Court upholds Ginnie Mae’s authority in reverse mortgage dispute, grants summary judgment | Orrick, Herrington & Sutcliffe LLP

On April 2, the U.S. District Court for the Northern District of Texas granted defendant Ginnie Mae’s motion for summary judgment in a dispute concerning Ginnie Mae’s Home Equity Conversion Mortgage (HECM) mortgage-backed securities (HMBS) program. The plaintiff, a lender to a former issuer of Ginnie Mae HMBS, filed suit after defendant Ginnie Mae extinguished plaintiff’s first-priority lien over certain loan collateral (“tail collateral”) the HMBS issuer (the plaintiff’s borrower) had pledged to the plaintiff. Tail collateral refers to portions of a securitized loan added to the loan balance after the closing, such as mortgage insurance premiums and interest accruals, which can remain un-securitized.

Ginnie Mae extinguished the plaintiff’s interest in the tail collateral after the HMBS issuer (the plaintiff’s borrower) declared bankruptcy and was terminated as a Ginnie Mae HMBS issuer. Under the agreement between Ginnie Mae and the HMBS issuer, Ginnie Mae had the right to extinguish any interest in any mortgage constituting part of the securitization pool. Consequently, Ginnie Mae sought to extinguish the plaintiff’s interest in the tail collateral attached to underlying, securitized loans, even though the tail collateral was not itself securitized.

The plaintiff challenged Ginnie Mae’s conduct under the APA, arguing that Ginnie Mae’s authority to extinguish interests only extended to securitized mortgage interests included in the securitization pool. The plaintiff contended that, because the tail collateral was un-securitized, it fell outside Ginnie Mae’s extinguishment authority. However, the court found that Ginnie Mae’s statutory authority used “mortgages” as the base unit of measurement, meaning that if any portion of the mortgage was securitized, all interests in the mortgage — including the un-securitized tail collateral — were subject to Ginnie Mae’s extinguishment authority. In addition, the court found the plaintiff’s tortious interference claim both substantively flawed and preempted by federal law. The court granted Ginnie Mae’s motion for summary judgment, issuing an order in favor of Ginnie Mae on all remaining counts.