ATTACHMENT #4 - DEGM - Final.docx

DESCRIPTION OF ENTITY – GINNIE MAE

ATTACHMENT #4

Background

Ginnie Mae was created in 1968 through amendment of Title III of the National Housing Act. Under provisions of the Housing and Urban Development Act of 1968, the Federal National Mortgage Association (FNMA) which was originally established in 1938 as a federal agency was partitioned into two entities. FNMA was chartered as a private corporation to provide secondary market support for the private residential market and Ginnie Mae was established as a government corporation within the US Department of Housing and Urban Development (HUD) to administer mortgage support programs that could not be carried out in the private market.

Mission

Ginnie Mae’s mission is to expand affordable housing in the US by channeling global capital into the nation’s housing markets through its Mortgage-Backed Securities (MBS) program. Under the MBS program, Ginnie Mae guarantees timely payment of principal and interest (P&I) payments on residential MBS to institutional investors worldwide. The Ginnie Mae guarantee allows mortgage lenders to obtain a better price for their loans in the capital markets. Lenders can then use the proceeds to make mortgage loans available to consumers. This helps to lower financing costs and create opportunities for sustainable, affordable housing for families seeking homeownership.

Entity’s Business Operations

The MBS program is Ginnie Mae’s most important ongoing activity. The purpose of the program is to increase liquidity in the secondary mortgage market and attract new sources of capital for residential loans. Through the MBS program, Ginnie Mae guarantees timely payment of (P&I), backed by pools of mortgage loans originated and underwritten by the private mortgage institutions. These pools of mortgage loans are used as collateral for the issuance of securities. Ginnie Mae guarantees only those securities backed by single-family and multifamily loans insured by HUD’s Federal Housing Administration, the Department of Veterans Affairs, HUD’s Office of Public and Indian Housing. and the Department of Agriculture’s Rural Development. Ginnie Mae’s fundamental business model significantly limits its exposure to risk. Ginnie Mae neither originates nor purchases mortgage loans. It does not purchase, sell, or issue securities. Accordingly, Ginnie Mae does not use derivatives to hedge and it does not carry long-term debt (or related outstanding securities liabilities) on its balance sheet. Instead, private lending institutions approved by Ginnie Mae originate eligible loans, pool them into securities, and issue the Ginnie Mae MBS. These institutions include geographically diverse mortgage companies, commercial banks, and thrifts of all sizes, as well as state housing finance agencies.

The MBS program offers two core MBS products, Ginnie Mae I MBS and Ginnie Mae II MBS. The key differences between these two products vary on the types of mortgages, variation of interest rates, and the number of issuers that can be pooled into the Ginnie Mae MBS. Additionally, these two core MBS products may be used as collateral to other Ginnie Mae MBS products such as Real Estate Mortgage Investment Conduits, Callable Trusts, Platinums, and Stripped MBS.

Ginnie Mae has experienced a dramatic increase in its MBS business since the financial crisis began in 2008. In fiscal year 2018, Ginnie Mae issued $435 billion in MBS, down from $505 billion in 2017. According to Ginnie Mae, more than $2.008 trillion in Ginnie Mae MBS were outstanding as of September 2018. Ginnie Mae currently has a contract with a large national financial institution in New York City to perform pool processing, authenticating agent, and central registry functions. Also, a major accounting firm performs cyclical and targeted issuer/custodian reviews and risk management work for Ginnie Mae regarding the oversight of almost 400 Ginnie Mae issuers participating in the MBS programs.

Ginnie Mae and its servicers are located in a number of cities across the country. The majority of these locations maintain certain systems and accounting processes that are necessary in the processing of accounting for loans and guarantees.

Funding

Ginnie Mae’s operations are self-financed through a variety of fees collected from its normal operations. In fiscal year 2018, Ginnie Mae generated total revenue of $2,887 million which included $1,237 million in guarantee fees and $236 million in interest income from US Treasury securities. A significant portion of Ginnie Mae’s assets are liquid assets consisting of Fund Balance with Treasury and Treasury securities. Ginnie Mae’s retained earnings (i.e., investment of US government) as a percentage of total assets was 75 percent as of the end of fiscal year 2018. A significant portion of Ginnie Mae’s liabilities is the guaranty obligation, which was 93 percent of total liabilities as the end of fiscal year 2018.

Ginnie Mae Information Systems

The mortgage industry is undergoing a technological revolution and with a rapidly changing environment, the value of information is increased, and ownership of information is more important than ever. To survive in this competitive environment, Ginnie Mae must keep pace with these industry changes.

In May 2018, Ginnie Mae migrated its data center operations that were hosted by a managed service provider to a Government Cloud provider. Ginnie Mae also migrated its new portal, MyGinnieMae, from its pool processing agent and its distributed applications to the Government Cloud provider.

Due to staffing limitations, Ginnie Mae relies heavily on contractors and their information systems to perform most of the needed work to accomplish its mission.

The following are the major application systems currently being used to support Ginnie Mae’s business operations and financial reporting activities:

· Ginnie Mae Financial and Accounting System (GFAS/P237) – tracks and records all of the accounting transactions and contains the necessary data for the preparation of the financial statements. The system contains the general ledger, accounts payable, accounts receivable, and purchasing modules. The system is a PeopleSoft application that runs on Windows 2012, Release 2, 64-bit operating system and is hosted in the Government Cloud. In fiscal year 2019 there was a major enhancements in GFAS, which included a new processing subsystem defined as the Subledger Database (SLDB). The SLDB is the core component responsible for the loan-level accounting of the non-pooled assets population and would be subject to this audit. This new capability for Ginnie Mae was implemented in November 2018 and is integrated in the PeopleSoft general ledger.

