You get what you pay for.

Ginnie Mae’s continual requests for increased funding to hire more staff have fallen on deaf ears for years. To add insult to injury, the HUD Office of Inspector General released an Audit Report this week that criticizes Ginnie Mae for insufficient supervision of its non-depository issuers. The Report concludes that, among other findings, Ginnie Mae did not adequately respond to changes in its issuer base because it did not implement policies and procedures in a timely manner to manage non-depository issuers. The Report also asserts that Ginnie Mae did not develop a written strategy to plan for all potential issuer default scenarios and, in particular, whether the agency and its contractors could absorb a large issuer default.

With fewer than 150 employees to supervise over 300 issuers, it is little wonder that Ginnie Mae is stretched, which may have hampered its response to the shifting issuer base and the different oversight approach required. In fact, the Report notes that Ginnie Mae’s small staff did not have sufficient secondary mortgage market experience to properly address the risks of its growing and shifting issuer base, as its “entire model had been built around the idea that the predominant issuers were regulated banking institutions.”

While the Report is critical of the speed with which Ginnie Mae responded to the changes , the Report acknowledges that Ginnie Mae recently has begun to address the shortcoming. For example, the Report notes several programs Ginnie Mae has implemented to increase its oversight efforts of non-depository issuers, including operational and desktop reviews and a Spotlight program that identifies issuers that warrant more intense levels of scrutiny. The Report also notes that, as of July 2017, Ginnie Mae was finalizing and implementing a more robust default strategy that includes plans for default, termination, and master subservicer portfolio seizure and requires master subservicers to submit semiannual plans on how they would absorb a large issuer default.

While these initiatives demonstrate Ginnie Mae’s amendments to its oversight procedures to manage its shifting issuer base, it remains to be seen whether the Report’s conclusions will result in additional funding and staffing to Ginnie Mae to provide additional support for this endeavor.

The United States Securities and Exchange Commission’s (“SEC”) Division of Enforcement continues to target issuers of Ginnie Mae mortgage-backed securities and charge those who violate federal securities laws.  Importantly, those cases seek penalties not only against the companies but also their senior executives.  Issuers of Ginnie Mae securities must comply not only with HUD/GNMA regulations, but be prepared to demonstrate their compliance with the US securities laws and regulations, or face potentially significant consequences.  Read more about the latest enforcement action, costing a Ginnie issuer and its executives $12.7 million, in Mayer Brown’s Legal Update, available here.