5th Circuit Upholds Ginnie Mae’s Authority to Extinguish Interests in Mortgage Tails

The U.S. Court of Appeals for the Fifth Circuit has held that Ginnie Mae possesses statutory and contractual authority to extinguish third-party interests in additional balances and costs that borrowers incur after securitization (so-called “tails”).

As background, when one mortgage issuer participating in Ginnie Mae’s HECM securitization program entered bankruptcy, a third-party lender provided financing secured by the mortgage issuer’s retained interests in the HECM tails.  Exercising authority conferred by its guaranty agreement with the mortgage issuer as well as federal statute, Ginnie Mae subsequently extinguished the mortgage issuer’s interests in the HECM tails.  In so acting, Ginnie Mae also purported to extinguish the third-party lender’s interests in the HECM tails.

The third-party lender sued Ginnie Mae in Texas federal court, alleging that Ginnie Mae’s purported extinguishment of its interests in the HECM tails violated the Administrative Procedure Act (APA) and Texas state law.  The court ultimately granted summary judgment in favor of Ginnie Mae on the remaining APA and tortious interference claims.  The third-party lender appealed.

The Fifth Circuit affirmed, reasoning that — subject to a single irrelevant exception — Ginnie Mae possesses absolute authority to extinguish interests in the HECM tails.  This conclusion, the court explained, follows from the plain statutory language authorizing Ginnie Mae “by contract with the issuer” to extinguish “any . . . right, title, or interest of the issuer in any mortgage” upon default under such contract.  And as the court further explained, similar language in the guaranty agreement confirms this conclusion.

Additionally, the Fifth Circuit affirmed summary judgment on the tortious interference claim because sovereign immunity precluded the claim.  Further, the court observed, the Federal Tort Claims Act — which waives sovereign immunity for certain tort claims — expressly preserves sovereign immunity for tortious interference claims.  Finally, the court affirmed the district court’s decision not to consider the separate APA arbitrary and capricious claim because the complaint “affirmatively pled an APA statutory-authority theory while conspicuously omitting [any reference to] ‘arbitrary and capricious.’”