Unreported / Non-Citable
Background
Reverse Mortgage Funding, LLC participated in Ginnie Mae’s Home Equity Conversion Mortgage-Backed Securities program. Under that program, issuers securitize federally insured reverse mortgages but retain interests in later-accruing, unsecuritized balances known as “tails.” RMF’s guaranty agreement authorized Ginnie Mae, upon RMF’s default, to extinguish RMF’s interests in the mortgages and related interests.
After RMF filed for Chapter 11 bankruptcy, Texas Capital Bank provided more than $28 million in debtor-in-possession financing secured by RMF’s interests in the tails. When efforts to transfer RMF’s servicing platform and loan portfolio failed, Ginnie Mae terminated RMF from the program, extinguished RMF’s mortgage interests, and treated Texas Capital’s liens as extinguished as well. Texas Capital sued Ginnie Mae and HUD under the Administrative Procedure Act and Texas law. The district court ultimately entered judgment for the agencies, and Texas Capital appealed.
The Court’s Holding
The Fifth Circuit affirmed. It held that 12 U.S.C. § 1721(g)(1) authorized Ginnie Mae, through its contract with RMF, to extinguish RMF’s interests in the pooled mortgages upon default. Because the statute addresses interests in the entire “mortgage,” rather than only securitized participations, that authority extended to later-arising tails. Texas Capital’s liens were wholly derivative of RMF’s rights, remained subject to Ginnie Mae’s interests, and could not survive the extinguishment of RMF’s underlying interests. No separate contract between Ginnie Mae and Texas Capital was required.
The court also held that sovereign immunity barred Texas Capital’s tortious-interference claim because, in substance, the claim arose from alleged interference with contractual payment rights and therefore fell within the Federal Tort Claims Act’s exception for interference-with-contract claims. Finally, the district court properly declined to consider an arbitrary-and-capricious APA theory because Texas Capital deliberately omitted that distinct theory from its complaint, could not add it through an opposition brief, and never sought leave to amend.
Key Takeaways
- Ginnie Mae’s statutory power to extinguish a defaulting issuer’s interest in pooled mortgages reaches the entire mortgages, including later-accruing, unsecuritized tails.
- A lender taking collateral derived from an HMBS issuer’s rights cannot obtain a greater interest than the issuer possessed, and its lien may disappear when Ginnie Mae validly extinguishes the issuer’s interests.
- An APA statutory-authority claim does not automatically preserve a distinct arbitrary-and-capricious theory, particularly when the complaint conspicuously omits that theory and the plaintiff never amends.
Why It Matters
The decision clarifies the substantial risk faced by lenders financing distressed HMBS issuers: even a bankruptcy-court-approved, perfected lien on mortgage tails may remain subordinate to Ginnie Mae’s statutory and contractual extinguishment rights. Lenders must account for those rights when valuing collateral and structuring debtor-in-possession financing.
The opinion also underscores two litigation constraints in disputes with federal agencies: the FTCA does not waive immunity for claims arising from interference with contract rights, and plaintiffs must expressly plead each distinct APA theory they intend to pursue.