)                                  2016                   2015
    Acquired Properties, beginning balance         $               52,600 $               16,000
      Additions                                                    98,700                 86,300
      Dispositions                                                 (66,800)               (49,700)
    Acquired Properties, ending balance                            84,500                 52,600
    Valuation allowance, beginning balance                         (22,300)                (3,200)
       Change in valuation allowance                               (21,000)               (19,100)
    Valuation allowance, ending balance                            (43,300)               (22,300)
    Acquired Properties, ending balance, net       $               41,200     $           30,300


Ginnie Mae’s current practice for reporting property values is a departure from U.S. GAAP. Refer to
Note 3: Summary of Significant Accounting Policies for U.S. GAAP requirements.

Ginnie Mae is refining its loan-level transaction data collection and reporting with the MSS to comply
with U.S. GAAP. Management will assess the information presented within this footnote for
restatement in fiscal year 2017. Please refer to Note 2: Restatement-Non-pooled Loans for the
non-pooled assets list of out of scope line items.

Note 12: Fair Value Measurement

The accounting guidance for the fair value measurements and disclosures defines fair value, establishes
a framework for measuring fair value, and sets forth disclosure requirements regarding fair value
measurements. This guidance applies whenever other accounting guidance requires or permits assets
or liabilities to be measured at fair value. Fair value measurement assumes that the transaction to sell
the asset or transfer the liability takes place either in the principal market for the asset or liability, or,
in the absence of a principal market, in the most advantageous market for the asset or liability.

We use fair value measurements for the initial recognition of assets and liabilities and periodic re-
measurement of certain assets and liabilities on a recurring or non-recurring basis.



                                                                                                              
 
                                                       93
Assets Measured at Fair Value on a Recurring Basis: The following tables present 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:

                                                                                       September 30, 2016
(Dollars in thousands)                                   Level 1             Level 2           Level 3           Total
Mortgage Servicing Rights(1)                              $                - $               - $               - $               -
Guaranty Asset                                                                                        6,397,600          6,397,600
Total Assets at Fair Value                                $               - $                - $      6,397,600 $        6,397,600
(1)
    The September 30, 2016 balance of $35 thousand is not shown due to rounding

                                                                                       September 30, 2015
(Dollars in thousands)                                  Level 1            Level 2             Level 3          Total
Mortgage Servicing Rights                               $                - $                 - $         29,600 $           29,600
Guaranty Asset*                                                         -                    -        6,742,200          6,742,200
Total Assets at Fair Value                               $              - $                  - $      6,771,800 $        6,771,800
* See Note 2 (Restatement)

Mortgage Servicing Rights – Ginnie Mae measures the fair value of MSR 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 3: Summary of Significant Accounting Policies
contains additional details with regards to specific fair value assumptions of MSR.

The significant unobservable inputs used in estimating the fair value measurement of our Level 3 MSR
assets and financing liabilities include assumptions for underlying loan constant prepayment rates and
delinquency rates, as well as discount rates. We review the various inputs used to determine the fair
value of our MSR and perform procedures to validate their reasonableness. In reviewing the estimated
fair values of our Level 3 MSR, we use internal models and our own estimates of prepayment and
delinquency rates on the loans underlying our MSR.

 




                                                                                                                                      
 
                                                                   94
The table below provides valuation techniques, the range and weighted average of significant
unobservable inputs and impacts of key economic assumptions used in determining the fair value of
Ginnie Mae’s Mortgage Servicing Right assets valued on a recurring basis:

                                                                    September 30,
(Dollars in thousands)                                        2016              2015
Valuation at period end:
     Fair value(1)                                       $                - $       29,600
    Weighted- average life (years)                                   3.96              3.62
Prepayment rates assumptions:
    Weighted Average Rate assumption                              20.72%           21.94%
    Weighted Average Minimum                                      14.28%            10.20%
    Weighted Average Maximum                                      30.78%            23.40%
    Impact on fair value of a 10% adverse change                          -          (2,400)
    Impact on fair value of a 20% adverse change                          -          (4,600)
Discount rate assumptions:
    Weighted Average Rate assumption                              10.54%           10.68%
    Weighted Average Minimum                                      10.54%            10.60%
    Weighted Average Maximum                                      10.54%            13.20%
    Impact on fair value of a 10% adverse change                          -            (800)
    Impact on fair value of a 20% adverse change                          -          (1,600)
(1)
    The September 30, 2016 balance of $35 thousand is not shown due to rounding

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.