· Unclaimed Fund System (UFS/P244) – enables Ginnie Mae to maintain a record of P&I payments that were not received (or cashed) by security holders. Ginnie Mae I and Ginnie Mae II unclaimed P&I payments are recorded in the system. UFS is a network server application. The network applications are secured under Microsoft Server’s security.

· Ginnie Mae Enterprise Portal General Support System (GMEP/P270) – is a general support system (GSS) that provides a single access point for Ginnie Mae issuers and other business partners to Ginnie Mae’s business applications, data, and documentation via portals. The legacy GMEP portal was replaced by a new modernized, enterprise portal (MyGinnieMae), which is a web-based environment that allows users to conduct daily business activities through a single, more user-friendly interface. The portal is supported by a more secure set of technologies leveraging the Identify and Access Management services, enabling business processes and facilitating information supporting the authentication, authorization, and auditing of its user base. The portal was previously hosted at Ginnie Mae’s pool processing agent’s data center, but in fiscal year 2019 was moved to the Government Cloud.

· Integrated Pool Management System (IPMS/P240) – functions as the core processing system for GNMA pool and MBS certificates/book entry positions. It contains pool, investor, and issuer information. IPMS is a proprietary mainframe application that has three major modules: New Pool Processing, Pool Reporting, and Generalized Mortgage Backed Securities. The IPMS is run by a contractor at its hosting facilities in Tennessee. The system runs on IBM’s z/OS 1.8 operating system, CICS 3.2 and DB2 v8.

· Reporting Feedback System (RFS/P269) – The Reporting and Feedback System (RFS) is a major application that supports centralized data collection and processing for all Ginnie Mae post-settlement accounting related to the MBS program. Ginnie Mae issuers upload monthly reported data to RFS for data collection, quality checking, data reconciliation, exception reporting to issuers, issuer operational reporting, and final storage in a central data store called the Enterprise Wide Operational Data Store (EWODS). RFS provides immediate feedback to issuers regarding the status of the reported data. RFS is integrated with IPMS through shared use of enterprise data via EWODS. RFS consists of several modules: Pool Accounting/Exception Feedback (PA/EF); Service members’ Civil Relief Act (SCRA); Independent Public Accountant (IPA) database system; GNMA Portfolio Analysis and Display System (GPADS); RFS-Administration (ADMIN); Data Disclosure (DD); Loan Matching and Suspense (MAS); Custodial Account Verification System (CAVS); Contact Management (CM); and E-Notification (e-Note). RFS utilizes the GMEPS general support system. RFS is hosted in the Government Cloud.

· Ginnie Mae’s General Support System (GSS) - The Ginnie Mae GSS provides the common components used to process, store, and transmit data of Ginnie Mae’s major applications. The GSS includes the Ginnie Mae infrastructure, platforms, software, portals, and business logic to support the operations and management of the Ginnie Mae major applications. The Ginnie Mae major applications provide transactional services and functions, via a web-based publicly facing application. The GSS is currently hosted in the Government Cloud.

The current GSS supports the following two major applications, the Ginnie Mae Network (GinnieNet) and Unclaimed Funds System (UFS). GinnieNet receives pool information from issuers and document custodians electronically, thus eliminating paper submissions. GinnieNet is a network server application leveraging Microsoft Server’s security. The current GSS also hosts EWODS, Ginnie Mae’s central depository which is required by the RFS. This database consolidation project which began in fiscal year 2008 and was completed in fiscal year 2009 eliminated the need for multiple databases and it improved data integrity.

· Ginnie Mae Web Services (WS) - Ginnie Mae WS is a major application that is made up of supporting information systems, primarily the Ginnie Mae public website, used to facilitate Ginnie Mae’s business operations. The purpose of Ginnie Mae WS is to provide the tools needed for issuers to conduct business with Ginnie Mae. It also serves as a communication channel for the general public. Ginnie Mae WS encompasses a system environment that consists of multiple individual modules, each having different access roles and regulations depending on its function in support of Ginnie Mae’s mission to expand affordable housing in America by linking global capital markets to the nation’s housing markets.

In addition to the above systems, the single-family master subservicer, multi-family master subservicer, and manufactured homes master subservicer (collectively “master subservicers”), and various multi-class products sponsors, used their own proprietary systems to record, process, and capture all of the activities in their respective portfolio (e.g. whole loans and foreclosed properties) and report them in summary form each month to Ginnie Mae for posting into GFAS. Further, each year Ginnie Mae requires the service providers/contractors to have Statement on Standards for Attestation Engagements-18 reports[footnoteRef:1] issued on the IPMS, RFS and GFAS systems.

[1: Report prepared in accordance with AU-C 402, Audit Considerations Relating to an Entity Using a Service Organizations.]

1.3 Audit History

Ginnie Mae received a disclaimer of opinion on its commercial financial statements, prepared under generally accepted accounting principles, for each fiscal year from 2014 through 2018. HUD OIG is currently performing the audit of Ginnie Mae’s financial statements for fiscal year 2019, and has conducted the audit of Ginnie Mae in-house from fiscal years 2014 through 2019.

The Report on Internal Controls and Compliance that accompanied Ginnie Mae’s financial statements provided details on the nature of significant deficiencies as well as information on corrective actions planned and completed. OIG reported material weaknesses and significant deficiencies regarding Ginnie Mae’s non-pooled assets, internal controls over financial reporting, allowance for loan losses, and finance management governance issues for fiscal years 2014, 2015, 2016 and 2017. Additionally, OIG reported incidences of noncompliance with laws and regulations, in particular, Ginnie Mae’s compliance with the security requirements under the Federal Information System Management Act and Debt Collection Improvement Act of 1996.

Ginnie Mae’s more recent audited financial statements are available at www.ginniemae.gov