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Ginnie Mae's financial statements unreliable- auditor

Saturday, February 28, 2015 - 11:25

[WASHINGTON] Leadership failure and shoddy accounting at Ginnie Mae have made it impossible to audit the US bond guarantor's 2014 financial statements, a federal overseer said.

Ginnie Mae's accounting "may not be reliable," the Department of Housing and Urban Development's Inspector General said in a report released on Friday. In addition, an outside auditor has withdrawn an earlier approval of Ginnie Mae's 2013 financial statements, according to the report.

The government-owned corporation failed to verify the value of US$6.6 billion in mortgages it holds because contracted servicers didn't maintain sufficient data, the inspector general said. Ginnie Mae's statements also contained accounting errors relating to those assets, according to the report. That happened because of under-staffing in the company's financial office, the inspector general said.

"This occurred because of Ginnie Mae executive management's failure to respond appropriately to changes in its business environment and risks," according to the report. "The combination of these failures in governance resulted in material misstatements and contributed to Ginnie Mae's inability to produce auditable financial statements."

The auditor's concerns involve less than half of 1 per cent of Ginnie Mae's $1.5 trillion book of business and won't affect investors who own securities backed by the company, John Getchis, Ginnie Mae's senior vice president of capital markets, said in an interview.

"What we're debating here is the value of loans that are severely delinquent but not in default," Mr Getchis said. "The IG doesn't feel it has enough background documents." Ginnie Mae already has transferred servicing of the loans in its portfolio to two specialty companies that maintain better data systems and has hired Ernst & Young LLP to help with accounting, he said.

"We believe without question we've protected the interests of the taxpayers," Mr Getchis said. "We've conducted the mission of Ginnie Mae actually quite well in terms of the housing finance activities we provide in the marketplace." Ginnie Mae guarantees securities backed by loans insured by the Federal Housing Administration, Department of Veterans Affairs and the US Department of Agriculture.

The problems stem from actions outside of that core business: a 2009 takeover of a US$25 billion portfolio of government-backed loans serviced by Taylor Bean & Whitaker Mortgage Corp, which filed for bankruptcy that year amid the unraveling of a US$3 billion scheme involving fake assets.

Acquisition of that portfolio, and the related purchase of billions of dollars in delinquent loans, "changed the dynamics of Ginnie Mae's role from being a guarantor to a multi-billion- dollar servicer and investor," according to the report. Ginnie Mae management "did not allow for an adjustment in its processes to ensure that an effective internal-control system would be maintained."

BLOOMBERG