This is the accessible text file for GAO report number GAO-15-131 
entitled 'Housing Finance System: A Framework for Assessing Potential 
Changes' which was released on October 7, 2014. 

On September 16, 2016, we revised the description of figure 10 
to remove specific data points that were inadvertently added.

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to Congressional Addressees: 

October 2014: 

Housing Finance System: 

A Framework for Assessing Potential Changes: 

GAO-15-131: 

GAO Highlights: 

Highlights of GAO-15-131, a report to congressional addressees. 

Why GAO Did This Study: 

Housing finance played a major role in the 2007-2009 financial crisis, 
and the housing sector continues to show considerable strains. The 
federal government's role in the single-family housing finance system 
has also grown substantially. As a result, policymakers and others 
have made proposals to change the system. To help policymakers assess 
various proposals and consider ways to make it more effective and 
efficient, this report (1) describes market developments since 2000 
that have led to changes in the federal government's role in the 
single-family housing finance system; (2) analyzes whether and how 
these market developments have challenged the housing finance system; 
and (3) presents an evaluation framework for assessing potential 
changes to the system. 

GAO reviewed literature on housing finance and housing market
developments as well as prior GAO reports presenting frameworks for
reform in the financial sector and criteria for improving government
performance. GAO also met with officials from a number of federal
agencies. Based on the literature review and interviews, GAO developed
a draft framework that it shared with seven discussion groups composed 
of government officials, experts from academia and research 
organizations, and interested parties such as consumer advocates and 
industry representatives. The discussants provided input on market
developments and the framework. 

What GAO Found: 

Developments in the single-family housing finance market from 2000-
2013 led to changes in the federal government's role in the housing 
finance system and ultimately to a significant increase in that role. 
For example, 

* Before the 2007-2009 financial crisis, the market share of nonprime
mortgages-—loans often made to borrowers with high-risk 
characteristics and funded by mortgage backed securities (MBS) issued 
by private institutions without a federal guarantee (private-label 
MBS)-—grew but fell dramatically during the crisis. 

* As this market segment grew the share of new mortgage originations
(refinances and purchase loans) insured by federal entities—-the Federal
Housing Administration and the Departments of Veterans Affairs and
Agriculture—-fell from 11 percent in 2000 to less than 3 percent of 
the value of new originations in 2006 but, with the onset of the 
crisis, the market share of these mortgages rose as high as 25 percent 
before declining to 20 percent of the market in 2013. 

* The market share of new mortgages backing MBS guaranteed by Fannie
Mae and Freddie Mac (the enterprises) fell from 36 percent in 2000 to 27
percent in 2006 but stood at 61 percent in 2013. 

* In 2008, when the enterprises' weakened financial condition led to 
their being placed into conservatorship, the federal government's 
support for them became explicit. 

* In 2013 the federal government was providing support either directly 
or indirectly for 81 percent of the value of all new mortgages. In 
addition, during the crisis, the Federal Reserve System and the 
Department of the Treasury began purchasing MBS issued by the 
enterprises. The Federal Reserve System began reducing these purchases 
in January 2014, and Treasury completed the sale of its MBS 
investments in fiscal year 2012. 

Developments in mortgage markets since 2000 have challenged the housing
finance system and revealed or led to weaknesses in that system 
including misaligned incentives, an overall lack of reliable 
information or transparency, and excessive risk taking. For example: 

* Originators' and private-label securitizers' incentives were not 
aligned with those of borrowers and investors, because originators and 
private-label securitizers generally did not retain credit risk. 

* Some borrowers lacked reliable and relevant information to adequately
understand the risks of mortgage products because originators were not
required to share certain information. 

* A loosening of underwriting standards prior to the financial crisis 
likely led to excessive risk taking by borrowers. 

Limitations in federal oversight of housing market participants 
exacerbated these weaknesses, though Congress has taken some steps 
designed to address these limitations. The Federal Housing Finance 
Agency and Bureau of Consumer Financial Protection (known as the 
Consumer Financial Protection Bureau) were created to address 
regulatory gaps, including oversight of the enterprises and consumer 
protection. These agencies have taken steps designed to oversee the 
enterprises, protect consumers, and provide better information to the
public. However, representatives of market participants said that they 
faced uncertainties because some regulations had not been implemented, 
and Congress was considering further changes to the system. 

