Tozer Says Watchdog's Criticisms of Ginnie Are Actually Positives
Ginnie Mae President Ted Tozer took issue with a government watchdog report that criticized both his agency and the government-sponsored enterprises for failing to catch the massive fraud at Taylor, Bean & Whitaker.
Tozer, who was hired to lead Ginnie Mae in 2010, a year after TBW's demise, said the Federal Housing Finance Agency's Office of Inspector General does not fully understand how Ginnie works.
"When you drive looking in the rearview mirror, a lot of things look different," Tozer said in an interview with National Mortgage News.
The investigators generally criticized Fannie Mae, Freddie Mac and Ginnie for failing to communicate with each other, for not monitoring counter-party risk and for allowing TBW to lapse on some of its contracts.
Tozer took umbrage with four specific points raised in the report about Ginnie, saying the investigators "missed the point."
"I wish FHFA's IG would have called me because we could have explained a lot of this stuff away because all four things they pointed out were positives," he said.
The inspector general typically does not give parties to its investigations an advance copy of its reports or notify them when a report will be released. The 17-page report, released Tuesday, was intended to "extract lessons learned" from the seven-year fraud scheme perpetrated by officers and employees of TBW, an Ocala, Fla., mortgage company, and its warehouse lender, Colonial Bank, which ultimately failed.
The report was co-authored by Peter Emerzian, a senior policy advisor at the inspector general's office and a former assistant special agent in charge of the Troubled Asset Relief Program. Bryan Saddler, the OIG's chief counsel, had served as SIGTARP's chief legal advisor. The multibillion dollar TBW fraud was uncovered when Colonial applied to the Treasury in 2008 for $553 million in TARP funding.
First, the report stated that Ginnie bought more than $4 billion of nonperforming Taylor, Bean & Whitaker loans out of its guaranteed mortgage-backed securities pools. Ginnie had to increase its loan loss reserve by $720 million, "to prepare for anticipated losses," from delinquent TBW loans.
In fact, delinquent loans are routinely bought out of Ginnie pools because issuers can avoid paying bondholders interest and instead, fund loans on balance sheet, something Tozer described as "a positive."
In addition, the $720 million increase was the reserve for all delinquencies in the entire trillion-dollar Ginnie portfolio in 2010 — not just for soured TBW loans, he said. Since there were not actual losses that year, the entire reserve was swept back to Ginnie's income statement in 2011, causing a huge spike in earnings, Tozer said.
Second, the report faulted Ginnie for failing to uncover TBW's practice of "net funding" loans, in which a refinanced loan was paid off only when the new loan was sold, instead of paying the old loan in full when the new loan closed. When TBW's business collapsed in mid-2009, roughly 750 loans had not been sold to investors, so those borrowers were unwittingly stuck with both an old loan and a new loan.
The report alleged that "Ginnie Mae and its monitoring contractor failed to discover the practice prior to TBW's demise."
But Tozer said there was no way to uncover the collusion between TBW and its title company, which were responsible for committing fraud.
Third, by 2008, TBW had exceeded the delinquency rate ceiling set by Ginnie, which waived its guidelines, allowing the lender to increase its volume.
But Tozer said Ginnie typically does not cut off funding to lenders if they exceed specific delinquency thresholds. Rather, guidelines require that Ginnie work with the lender, remediate the issues and have the changes signed off by their chief risk officer. He explained that a couple of lenders recently exceeded the delinquency ceilings and after instructions on how to properly service loans, saw their delinquencies drop.
"They are some of the most profitable issuers we have," he said. "If we had taken the point that they were above a specific delinquency, we would have put two successful businesses out of business."
Finally, the inspector general recommended that the FHFA should consider coordinating with Ginnie on how long an independent public accountant may audit a counterparty before it must be replaced. The teams of accountants that audit Ginnie issuers are typically rotated every five years. Still, Tozer acknowledged that accounting firms can become complacent, but added regularly replacing an entire firm would be detrimental to Ginnie's operations.
"Every two to three years we have to change external auditors and the first year is always resource-draining because we spend a month or two educating them," Tozer said. "Without the continuity you lose the ability to catch things, and it's a big drain on your staff."
In 2013, Deloitte & Touche settled lawsuits by TBW's trustee and Deutsche Bank for failing to detect fraud that led to $7.6 billion in losses associated with the lender's collapse.
"Making sure the independent public accountant is independent is something we should look at, but TBW was the first time that an independent auditor was not independent," Tozer said.
The TBW fraud could have been caught if Ginnie had been able to send its own staff into the lender's shop, Tozer said. But Ginnie runs on such a small budget that it relies on contractors for such reviews, and a contractor did do a review of TBW in 2008.
"I always wonder if we had had Ginnie Mae staff instead of sending a contractor down there, they would have come back and said it didn't smell right," Tozer said. "We need more boots on the ground instead of relying on contractors who check a box."