Guaranty asset (as Restated) – The fair value option provides Ginnie Mae an option to elect fair
value as an alternative measurement for selected financial assets and financial liabilities not otherwise
reported at fair value. Ginnie Mae has elected the fair value option for the guaranty asset and its value
is determined based on the present value of the expected future cash flows from the guaranty fees
based on the UPB of the outstanding MBS in the defaulted and non-defaulted pooled Issuer portfolio,
which results from new issuances of MBS, scheduled run-offs of MBS, prepayments and defaults.

Ginnie Mae provides the guarantee 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 UPB of the
outstanding MBS in the defaulted and non-defaulted Issuer pooled portfolio. Accordingly, the fair
value of the guarantee asset is based on the expected present value of these fees, taking into account
anticipated defaults and prepayments.



                                                                                                         
 
                                                            95
The table below provides valuation techniques and assumptions used in determining fair values of
Guaranty Assets:

                                                                          September 30,
    (Dollars in thousands)                                            2016           2015*
    Valuation at period end:
        Fair value                                              $     6,397,600 $             6,742,200
    Prepayment rate assumptions:
        Weighted Average Rate assumption                                   41.96%                    33.37%
        Weighted Average Minimum                                            0.02%                     0.00%
        Weighted Average Maximum                                           98.51%                    99.67%
    Default rate assumptions:
        Weighted Average Rate assumption                                   26.40%                    27.60%
        Weighted Average Minimum                                            0.00%                     0.00%
        Weighted Average Maximum                                           99.97%                    99.63%
    Discount rate assumptions:
        Weighted Average Rate assumption                                   1.25%                     1.50%
        Weighted Average Minimum                                           0.26%                     0.05%
        Weighted Average Maximum                                           2.04%                     2.49%
    * See Note 2 (Restatement)

These significant unobservable inputs change according to macroeconomic market conditions.
Significant increases (decreases) in discount rate, constant prepayment rate, or constant default rate in
isolation would result in a lower (higher) fair value measurement. The constant prepayment rate
represents the percentage of the mortgage pool’s outstanding principal balances assumed to be paid
off prematurely in each period and is based on historical prepayment rates and future market
expectations. The constant default rate is the annualized rate of default on a pool of mortgages and
represents the percentage of the pool’s outstanding principal balances that are in default.

The following table presents a reconciliation measured at fair value on a recurring basis using
significant unobservable inputs for the years ended September 30, 2016 and 2015:

                                                     September 30, 2016
                                             Mortgage
                                                                 Guaranty Asset
(Dollars in thousands)                    Servicing Rights
Balance, October 1, 2015                  $         29,600      $     6,742,200
Total realized and unrealized                       (4,100) (1)      (2,133,600)               (2)

gains/(losses) included in net
income:
Proceeds from Sale of MSRs                             (25,500)                         -
Issuances                                                     -                 1,789,000
Balance, September 30, 2016(3)            $                  -         $        6,397,600
       (1) Includes loss of $(3,800) from change in fair value prior to the sale of the MSR.
       (2) Includes realized gains (losses) due to payoffs and paydowns and unrealized gains (losses) of $976 million from change in fair
           value on remaining guarantees at the end of the reporting period.
       (3) The September 30, 2016 balance of $35 thousand is not shown due to rounding


                                                                                                                                             
 
                                                                     96
                                     September 30, 2015*
                                    Mortgage       Guaranty
(Dollars in thousands)           Servicing Rights    Asset
Balance, October 1, 2014         $         44,600 $ 5,963,100
Total realized and unrealized             (15,000)  (814,500)
gains/(losses) included in net
Proceeds from Sale of MSRs                      -           -
Issuances                                       -   1,593,600
Balance, September 30, 2015      $         29,600 $ 6,742,200
* See Note 2 (Restatement)

Ginnie Mae records transfers between Level 1, Level 2 and Level 3, if any, at the beginning of the
period. There were no transfers between Level 1, Level 2 and Level 3 during the years ended
September 30, 2016 and 2015. Gains and losses on Mortgage Servicing Rights and Guarantee Assets
are recorded in the Gain (loss) on mortgage servicing rights and Gain (loss) on guaranty asset line
items, respectively, in the Statement of Revenue and Expenses and Changes in Investment of U.S.
Government.

