• Key Insight: Learn why a federal appeals court rejected industry standards regarding reverse mortgage "tails".
• Supporting Data: Texas Capital Bank provided $28 million in debtor-in-possession financing to Reverse Mortgage Funding in 2022.
• Forward Look: Watch for a potential petition for reconsideration or a rehearing before all appellate judges

A federal appeals court has upheld a victory for Ginnie Mae against a bank, putting the bank's hefty lien on certain mortgage assets further out of reach. 

Three judges on the 5th Circuit Court of Appeals ruled unanimously last week to affirm a district court ruling against Texas Capital Bank. The bank alleged Ginnie broke the law in extinguishing its interest in collateral for $28 million in financing it put up for failed lender Reverse Mortgage Funding in 2022. 

The case focuses on Home Equity Conversion Mortgage assets known as "tails", or subsequent draws on already-securitized reverse mortgage loans. Judges sided with Ginnie in finding that the government didn't exceed its statutory authority in its actions. 

"Ginnie Mae's extinguishment authority reaches the entire mortgage, including later arising unsecuritized balances (i.e., 'tails')," wrote Circuit Judge Cory T. Wilson for the panel, in a 16-page opinion. 

TCB previously suggested that the earlier ruling in Ginnie's favor could have a "chilling effect" on the industry's interest in working with the government agency. A spokesperson for TCB declined to comment Wednesday, while a representative for Ginnie didn't reply to a request for comment. 

The dispute

The case arose from RMF's bankruptcy, one of the few major lender failures earlier this decade when rates soared from pandemic-era lows. TCB agreed to loan RMF the debtor-in-possession financing in exchange for a first-priority lien on the HECM tails, which include additional draws by borrowers, mortgage insurance premiums, and other assorted fees. 

Ginnie extinguished RMF's rights in the mortgages in early 2023, which wiped out the bank's lien on the tails. TCB sued later that year, claiming Ginnie violated the Administrative Procedure Act. Texas Capital appealed its loss in the district court last May after a judge granted summary judgment in favor of Ginnie. 

The case hinged on whether the HECM tails were distinct from the RMF loans' initial participations. The appellate judges agreed with a district judge's findings last April that the statute didn't carve out a relevant exception for tails in the case. 

TCB accused Ginnie leadership of reneging on verbal assurances that it would retain its interest in the tails; Ginnie's attorneys denied the accusation. The bank also cited an expert witness describing how the reverse mortgage industry treats unpooled tails as distinct from initial participations. 

"But the meaning of the statutory text does not turn on how the industry segments cash flows — and the statute dictates Ginnie Mae's extinguishment authority," the judges wrote. 

The bank could ask for a reconsideration by the judges, or rehearing before all of the Fifth Circuit judges, before attempting a long-shot petition to the U.S. Supreme Court. 

HECM volume, meanwhile, hit a six-year low as the reverse mortgage industry faces the same affordability constraints slamming the larger housing market.