In light of the substantial increase in federal support of the single-
family housing finance system and weaknesses revealed during and after 
the financial crisis, some experts believe the U.S. housing finance 
system warrants reform. In addition, GAO has identified the federal 
role in housing finance as a high risk area. GAO is providing a 
framework to help assess proposed changes in the housing finance 
system. This framework is comprised of nine elements (see table), and 
certain characteristics—transparency, accountability, aligned 
incentives, and efficiency and effectiveness—need to be addressed 
throughout the elements. Applying the elements of this framework should
help reveal the relative strengths and weaknesses of any proposal for 
change and identify what are likely to be significant trade-offs among 
competing goals and policies. Similarly, the framework could be used 
to craft new proposals. Finally, the framework should help 
policymakers understand the risks associated with transitioning to a 
new housing finance system. 

Table: 

Element: Clearly defined and prioritized housing finance system goals; 
Description: Broad goals for the housing finance system should be 
clearly articulated and relevant so that government and market 
participants can effectively conduct activities to implement their 
missions. Additionally, market and government performance can be 
assessed against those broad goals. These goals should recognize 
broader housing policy objectives, as well. Where trade-offs among the 
broad goals exist, the goals should be prioritized. 

Element: Policies and mechanisms that are aligned with goals and other 
economic policies; 
Description: Housing finance policies and mechanisms should be aligned 
with the broader goals of housing finance. Changes in housing finance 
should consider the full range of options for government actions—such as
direct participation in markets through government guarantees, 
oversight and regulation, data collection and dissemination, and tax 
or other federal incentives to promote greater private market 
participation—-and show how policies and mechanisms interact to 
achieve the goals on a comprehensive basis, while minimizing 
fragmentation, overlap, and duplication. In light of weaknesses 
exposed during the financial crisis these policies and mechanisms 
should help to align incentives, provide more information and 
transparency, and restrain excessive risk-taking. Proposals should 
also reflect how these mechanisms will interact with broader economic 
policies. 

Element: Adherence to an appropriate financial regulatory framework; 
Description: In 2009, GAO proposed a framework for a financial 
regulatory system that included some of the elements listed here as 
well as ensuring that regulation was appropriately comprehensive, 
consistent, flexible, adaptable, and had a systemwide focus (GAO-09-
216). A regulatory system should also ensure that regulators have 
independence from inappropriate influence; have sufficient resources, 
clout, and authority to carry out and enforce statutory missions; and 
are clearly accountable for meeting regulatory goals. 

Element: Government entities that have capacity to manage risks; 
Description: Government entities will need adequate skills and 
resources to understand, price, and manage risks. These entities would 
also need the capacity to ensure that their counterparties in the 
private sector have the capacity to manage the risks inherent in their 
activities. 

Element: Mortgage borrowers are protected and barriers to mortgage 
market access are addressed; 
Description: Borrowers need consistent, useful information, as well as 
legal protections, including disclosures, sales practice standards, 
and suitability requirements, over the mortgage life cycle. Any 
barriers facing creditworthy borrowers in accessing mortgage markets 
should be addressed. Key issues will be to encourage innovation to 
reduce barriers while ensuring that products are easily understood, 
such as through standardization and developing better tools to assess 
creditworthiness. 

Element: Protection for mortgage securities investors; 
Description: Investors in the secondary market require adequate, 
reliable information to assess secondary-market risks. This would 
include providing clear information on securitizer and trustee 
responsibilities as they relate to investors. As with borrower 
protection, some standardization may be useful; however, care must be 
taken to ensure that certain protections do not discourage beneficial 
innovation. 

Element: Consideration of cyclical nature of housing finance and 
impact of housing finance on financial stability; 
Description: Housing finance has been characterized by cycles that 
have alternated between loose credit standards and those that are 
tight. Because housing is a significant part of the economy, these 
cycles may pose risks to financial and economic stability. Government 
should determine whether actions related to housing finance are 
procyclical or countercyclical and consider making actions less 
procyclical. Government may also want to consider the appropriateness 
of countercyclical measures. Actions also should address the threat 
housing finance poses for financial stability when there are 
incentives for excessive risk taking. 

