Panel probes whether Ginnie Mae lawfully cut bank’s collateral during mortgage crisis

(CN) — Lawyers for Texas Capital Bank and the federal government clashed Thursday morning before a Fifth Circuit panel over whether the Government National Mortgage Association known as Ginnie Mae lawfully wiped out the bank’s $28 million security lien in a portfolio of reverse mortgages during a 2022 bankruptcy crisis.

The dispute centers on a rarely litigated 1984 statute that lets Ginnie Mae, upon an issuer’s default, extinguish the issuer’s rights in certain mortgages so the mortgages become “the absolute property” of the government lending agency. Texas Capital Bank says the law is narrower than Ginnie Mae claims and the agency’s sudden move after encouraging the bank’s emergency loans was both illegal and unfair.

Arguing for the bank, attorney Christopher Michel told the three-judge panel the statute authorizes Ginnie Mae to extinguish only the issuer’s interests, only if spelled out in a contract “with the issuer” and only to mortgages that actually “constitute the trust or pool” Ginnie Mae guarantees. None of those conditions applied to TCB’s lien, he said.

“We are not an issuer,” Michel emphasized. “We had no contract with Ginnie Mae … so the statute doesn’t give them the power to do that.”

According to briefs from the case, reverse mortgage issuer Reverse Mortgage Funding LLC faced a liquidity crisis in 2022 and filed for bankruptcy after it could no longer fund monthly draws that elderly homeowners relied on. Ginnie Mae initially avoided exercising its extinguishment rights while stakeholders tried to find a buyer but when talks collapsed, Ginnie Mae pulled the trigger.

Exactly one year ago, U.S. District Judge Matthew Kacsmaryk, a Donald Trump appointee, granted summary judgment to Ginnie Mae, holding it had contractual authority to extinguish RMF’s interests in the reverse mortgages and that TCB had failed to properly plead an arbitrary and capricious claim under the Administrative Procedure Act.

Chief U.S. Circuit Judge Jennifer Walker Elrod, an appointee of George W. Bush, asked Michel about the issue of “tails” — extra loan balances that build up when RMF advances cash to homeowners but haven’t yet been pooled into guaranteed securities. Michel argued tails are separate from the guaranteed pool.

“Ginnie Mae is not guaranteeing the tails,” he said. “The statute has to be understood against the backdrop of what Ginnie Mae is guaranteeing.”

U.S. Circuit Judges Cory T. Wilson and Don R. Willett, both Trump appointees, repeatedly asked whether TCB’s lien, being derivative of RMF’s interest, could survive once Ginnie Mae extinguished RMF’s rights. Michel replied that the government still had to show the statute authorized it to destroy TCB’s collateral.

“I don’t think I have to prove that the statute protects our lien,” he argued. “I think the government has to prove that the statute authorizes it to extinguish our lien.”

On the bank’s separate “arbitrary and capricious” claim under the Administrative Procedure Act, Michel called Ginnie Mae’s about-face a “classic bait and switch.” The agency had urged TCB to make the loans and promised the collateral would be protected, he said, only to announce during a conference call that the lien was gone. Those facts, he argued, were pleaded in detail even if the exact legal label “arbitrary and capricious” was not spelled out in the complaint.

For the government, attorney Shane Huang countered that the statute is straightforward: Once an issuer defaults, the mortgages “shall become the absolute property of” Ginnie Mae. Tails are simply part of those mortgages, he said.

“The statutory text alone is enough to decide this,” Huang told the judges. “The context, the surrounding uses of the word ‘mortgage’ all clearly refer to mortgages in their entirety.”

Elrod asked whether Ginnie Mae’s precrisis assurances to TCB mattered. Huang noted the administrative record contains no written promise and that TCB moved for summary judgment before discovery closed. Even if assurances had been given, he added, Ginnie Mae could not have lawfully surrendered its statutory extinguishment power.

“The statute doesn’t give any wiggle room,” he said. “It says the absolute property.”

In a brief rebuttal, Michel pushed back on the pleading point, citing Supreme Court precedent that plaintiffs need not plead legal theories, only facts. He reiterated that the same detailed narrative that would support a promissory estoppel claim also supports an APA claim.

“[The government] promised that we would have access to this collateral and then with no explanation … told us that it was erasing our collateral,” Michel concluded.

The judges’ questions were focused on both the limits of the statute and the procedural pleading issue, but they gave no hint of their leanings. The case was submitted without an indication of when the federal appeals court may rule.

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