Assets Measured at Fair Value on a Nonrecurring Basis: The following tables display assets
measured on the Balance Sheets at fair value on a nonrecurring basis for the years ended September 30,
2016 and 2015:

                                                    September 30, 2016
(Dollars in thousands)     Level 1        Level 2           Level 3          Total
Acquired Property, net     $            - $               - $        41,200 $        41,200
Total Assets at Fair Value $           - $                - $         41,200 $       41,200


                                                    September 30, 2015
(Dollars in thousands)     Level 1        Level 2           Level 3         Total
Acquired Property, net     $            - $               - $        30,300 $        30,300
Total Assets at Fair Value $           - $                - $        30,300 $        30,300


As noted in Note 11: Acquired Property, Ginnie Mae’s current practice for reporting acquired property
is a departure from U.S. GAAP and the amounts presented in the table above do not reflect the
properties’ fair value, as Ginnie Mae does not obtain fair values for acquired properties or calculate
the estimated cost to sell upon initial recognition or in subsequent periods. Instead, Ginnie Mae
initially recognizes acquired property at UPB plus accrued interest and is presented net of a valuation
allowance on the Balance Sheet. The valuation allowance calculated by Ginnie Mae is designed to
approximate the expected cash flows that Ginnie Mae will not receive upon sale of the property. Refer
to Note 3: Summary of Significant Accounting Policies for requirements under U.S. GAAP.




                                                                                                       
 
                                                     97
As a result, Ginnie Mae is not able to disclose the valuation technique and significant unobservable
inputs used in the fair value measurements for acquired property. Acquired property is classified within
Level 3 of the valuation hierarchy because significant inputs are unobservable. Refer to Note 11:
Acquired Property for further details on Ginnie Mae’s current practice.

Note 13: Fixed Assets (As Restated)

The tables below show the total balance of hardware and software as of September 30, 2016 and 2015,
net of the accumulated amortization:
                                                 As of September 30, 2016
(Dollars in thousands)                        Hardware Software       Total
Cost, beginning balance                       $ 5,000 $ 145,300 $ 150,300
Additions                                           -       36,300     36,300
Disposals                                           -            -         -
Cost, ending balance                          $ 5,000 $ 181,600 $ 186,600

Accumulated amortization, beginning balance   $ (1,700) $ (86,300) $ (88,000)
Amortization                                      (700)   (15,000)   (15,700)
Disposals                                            -          -         -
Accumulated amortization, ending balance      $ (2,400) $(101,300) $(103,700)

Fixed Assets, net                             $   2,600   $ 80,300    $ 82,900

                                                 As of September 30, 2015
(Dollars in thousands)                        Hardware Software      Total
Cost, beginning balance                       $ 4,900 $ 123,900 $ 128,800
Additions                                          100      26,000    26,100
Disposals                                          -        (4,600)    (4,600)
Cost, ending balance                          $ 5,000 $ 145,300 $ 150,300

Accumulated amortization, beginning balance   $     (900) $ (77,800) $ (78,700)
Amortization                                        (800)   (13,100)   (13,900)
Disposals                                            -        4,600      4,600
Accumulated amortization, ending balance      $   (1,700) $ (86,300) $ (88,000)

Fixed Assets, net*                            $   3,300   $ 59,000   $ 62,300

*See Note 2: Restatement

Assets recorded under capital leases (hardware) as of September 30, 2016 and 2015 were $0.1 million
and $0.4 million, respectively. These assets are recorded net of accumulated amortization of $1.1
million and $0.8 million as of September 30, 2016 and 2015, respectively. The charge to income
resulting from amortization of assets recorded under capital leases is included in Fixed Assets
Amortization on the Statements of Revenues and Expenses and Changes in Investment of U.S.
Government.

There are no remaining future lease payments for either operating leases or capital leases.

