Top warehouse lender Texas Capital Bank (TCB) filed a lawsuit on Wednesday in the U.S. District Court for the Northern District of Texas against Ginnie Mae, alleging that the government-owned company “extinguished, in return for no consideration, TCB’s first priority lien on tens of millions of dollars in collateral” stemming from the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program.
This is according to court documents reviewed by RMD. TCB alleges that even FHA itself “has stated that Ginnie Mae’s position is wrong,” the complaint reads. “TCB hereby asks this Court to do so as well.”
RMF collapse and subsequent actions
When Reverse Mortgage Funding (RMF) filed for bankruptcy at the end of Nov. 2022, it failed to fund cash draws for thousands of its reverse mortgage borrowers, causing Ginnie Mae itself, along with FHA and stewards of RMF to seek an entity willing to lend money to RMF to minimize the impact on its existing reverse mortgage borrowers.
“Ginnie Mae, FHA, and RMF therefore urgently sought to identify an entity willing to loan money to RMF so that RMF could make its required payments to the HECM mortgagors,” the complaint said. “But only a few banks finance the HECM program under ordinary circumstances and, as relevant here, the loan would need to be made to RMF, a bankrupt company.”
This is when Ginnie Mae allegedly turned to TCB, which already stood as a financier for the HECM program, in an effort to avoid “a catastrophic disruption of the HECM program.” In return for lending money to RMF, TCB received a first priority lien “on certain HECM collateral,” which the bank describes as “critically important” since without it, the only collateral TCB could rely on was a bankrupt company in RMF.
“Indeed, TCB asked Ginnie Mae to confirm that TCB would be able to monetize the collateral if Ginnie Mae seized RMF’s mortgage servicing rights during the bankruptcy,” an assurance they allege was given to them by Ginnie Mae President Alanna McCargo and other company officials.
Based on these assurances that TCB says are substantiated by included affidavits, TCB agreed to provide debtor-in-possession (DIP) financing to RMF, which was “secured by first priority valid, perfected, enforceable and unavoidable liens on specified HECM collateral,” the complaint alleges. “Ginnie Mae was aware of and consented to TCB’s lien that was memorialized in the orders.”
Although TCB provided “tens of millions of dollars” in DIP financing to RMF, the bank says at that point that Ginnie “went back on its word.” On Dec. 20, 2022, Ginnie Mae seized RMF’s servicing portfolio and on March 9, 2023 TCB alleges that Ginnie Mae “asserted for the first time that its seizure of RMF’s mortgage servicing rights meant that TCB had no rights to any proceeds from the collateral securing TCB’s loans.”
The bank claims that Ginnie Mae induced TCB to provide critical financing to support the stability of RMF’s draws and the HECM program, “Ginnie Mae seeks to declare by fiat that TCB’s only recourse for repayment is RMF—a bankrupt entity with few if any assets.”
TCB attorneys claim that Ginnie Mae’s positions are not supported by previously-approved agreements; nor are they supported by law. On top of this, TCB claims that in March of this year, when Ginnie Mae first made such an assertion, “the FHA’s current Commissioner, who also holds the title of Assistant Secretary of Housing And Federal Housing Commissioner at HUD, stated that FHA disagrees with Ginnie Mae’s position.”
“Chilling effect on the industry”
When reached, TCB representatives said the company will continue to support the HECM program, but has filed the lawsuit “reluctantly after many attempts at resolving the situation amicably so that the firm can continue to meet customer and community needs, including for seniors, in the reverse mortgage program.”
The bank added that Ginnie Mae “has refused” to honor both commitments it previously made and legal obligations, and to “desist from its unlawful seizure of collateral that rightly belongs to Texas Capital,” the bank said. “Those actions by Ginnie Mae have left Texas Capital no choice but to pursue legal action to protect the firm’s rights.”
A failure to take action would harm the bank itself, but would also “have a chilling effect on the industry, including the ability and willingness of Texas Capital and others to participate in programs like this one,” the statement said. “Ultimately, the victims of Ginnie Mae’s unlawful action will be the seniors who rely on the reverse mortgage program to pay basic expenses.”
The bank added it that while it would prefer to reach an amicable settlement, “Texas Capital is confident it will prevail in this case and is committed to doing so because the law, facts and equities – in addition to the interest of thousands of seniors – are on its side.”
In response to a request for comment, a representative of HUD advised RMD that it does not comment on active litigation.