Texas Capital lent $28 million against reverse mortgage tails. Ginnie Mae took them
Ginnie Mae wiped out a bank’s $28 million lien on reverse mortgage tails - and a federal appeals court said it could.
The Fifth Circuit’s October 9 decision answered a question that matters to any lender holding security interests in reverse mortgage residual balances: when Ginnie Mae extinguishes a defaulting issuer’s interests in securitized Home Equity Conversion Mortgage loans, does that power reach a third party’s separate lien on unsecuritized balances?
The court said yes.
Reverse Mortgage Funding, LLC (RMF) participated in Ginnie Mae’s Home Equity Conversion Mortgage-Backed Securities (HMBS) program, originating reverse mortgages and securitizing them through government-backed pools under a guaranty agreement executed in July 2021. In late 2022, RMF filed for Chapter 11 bankruptcy - an “immediate default” under that agreement.
To keep operating, RMF turned to Texas Capital Bank for debtor-in-possession financing. Texas Capital provided over $28 million, secured not by pooled mortgage participations but by incremental balances accruing after securitization - the “tails.” These include additional borrower draws, interest accruals, insurance premiums, and charges that build on reverse mortgages over time.
When negotiations to transfer RMF’s portfolio collapsed, Ginnie Mae terminated RMF and extinguished its rights in the underlying mortgages under Section 10.04 of the guaranty agreement. It extinguished Texas Capital’s lien on the tails too.
Texas Capital sued in October 2023, arguing Ginnie Mae exceeded its statutory authority under 12 U.S.C. section 1721(g)(1). The bank contended its lien was its own property interest - not an “interest of the issuer” - and that unsecuritized tails fell outside the HMBS pool under industry practice.
The Fifth Circuit rejected every argument. Judge held the statute’s reference to “any mortgage or mortgages constituting the trust or pool” meant the whole mortgage, not just the securitized portion. Texas Capital’s interest was “wholly derivative” of RMF’s rights, and its Tail Agreement acknowledged the collateral remained “subject to the rights and interests of Ginnie Mae.”
Sovereign immunity barred the tortious interference claim. The bank’s arbitrary-and-capricious APA theory never got off the ground - Texas Capital had deliberately omitted those words from its complaint. “A plaintiff cannot intentionally leave a theory out of its complaint and then try to smuggle it into the case through an opposition brief,” the court wrote.
For warehouse lenders, debtor-in-possession financiers, and anyone taking security in reverse mortgage residual balances, this is the line: when the issuer defaults, Ginnie Mae can take the whole mortgage, tails and all.
