Texas Capital Bank v Ginnie Mae

October 09, 2023 | Premium Service | In this issue of The Institutional Risk Analyst, we update subscribers to our Premium Service on the latest developments at Texas Capital Bank (TCBI). Back in August, we told our readers that TCBI did not seem to be in any hurry to disclose the $40 million loss it took on the collapse of Reverse Mortgage Investment Trust (RMIT) and affiliates last November. The US Treasury now owns the RMIT portfolio.

TCBI has sued Ginnie Mae (GNMA) and HUD (2:23-cv-00156-Z-BR), alleging that GNMA President Alanna McCargo provided verbal guarantees to the bank for post-filing debtor-in-possession (DIP) financing. TCBI’s Madison Simm stated in a sworn affidavit: “President McCargo assured [TCB] that TCB would be able to look to the Collateral for repayment even if Ginnie Mae were to seize RMF’s MSRs.” Sadly, that was not the case.

Akiko Matsuda of the Wall Street Journal reported that “Texas Capital Bank said it was convinced by the U.S. government to loan $28 million in December to help a bankrupt reverse-mortgage company fund payments to elderly homeowners and avert a crisis in the reverse-mortgage industry.”

The trouble, of course, is that President McCargo has no power to commit the United States financially. More, McCargo should never have met with TCBI or the creditors of RMIT. HUD, and not private banks, have the legal obligation to advance cash to reverse mortgage borrowers in the event of an issuer default. Apparently McCargo did not know this and, more important, did not ask HUD's lawyers for advice.

McCargo, who has no background in business or finance, apparently did not understand her position as President of Ginnie Mae and has now created a legal mess for the Biden Administration. Rather than ask a private lender such as TCBI for cash to help elderly borrowers, for example, HUD itself should have advanced the cash to consumers. McCargo apparently did not understand this legal and operational reality.

McCargo's tenure at GNMA is fast becoming a disaster for the Biden White House, although the flaws in the reverse mortgage market long predate the 2020 election. The RMIT reverse MSR is now owned by the US Treasury and has cost taxpayers over $2 billion in advances to borrowers and loan buyout expenses since last December. The legal dispute between Ginnie Mae and TCBI makes additional defaults by HECM lenders more likely.

Good news is that GNMA deserves to be sued for the ill-considered actions of President McCargo in the RMF bankruptcy, actions that the Federal Housing Administration has allegedly disavowed. Bad news is that despite all of the extraordinary evidence of duplicity by GNMA and President McCargo, and the notable role of the Quinn Emanuel law firm as lead counsel, TCBI may still never be made whole.

While the bank’s interest in the Home Equity Conversion Mortgage (“HECM”) participation or “tails” may remain, the bank does not possess the mortgage note. When a consumer takes out a HECM reverse mortgage, the note is contained in the first GNMA securitization. The “tails” that fund subsequent cash advances to the consumer are participations only. Thus when GNMA extinguished the MSR held by RMIT, any viable claim by TCBI died with it.

Because of the ironclad statutory position of HUD with respect to government insured assets, McCargo was able to pretend to offer comfort to the creditors like TCBI, but nonetheless GNMA’s professional staff seized the asset a week later. As we’ve noted previously, a private lender never has a secured interest in a government insured loan or servicing asset, or any indirect interests such as participation.

The implications of this latest fiasco at GNMA for the government loan market are substantial and may cause the remainder of the HECM market to collapse. Specifically, if TCBI and other “secured” lenders take losses on the RMF bankruptcy, then other lenders will likely step back from the market. Again, a bank lender never has a perfected interest in a government-insured loan. This ugly reality has been exposed by the default of RMIT.

Moreover, if the FOMC maintains its present interest rate policies, the remaining private issuers cannot finance HECMs – especially without support from banks. As TCBI notes: “Ginnie Mae’s assertion that it has somehow extinguished TCB’s rights also has chilled and will continue to chill future HECM lending (including from TCB) to the detriment of HECM borrowers.” Very true.

Trouble is, when TCBI states that “There is no basis, however, for the proposition that Ginnie Mae’s seizure of RMF’s servicing rights extinguished TCB’s rights to its collateral,” the bank’s counsel is engaging in skilfull puffery. No private agreement, even if blessed by a US bankruptcy court, changes GNMA’s statutory rights regarding the insured FHA loan and the servicing asset, which are inseparable. The Mayer Brown law firm published a note on this issue in 2020:

We’ve checked with several lawyers who have practiced for decades in front of the GSEs and GNMA. The unanimous decision is that no agreements made in the bankruptcy affect GNMA’s right to enforce the security agreement against a defaulted issuer. This is why, for example, Ginnie Mae does not participate in the bankruptcy of a government issuer because there is no need. As we noted in 2020 (“Improving Liquidity for Ginnie Mae Servicing Assets“):

Whereas Fannie Mae and Freddie Mac do provide a mechanism for the transfer of servicing within the context of an issuer default, GNMA essentially provides one day – 24 hours – for a servicer to cure a default. Otherwise GNMA will transfer the servicing, but this assumes that a servicer with ready capacity and financing to accept the transfer of servicing, and make the required bond payments, is standing by to take over the servicing obligation.

RMIT's 2022 bankruptcy and the failure of the auction which preceded the seizure by GNMA has shaken some of the basic assumptions in the $2.3 trillion residential government loan market. A GNMA MSR only has value if the owner has sufficient liquidity to meet any cash calls required, even if this means going into loss on a net cash basis temporarily or permanently. And if GNMA cannot find a qualified issuer to take ownership of the MSR, then the US Treasury owns the portfolio.

So given the above, why is TCBI pursuing a litigation strategy? Because attempting to collect on a hopeless claim against the United States is better than reporting a mid-double digit loss. We can certainly understand why the FHA would take the part of TCBI in this imbroglio. TCBI has been one of the largest financiers of the HECM program. TCBI facilitated RMF’s operations—and thus a significant portion of the HECM program—by providing RMF with multiple credit facilities.

Ultimately we think that TCBI management may have decided that paying Quinn Emanuel a couple of million to drag GNMA through the mud in an embarrassing lawsuit is better than reporting the loss in 2023. When the Texas bank says that “Ginnie Mae never bound TCB to any agreement that would have allowed Ginnie Mae to extinguish TCB’s property rights without compensation,” that’s a hint.

The sad tale of TCBI illustrates, yet again, that the representations made by political appointees of the US government are not to be trusted. At the same time, however, TCBI should have known that HUD is responsible to advance cash on HECM reverse mortgages. The $28 billion asset bank never should have even considered McCargo's request for DIP financing. Sadly, the actions of President McCargo may now accelerate the collapse of the remainder of the HECM program.

During the Trump Administration, Treasury Secretary Steve Mnuchin, Housing Secretary Ben Carson and Federal Housing Finance Agency Director Mark Calabria, sought to put limits on new reverse mortgages guaranteed by the FHA. Calabria told The IRA last month that, during his tenure at FHFA, he supported suspending all new HECM endorsements because of the operational problems in the FHA program. The RMIT bankruptcy has now exposed this ugly reality.

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