                                                                                                        
 
                                                     98
Note 14: Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities include the following as of September 30, 2016 and 2015:

                                                      September 30,
    (Dollars in thousands)                        2016            2015
    Accounts Payable-trade                   $       89,000 $        111,800
    Salaries and benefits payable                       800              600
    Unclaimed Securities Holder Payments             23,600              23,400
    Accrued unfunded leave                            1,400                    -
    Accounts payable and accrued liabilities $      114,800 $           135,800

Note 15: Reserve for Loss

As Ginnie Mae guarantees investors the timely payment of principal and interest on MBS backed by
federally insured or guaranteed loans (mainly loans insured by FHA, VA, USDA and PIH), Ginnie
Mae is susceptible to credit losses. Due to multiple U.S. GAAP requirements related to accounting
for credit losses, Ginnie Mae’s financial statements recognize credit losses associated with its guaranty
in multiple line items (as further outlined below):

           Liability for non-defaulted Issuers’ pooled loans: Upon issuance of a guaranty, Ginnie Mae recognizes
            a liability based on the premium received or receivable (i.e. present value of guarantee fee
            expected to be collected under the guaranty) within the financial statement line item “Guaranty
            liability.” 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 specified triggering events or
            conditions occur.
           Liability for probable Issuer defaults pooled loans: The loss contingency arises from the guaranty
            obligation that Ginnie Mae has to the MBS holders as a result of a probable Issuer default.
            The Issuers have the obligation to make timely principal and interest payments to investors,
            however, in the event whereby the Issuer defaults, Ginnie Mae steps in and continues to make
            the contractual payments to investors. Ginnie Mae performs a qualitative and quantitative risk
            grade analysis to determine if a liability (and a loss) should be recognized. Ginnie Mae
            recognizes this liability if it is probable that a liability had been incurred at the date of the
            financial statements and the amount of loss can be reasonably estimated. As of September
            30, 2016 and 2015, liability for loss contingencies presented within Liability for loss on
            mortgage-backed securities program guaranty was $1 million and zero, respectively. Since
            Ginnie Mae does not have a process in place to assess for Issuer Default that is reasonably
            possible, Ginnie Mae is not able to disclose those contingencies for which there is a reasonable
            possibility that a loss due to Issuer default may have been incurred at the date of the financial
            statements.
           Liability for currently defaulted Issuers’ pooled loans: Ginnie Mae records a servicing asset (or liability)
            each time it takes over a defaulted Issuer’s Ginnie Mae guaranteed portfolio (see “Mortgage
            servicing rights” financial statement line item). Ginnie Mae’s servicing asset is recorded at fair
                                                                                                                        
 
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         value based upon the present value of the expected future net cash flows related to servicing
         these loans. Ginnie Mae’s cash flow model incorporates a number of factors (see MSR section
         in Note 3: Summary of Significant Accounting Policies, for further analysis) including
         delinquencies and expectation of credit losses that management believes are consistent with
         the assumptions other similar market participants use in valuing the mortgage servicing right.
         Thus, estimated credit losses for defaulted Issuers’ pooled loans are incorporated within the
         servicing asset (or liability value).
        Allowance for defaulted Issuers’ non-pooled loans: When Ginnie Mae purchases loans out of a pool,
         it recognizes the loan on its balance sheets along with the corresponding incurred loss (i.e.,
         “Allowance for loan loss” within the financial statement as “Mortgage loans held for
         investment, net” and “Accrued interest receivable, net” and “Claims receivable, net”).
        Liability for representations and warranties: Ginnie Mae performs an assessment of any
         representations and warranties associated with the purchase and sale agreement. These
         representations and warranties may require Ginnie Mae to buy back previously sold loans
         from the third-party or reimburse the buyer for losses per the contractual terms of the
         purchase and sale agreement. As of September 30, 2016, Ginnie Mae recorded $1.5 million to
         account for representations and warranties under an existing loan purchase and sale agreement
         that may require Ginnie Mae to repurchase mortgage loans that are modified or that are not
         insured or guaranteed by the FHA, VA, USDA, or PIH identified by the purchaser as of and
         after the sale date. This amount is presented in Liability for representations and warranties on
         the Balance Sheet.

Note 16: Concentrations of Credit Risk
Credit risk is the risk of loss arising from the failure or inability of Issuers to meet their obligations.
Concentrations of credit risk exist when a significant number of Issuers 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. No significant geographic
concentrations of credit risk exist; however, to a limited extent, securities are concentrated among
Issuers.

