Key Points

  • Under 12 U.S.C. § 1721(g)(1), Ginnie Mae's power to extinguish a defaulting issuer's interests reaches the entire pooled mortgage, including later unsecuritized balances known as tails.
  • Ginnie Mae's extinguishment of Reverse Mortgage Funding's interests also eliminated Texas Capital Bank's lien on the tails, because the bank's rights were wholly derivative of the issuer's.
  • The guaranty agreement between Ginnie Mae and the issuer satisfied the statute's contract requirement, and the constitutional-avoidance canon did not apply because the statute is unambiguous.
  • The bank's Texas tortious interference claim is barred by sovereign immunity under the Federal Tort Claims Act's exception for interference with contract rights.
  • The district court properly refused to consider an arbitrary-and-capricious APA theory that the bank omitted from its complaint and first raised in opposing dismissal.

A government-owned association that guarantees mortgage-backed securities lawfully wiped out a bank's lien securing more than $28 million in loans to a bankrupt mortgage company, the U.S. Court of Appeals for the Fifth Circuit ruled Oct. 9.

A three-judge panel affirmed summary judgment for the Government National Mortgage Association, known as Ginnie Mae, and the Department of Housing and Urban Development in a suit brought by Texas Capital Bank. Judge Cory T. Wilson wrote the opinion for the panel, which also included Chief Judge Elrod and Judge Willett.

The court held that when Ginnie Mae took over the loans of Reverse Mortgage Funding LLC, a defaulting participant in its securities program, it also extinguished the bank's lien on those loans. The bank's rights "remained wholly derivative of RMF's rights in the collateral," Judge Wilson wrote, even though a bankruptcy court had approved the lien as first priority.

The dispute grew out of two federal housing programs. Under HUD's Home Equity Conversion Mortgage program, elderly homeowners take out federally insured reverse mortgages, which convert home equity into cash while the borrowers stay in their homes. Under Ginnie Mae's companion program, issuers typically pool part of a loan's principal balance into securities that Ginnie Mae guarantees.

Reverse-mortgage balances often grow after securitization as borrowers draw more money and interest and other charges accrue. The industry calls those later, unsecuritized amounts "tails." According to the opinion, the issuer that pools the loans keeps an interest in the tails.

RMF filed for Chapter 11 bankruptcy in late 2022 after a severe liquidity crisis. The bankruptcy filing put it in default under its guaranty agreement with Ginnie Mae. Texas Capital then extended RMF more than $28 million in debtor-in-possession financing so RMF could continue operating during the bankruptcy. The loans were secured by RMF's tails, and the bankruptcy court granted the bank "first priority valid, perfected, enforceable and unavoidable liens on, and security interest in, the existing collateral."

Texas Capital said Ginnie Mae verbally assured it that the bank would keep its interest in the tails. Ginnie Mae disputed that account, saying it had warned the bank that such a promise would exceed its authority. After efforts to transfer RMF's portfolio failed, Ginnie Mae terminated RMF from the program, extinguished its rights in the mortgages, and treated the bank's lien as extinguished with them.

The bank sued in the Northern District of Texas in October 2023, alleging that Ginnie Mae violated the Administrative Procedure Act, the federal law that lets courts set aside unlawful agency action, and Texas tort law. The district court dismissed a promissory estoppel claim and later granted summary judgment to the government on the rest.

The appeal turned on 12 U.S.C. § 1721(g)(1), which lets Ginnie Mae provide "by contract with the issuer" for extinguishing, upon default, "any . . . right, title, or interest of the issuer in any mortgage" in a securitized pool. Texas Capital argued that the statute reached only RMF's interests and not the bank's own lien, that the bank had signed no such contract with Ginnie Mae, and that tails fall outside the pool under industry practice.

The panel rejected each argument. Because the statute speaks of mortgages, Judge Wilson wrote, "the object of the extinguishment power is the mortgage itself—not discrete subcomponents of securitized mortgages." The guaranty agreement between Ginnie Mae and RMF supplied the required contract with the issuer, the court held. That agreement let Ginnie Mae, by letter, "automatically effect and complete the extinguishment of any redemption, equitable, legal, or other right, title, or interest of the Issuer in the Mortgages."

The court added that RMF "could not convey to Texas Capital any greater interest than RMF itself possessed," and that the bank's own loan agreement made the collateral subject to Ginnie Mae's rights. The statute makes defaulted mortgages Ginnie Mae's "absolute property," subject "only" to the rights of security holders. "The statute does not carve out or even mention existing liens," Judge Wilson wrote.

Expert evidence on industry practice did not help the bank. "[T]he meaning of the statutory text does not turn on how the industry segments cash flows," the opinion said.

The panel also rejected the bank's argument that the statute should be read narrowly to avoid Takings Clause and due process concerns. Constitutional avoidance, a canon that steers courts away from readings that raise serious constitutional doubts, applies only to ambiguous text, the court said. Congress wrote the statute in terms of whole mortgages rather than "participations" in them. "Had Congress taken the latter course, the statute might exclude unsecuritized tails—but Congress did not parse so finely," Judge Wilson wrote.

The bank's tortious interference claim failed on sovereign immunity. The Federal Tort Claims Act preserves immunity for claims arising out of interference with contract rights. The court held that the bank's claim "ultimately rests on alleged interference with Texas Capital's contractual payment rather than any freestanding property right."

The court upheld the district court's refusal to consider a second APA theory, that Ginnie Mae acted arbitrarily and capriciously. The bank first pressed that theory in its brief opposing dismissal, and it argued on appeal that its complaint pleaded the facts behind the theory. Ginnie Mae responded that the complaint never used the words "arbitrary and capricious."

"This is not a case of an inartfully worded claim or imperfect citation," Judge Wilson wrote in siding with Ginnie Mae, adding that "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 opinion faulted the bank for never amending its complaint after the district court refused to consider the theory at the motion-to-dismiss stage. "Even liberal pleading rules reach their limit," Judge Wilson wrote. "Texas Capital made a deliberate pleading decision, to its detriment—and it is too late now for a do-over."

Texas Capital did not brief the promissory estoppel claim on appeal, and the panel treated it as forfeited. The affirmance leaves in place the district court's judgment for Ginnie Mae and HUD on every claim the bank brought.