Element: Recognition and control of fiscal exposure and mitigation of 
moral hazard; 
Description: Choices about policies and mechanisms will result in 
different levels of fiscal exposure. Wherever possible, exposures 
should be made explicit and costs recognized. Actions should be taken 
to minimize unexpected costs and to mitigate any moral hazard created 
by government policies and support. 

Element: Emphasis on implications of the transition; 
Description: Because changing the housing finance system may lead to 
substantial changes in the marketplace, issues related to 
transitioning from the current system to a new one will should be 
emphasized in any proposal for change. Any action that would severely 
limit market liquidity during the transition should be of particular 
concern. 

Source: GAO. GAO-15-131. 

[End of table] 

View [hyperlink, http://www.gao.gov/products/GAO-15-131]. For more 
information, contact Matt Scirè at (202) 512-8678 or sciremj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Market Developments since 2000 Have Changed the Government's Role in 
Housing Finance: 

Market Developments since 2000 Have Challenged the Single-Family 
Housing Finance System: 

A Framework for Assessing Potential Changes to the Housing Finance 
System: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: History of Federal Involvement in Housing Finance from 
1913 to 2014: 

Appendix III: Legislative Proposals to Change the Housing Finance 
System---March 2013 to July 2014: 

Appendix IV: List of Participants in Discussion Groups: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Some Weaknesses in the Housing Finance System Revealed Since 
2000: 

Table 2: Elements of a Housing Finance Framework: 

Figures: 

Figure 1: Mortgage Lifecycle: 

Figure 2: Mortgage Origination: 

Figure 3: Mortgage Securitization: 

Figure 4: Mortgage Servicing: 

Figure 5: Circumstances under Which Mortgages Terminate: 

Figure 6: CoreLogic National Home Price Index, 1976-2013: 

Figure 7: Value of Mortgage Loan Originations by Product Type and 
Distribution of Market Share, 2000-2013: 

Figure 8: Refinance and Home Purchase Rates and Mortgage Rates, 2000-
2013: 

Figure 9: Value of Home Equity and Aggregate Mortgage Debt and 
Recession Periods, 1945-2013: 

Figure 10: Percentage of Mortgage Loans in Default 90 Days or More or 
in Foreclosure and Recession Periods, 1979-2013: 

Figure 11: Value of New Insured Mortgage Originations and Distribution 
of Market Share, 2000-2013: 

Figure 12: Distribution of Mortgage Originations between Securities 
and Held-in Portfolio, 2000-2013: 

Figure 13: Value of Mortgage-Backed Securities Issued and Distribution 
of Market Share, 2000-2013: 

Abbreviations: 

ABS: asset-backed securities: 

ARM: adjustable-rate mortgage: 

CDO: collateralized debt obligations: 

CFPB: Consumer Financial Protection Bureau: 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection 
Act: 

DOJ: Department of Justice: 

ECOA: Equal Credit Opportunity Act: 

enterprises: Fannie Mae and Freddie Mac: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

FHA: Federal Housing Administration: 

FHFA: Federal Housing Finance Agency: 

FHLBank: Federal Home Loan Bank: 

FICO: Fair Isaac Corporation: 

FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989: 

GPRA: Government Performance and Results Act: 

HERA: Housing and Economic Recovery Act of 2008: 

HELOC: home equity line of credit: 

HOLC: Home Owners' Loan Corporation: 

HUD: Department of Housing and Urban Development: 

LTV: loan-to-value: 

MBS: mortgage-backed securities: 

OCC: Office of the Comptroller of the Currency: 

OFHEO: Office of Federal Housing Enterprise Oversight: 

OTS: Office of Thrift Supervision: 

QM: qualified mortgage: 

QRM: qualified residential mortgage: 

RESPA: Real Estate Settlement Procedures Act of 1974: 

RHS: Rural Housing Service: 

SEC: Securities and Exchange Commission: 

TBA: to-be-announced: 

TILA: Truth in Lending Act: 

Treasury: Department of the Treasury: 

USDA: U.S. Department of Agriculture: 

VA: Department of Veterans Affairs: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

October 7, 2014: 