The table below summarizes concentrations of credit risk by Issuers and loan type as of September 30,
2016:

                                                                                                            Home Equity
                                                                                  Manufactured
                               Single Family             Multifamily                                         Conversion
                                                                                   Housing
                                                                                                          (HECM/HMBS)
                                      Remaining                 Remaining                 Remaining                 Remaining
                           Number                  Number                    Number                    Number
                                      Principal                 Principal                 Principal                 Principal
                           of Issuers              of Issuers                of Issuers                of Issuers
(Dollars in billions)                 Balance                   Balance                   Balance                   Balance
Largest performing issuers      25    $ 1,226.2        23       $       86.7      1       $        0.3     16       $       54.9
Other performing issuers       283    $      351.7     31       $       10.7      1       $        0.0      0       $         -
Defaulted issuers               1     $        0.0      0       $         -       0       $         -       0       $         -




                                                                                                                                    
 
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The table below summarizes concentrations of credit risk by Issuer and loan type as of September
30, 2015:
                                                                                                           Home Equity
                                                                                   Manufactured
                               Single Family             Multifamily                                        Conversion
                                                                                    Housing
                                                                                                         (HECM/HMBS)
                                      Remaining                  Remaining               Remaining                Remaining
                           Number                   Number                    Number                   Number
                                      Principal                  Principal               Principal                Principal
                           of Issuers               of Issuers                of Issuers               of Issuers
(Dollars in billions)                 Balance                    Balance                 Balance                  Balance
Largest performing issuers         25 $ 1,167.3             22   $       82.2          1 $         0.3         14 $       52.3
Other performing issuers          261 $      294.4          30   $       10.4          1 $           -          - $          -
Defaulted issuers                  16 $         4.2          -    $         -          - $           -          - $          -


Issuers are only permitted to pool insured or guaranteed loans (from FHA, USDA, VA or PIH).
Ginnie Mae incorporates the probable recovery amount from mortgage insurance based on
established insurance rates and Ginnie Mae historical recovery experience. The insuring and
guarantying entities have strict underwriting standards and criteria for quality of collateral. Mortgage
loans insured by FHA get full recovery of the UPB, including all delinquent interest at the HUD
debenture rate with exception of the first two months since default. USDA, VA and PIH insured
loans are not fully recoverable. In addition, Ginnie Mae guarantees a small number of conventional
loans which are uninsured. The loan balance and related allowance for loan losses balance broken
down by portfolio segment and underlying insurance agencies as of September 30, 2016 and 2015 are
presented in the table in Note 9: Mortgage Loans.
In the event of an Issuer default, Ginnie Mae assumes the rights and obligations of the Issuer and
becomes the owner of the MSR asset, which typically is a salable asset. When Ginnie Mae assumes
the role of the defaulted issuer, it has the option to purchase loans out of the pool when it is 90 days
delinquent. However, Ginnie Mae has historically elected to buy Single Family and Manufacturing
Housing loans out at 120 days delinquent. Upon repurchasing the loan out of the pool, Ginnie Mae
obtains access to the underlying collateral or insurance claim by pursuing loss mitigation activities. 

Note 17: Contingencies and Commitments

From time to time, Ginnie Mae can be a party to pending or threatened legal actions and proceedings
which arise in the ordinary course of business. Ginnie Mae reviews relevant information about all
pending legal actions and proceedings for the purpose of evaluating and revising contingencies,
accruals, and disclosures.
Legal actions and proceedings resolution are subject to many uncertainties and cannot be predicted
with absolute accuracy. Ginnie Mae establishes accruals for matters when a loss is probable and the
amount of the loss can be reasonably estimated. For legal actions or proceedings where it is not
reasonably possible that a loss may be incurred, or where Ginnie Mae is not currently able to estimate
the reasonably possible loss or range of loss, Ginnie Mae does not establish an accrual.
As of September 30, 2016 and 2015, and as of the date of this report, Ginnie Mae’s Office of General
Counsel has identified one pending or threatened action. In the opinion of Ginnie Mae’s management

                                                                                                                            
 
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and Office of General Counsel the likelihood of an unfavorable outcome is remote and therefore no
accrual has been established. 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. No other asserted or unasserted claims or assessments in which Ginnie Mae’s exposure
is $1.0 million or greater, individually, or in the aggregate for similar matters have been identified.
Additionally, Ginnie Mae’s Office of General Counsel has determined that there are no pending or
threatened actions or unasserted claims or assessments in which Ginnie Mae’s potential loss exceeds
$2.0 million in the aggregate for cases not listed individually or as part of similar cases that could be
material to the financial statements.
Ginnie Mae has commitments to guaranty MBS, which are off-balance sheet financial instruments.
Additional information is provided in Note 6: 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 15: Reserve
for Loss.

