Ginnie Mae's handling of troubled issuers concerns HUD inspector

The Department of Housing and Urban Development's Inspector General issued a report voicing concern about a number of issues going into 2024, including how economic headwinds will impact Ginnie Mae.

The report points to soaring inflation and a rapid increase in interest rates as factors negatively impacting nonbanks and heightening risk for the government guarantor.

The HUD OIG report questions how Ginnie Mae can manage issuers that become troubled financially and the mechanisms it has in place to relocate a troubled portfolio to another issuer, rather than having to absorb the servicing portfolio itself. The watchdog dubbed this issue as "severe" and noted it published a previous report that found gaps in Ginnie's guidance and process for troubled issuers, which have yet to be fully addressed.

One of the main underlying risks, per the report, is that Ginnie Mae has issuers who service reverse mortgage loans, which are more vulnerable to negative impacts from higher interest rates than forward- mortgages are, since they decrease funds available to the borrower through the HECM loan. In its report, HUD OIG points out that Ginnie had to seize the portfolio of Reverse Mortgage Funding earlier in the year, which was "staff intensive even with a contract subservicer."

"Periods of rising interest rates have challenged [Home Equity Conversion Mortgage securities] issuers," the report said. "This condition is especially concerning since the four largest issuers have approximately 86% of the remaining HMBS market. Assumption of another defaulted HMBS portfolio could significantly challenge Ginnie Mae's capacity."

The government guarantor's capacity, in terms of staff, is slim, according to the HUD OIG's report, and there is a continuous overreliance on government contractors, despite Ginnie operating "a secondary market program similar in size to Fannie Mae and Freddie Mac government-sponsored enterprises."

Previously, Ginnie stated that it had completed an assessment of the optimal mix of contractors and in-house staff and would begin shifting staff from contractor to inhouse sometime this year.

Ginnie responded to HUD OIG's concerns about its management of troubled issuers portfolios, writing that it "has robust issuer monitoring protocols in place but that the organization needs more flexibility to be agile enough to respond to significant, rapidly evolving market events that strain Ginnie Mae's resources," the watchdog's report said. 

"In the event of future significant extinguishment scenarios, Ginnie Mae opined that it would be best equipped if it had flexibility to surge resources and staff support to match the scale of the portfolios that Ginnie Mae may need to onboard and service, similar to the model used by the Federal Deposit Insurance Corporation," the OIG wrote.

HUD OIG also flagged issues in counterparty risk related to protecting the Federal Housing Administration's Mutual Mortgage Insurance Fund. It pointed to the importance of having better oversight of servicers who provide loss mitigation options. Earlier this year, a separate report from HUD OIG found servicers, such as Mr. Cooper, struggled to provide proper retention options to borrowers with delinquent FHA-insured loans after their COVID-19 forbearance came to an end. The report also said FHA has a lengthy foreclosure and conveyance process. 

The inspector general also mentioned the department's ongoing lag in maintaining its information technology systems.

Though some progress has been made, such as reorganizing key IT and cybersecurity positions, "HUD must continue its efforts to strengthen its IT, cybersecurity, and data management systems and continue toward adapting and implementing a secure and modernized IT environment," the report added.

HUD faces several longstanding challenges in modernizing its IT systems – such as having outdated mission-essential applications, "which presents multiple sources of risk potential weak points in safeguarding personal identifiable information and lacking an accurate and complete inventory of its hardware, which "limits HUD's ability to understand, prioritize and address its most critical IT risks."

HUD did not immediately respond to a request for comment.