Congressional Addressees: 

Housing finance played a major role in the 2007-2009 financial crisis, 
and the housing sector, which is an important part of the overall U.S. 
economy, continues to show considerable strains.[Footnote 1] In the 
years since the crisis began, mortgages supported by the federal 
government, directly or indirectly, have accounted for over three-
quarters of the value of new originations in the single family housing 
market.[Footnote 2] Mortgages receiving support included loans 
guaranteed or insured by the Federal Housing Administration (FHA) and 
the U.S. Departments of Veterans Affairs (VA) and Agriculture (USDA) 
and those securitized by Fannie Mae and Freddie Mac (the enterprises), 
which guarantee the timely payment of principal and interest on those 
mortgage-backed securities (MBS). The federal government also provides 
support for mortgages through Ginnie Mae, which guarantees the timely 
payment of principal and interest of MBS supported by pools of loans 
insured by FHA, VA, and USDA. Recognizing the large role played by the 
federal government in the housing finance market and continuing 
challenges that were not addressed by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act), we have placed 
the housing finance system on our high-risk list.[Footnote 3] In part, 
as a result of concerns about the government's role in housing 
finance, many proposals have been introduced, both in Congress and 
elsewhere, to change the single-family housing finance system. 

To help policymakers assess various proposals for changing the single-
family housing finance system and consider ways in which the system 
could be made more effective and efficient, we prepared this report 
under the authority of the Comptroller General. Specifically, this 
report (1) describes market developments since 2000 that have led to 
changes in the federal government's role in single-family housing 
finance; (2) analyzes whether and how these market developments have 
challenged the housing finance system; and (3) presents an evaluation 
framework for assessing potential changes to the housing finance 
system. 

To meet these objectives, we reviewed literature, including prior GAO 
reports, on housing finance and housing market developments, as well 
as prior GAO reports presenting frameworks for reform in the financial 
sector and reports that contain criteria for improving government 
performance. We also met with officials from the Bureau of Consumer 
Financial Protection known as the Consumer Financial Protection Bureau 
(CFPB), Federal Deposit Insurance Corporation (FDIC), Federal Housing 
Finance Agency (FHFA), Board of Governors of the Federal Reserve 
System (Federal Reserve), Office of the Comptroller of the Currency 
(OCC), Securities and Exchange Commission (SEC), and Departments of 
Housing and Urban Development (HUD), Treasury (Treasury), USDA, and 
VA. Based on our literature review and meetings with officials, we 
developed a draft framework, which we shared with seven discussion 
groups to gather input on market developments and the framework. The 
groups were comprised of government officials, experts from academia 
and research organizations, and other relevant parties, such as 
consumer advocates and industry representatives. The experts and 
interested parties were chosen because they had made reform proposals, 
written or testified before Congress on housing finance reform issues, 
or been recommended by government officials. We also reviewed 
proposals for changing the housing finance system including 
legislative proposals and those made by groups that participated in 
our discussion groups. We used examples from these proposals to show 
how the framework elements can be used to assess potential changes. 
See appendix I for more information on the scope and methodology for 
this report. 

We conducted this performance audit from August 2013 to October 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The U.S. markets for single-family housing finance are complex and 
have numerous public and private participants. The housing finance 
markets include a primary market, in which lenders make loans to 
borrowers, and a secondary market, in which mortgage loans are 
purchased from lenders and packaged into securities that are sold to 
investors. Thus, a single mortgage is often owned or held by many 
different parties before the mortgage terminates. Figure 1 provides an 
overview of the lifecycle of a mortgage. The federal government 
participates in the primary and secondary mortgage markets as both an 
actor and a regulator, to promote home ownership and stabilize housing 
markets.[Footnote 4] The federal government also regulates certain 
aspects of mortgage servicing. 

Figure 1: Mortgage Lifecycle: 

[Refer to PDF for image: Interactive graphic] 

Directions: Click on any of the boxes below for more detail on each of 
the phases of a mortgage. 

Origination: 
Lenders originate mortgages primarily for borrowers to purchase or 
refinance a home. Lenders may sell their mortgages in the secondary 
market or hold them as interest-bearing assets. 