Note 18: Related Parties

Ginnie Mae is a self-financing, wholly owned U.S. Government corporation within HUD. 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 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. Accordingly, the accompanying
financial statements may not necessarily be indicative of the conditions that would have existed if
Ginnie Mae had been operated as an independent organization.

Ginnie Mae was authorized to use $33.2 million and $23.0 million during the year ended September 30,
2016 and 2015, respectively, for personnel (payroll) and non-personnel (travel and training) costs only.
During the year ended September 30, 2016 and 2015, Ginnie Mae incurred $25.5 million and $21.6
million, respectively, for these costs, which are included in Administrative expenses. Ginnie Mae has
authority to borrow from Treasury to finance operations in lieu of appropriations, if necessary. Ginnie
Mae did not borrow funds for the years ended September 30, 2016 and 2015.

Additionally, Ginnie Mae has an intra-entity relationship with the FHA, which is part of HUD. All
transactions between Ginnie Mae and FHA have occurred in the normal course of business. Of the
total mortgage loans HFI, approximately $3.4 billion and $4.2 billion of loans were insured by FHA
as of September 30, 2016 and 2015, 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:



                                                                                                         
 
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                                                    September 30,
    (Dollars in thousands)                      2016             2015
    Foreclosed Property Claims Receivable   $      652,900 $        840,000
    Short Sales Claims Receivable                  114,000           71,000
    Insurance Claims Receivable                      6,900              200
    Total FHA Claims, gross                 $      773,800 $        911,200

Pension Benefits and Savings Plan: Eligible Ginnie Mae employees are covered by the federal
government retirement plans, either the Civil Service Retirement System (CSRS) or the Federal
Employees Retirement System (FERS). Although Ginnie Mae contributes a portion of pension
benefits for eligible employees, it does not account for the assets of either retirement system. Ginnie
Mae also does not have actuarial data for accumulated plan benefits or the unfunded liability relative
to eligible employees. These amounts are reported by the Office of Personnel Management (OPM)
and are allocated to HUD.  
Under the Federal Thrift Savings Plan (TSP), Ginnie Mae provides FERS employees with an
automatic contribution of 1 percent of pay and an additional matching contribution up to 4 percent
of pay. CSRS employees also can contribute to the TSP, but they do not receive matching
contributions. During the year ended September 30, 2016 and 2015, Ginnie Mae contributed
$2.8 million and $2.4 million, respectively, in pension and savings benefits for eligible employees.

Post-Retirement Benefits Other Than Pensions: Ginnie Mae has no postretirement health
insurance liability since all eligible employees are covered by the Federal Employees Health Benefits
(FEHB) program. The FEHB is administered and accounted for by the OPM. In addition, OPM pays
the employer share of the retiree’s health insurance premium.

Note 19: Credit Reform

The Federal Credit Reform Act of 1990, which became effective on October 1, 1991, was enacted to
more accurately account and budget for 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.

Credit programs that operate at a profit result in negative subsidies. 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, 2016 and 2015, the U.S.
Government has an investment in Ginnie Mae of $21.6 billion and $21.3 billion, respectively.
Pursuant to the statutory provisions under which Ginnie Mae operates, its net earnings are used to
build sound reserves. In the opinion of management and HUD’s general counsel, Ginnie Mae is not
subject to the Federal Credit Reform Act.




                                                                                                       
 
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Note 20: Subsequent Events

Ginnie Mae’s management has evaluated events and transactions occurring after September 30, 2016,
the balance sheet date, through November 10, 2016, the date which the financial statements were
made available to be issued. Ginnie Mae concluded that no events or transactions have occurred that
would require disclosure in the financial statements for the year ended September 30, 2016.




                                                                                                   
 
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