An audit of Ginnie Mae's fiscal 2014 financial statements identified what examiners described as four "material weaknesses" and one "significant deficiency," primarily related to the accounting of $6.6 billion in defaulted loans made by the failed lender Taylor, Bean & Whitaker.

The weaknesses in Ginnie Mae's internal controls severely limited the scope of the audit on the nonpooled defaulted loan assets, along with an additional $734 million in nonrecoverable servicing and foreclosure costs, the auditors said.

"We were unable to obtain sufficient appropriate evidence to express an opinion on the fairness" of the financial statements, reads a Department of Housing and Urban Development Office of Inspector General report, issued Friday.

A dearth of loan-level details about the failed assets left auditors hard pressed to say whether Ginnie's financial reporting was accurate, citing limited visibility at the loan level. But they did find that Ginnie Mae improperly accounted for some Federal Housing Administration reimbursable costs as an expense, instead of capitalizing those costs as an asset.

In a written response included in the audit, Ginnie Mae Chief Financial Officer David Fender acknowledged the OIG's findings "present serious and specific accounting challenges," and pledged to strengthen its accounting practices.

At issue in the audit are departures from "generally accepted accounting principles," also known as GAAP, a Ginnie Mae executive said in an interview with National Mortgage News.

"We're not overstating our earnings in our standpoint here, but certainly the IG thinks that we're not following GAAP. We were taking the more conservative approach in our belief," said John Getchis, Ginnie Mae's senior vice president of capital markets.

"The important thing is this does not affect our explicit government guarantee," he added.

The auditors attributed flaws they found in reporting to inadequate monitoring; oversight and governance of accounting and reporting by the executive management team; loss of several key financial personnel; and the inability to track accounting transactions and events at a loan level due to system limitations.

The valuation concerns reflect defaulted loans which were removed from securitized pools. Ginnie Mae's government guarantee ensures investors continue to receive payments when issuers who sell its securities fail. It has been set up more to examine risk at the issuer level than the loan level, but will be working to change that, Getchis said.

"Ginnie Mae is not designed to manage individual loans. We delegate out, but we do not mirror, loan-level activity on our own system," he said.

However, the audit is critical of this.

"As Ginnie Mae intended to keep the servicing of these loans only on a short-term basis, it decided not to make the appropriate changes in its internal processes and information systems to accommodate the significant changes. This was not a prudent decision as Ginnie Mae’s inappropriate response to the changes contributed to the financial reporting problems facing Ginnie Mae in fiscal year 2014," they said in the report.

Ginnie Mae has been working on getting a better handle on its counterparty risk and this week issued a new issuer scorecard. It previously faced criticism of its handling of counterparty risk related to notorious issuer TBW, a leading mortgage wholesaler that folded in 2009 after a Federal Bureau of Investigation raid. TBW is the main issuer involved in the concerns in the audit, Getchis said.

"Our audit recommendations are directed toward strengthening Ginnie Mae's governance of its financial operations," the auditors said in the report.

"That's what we will endeavor to do," said Getchis, but he questioned whether the government agency currently has the budget to do so.

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