Securitization: 
Fannie Mae, Freddie Mac, and private financial institutions purchase 
mortgages from lenders, pool them into mortgage-backed securities, and 
sell them to investors. Ginnie Mae guarantees securities backed by 
government-backed loans. 

Servicing: 
Borrowers send payments of principal and interest to servicers and 
receive account statements. Servicers may own the mortgages or may act 
on behalf of the owners. Servicers pass on payments to investors for 
mortgages backing securities. 

Termination: 
A mortgage is terminated when the borrower pays it in full or the 
mortgage owner takes control of the property because the borrower is 
delinquent in making payments. 

Source: GAO. GAO-15-131. 

[End of figure] 

The Primary Mortgage Market Connects Borrowers and Lenders: 

When individuals purchase residential real property with borrowed 
funds, they usually enter into a contractual agreement, typically 
called a promissory note, in which they agree, among other things, to 
make principal and interest payments to the originating lender for a 
period of time. To secure their debt, lenders obtain a lien on the 
underlying property as collateral against borrower default, which 
grants the holder of the lien the right to seize, and usually sell, 
the property should the borrower fail to pay.[Footnote 5] In other 
words, what may be commonly referred to as a mortgage consists of both 
a promissory note evidencing the debt to be paid by the borrower and 
the lien or security interest in the underlying property, which 
generally is provided for in a deed of trust or a mortgage document. 
Equity is a homeowner's financial interest in a property, or the 
difference between the value of a property and the amount owed on the 
mortgage. Borrowers may make an initial down payment as a means of 
building equity. Home equity can increase over time if the mortgage 
balance is paid down or the value of the home appreciates. Borrowers 
who owe more on their mortgages than their properties are worth 
(negative equity) are commonly referred to as "underwater." 

In the primary market, lenders originate mortgages for borrowers to 
purchase homes, refinance existing mortgages, or to extend loans or 
lines of credit to borrowers based on the amount of equity the 
borrower has accumulated (called home equity loans or home equity 
lines of credit, known as HELOCs).[Footnote 6] Mortgages vary in terms 
of the interest rates charged and terms of the loan. Prime mortgages 
have the most competitive interest rates and terms and have generally 
been reserved for borrowers with strong credit histories and the 
ability to make required down payments. Nonprime mortgages include 
subprime and Alt-A loans, which have higher interest rates and fees 
than prime loans. Historically, subprime mortgages have been offered 
to borrowers who do not qualify for a prime loan, while Alt-A loans 
have been offered to borrowers who have some higher-risk 
characteristics, such as limited documentation of income or assets. 
However, prior to the financial crisis some borrowers who qualified 
for prime mortgages also were steered toward nonprime loans. Borrowers 
may be eligible for federally insured or guaranteed mortgages, which 
have interest rates that are similar to those of prime loans, but 
require borrowers to pay insurance premiums (FHA) or guaranty fees 
(USDA and VA). Some borrowers who do not qualify for prime loans, such 
as those unable to meet down payment or credit history requirements, 
may qualify for these loans. The most common mortgage length is 30 
years, but mortgages can have shorter or longer terms in some cases. 
Borrowers with equity in their homes can refinance their mortgages 
(pay off the current loan early by taking out a new mortgage loan) in 
order to lower their interest rate, change the length of their 
mortgage, or get more favorable terms. However, some lenders charge a 
prepayment penalty if a mortgage is paid off early. If the equity in 
the home has increased since the loan was originated, homeowners may 
be able to take out a loan larger than the principal balance, 
sometimes called a cash-out refinance mortgage. Figure 2 provides 
additional information about mortgage originations. 

Figure 2: Mortgage Origination: 

[Refer to PDF for image: flow-chart] 

1. Borrowers apply for mortgage loans to purchase a home, refinance an 
existing loan, or obtain a line of credit. Go to #'s 2, 3, or 5. 

2.[B] Brokers connect borrowers with lenders. Brokers do not 
underwrite or fund mortgages and may work with multiple lenders to 
provide borrowers with more loan options. Go to #5. 

3.[B] Private and federal mortgage insurance Borrowers seeking 
mortgages with high loan-to-value ratios may be required to have 
mortgage insurance. Borrowers pay insurance premiums or guarantee fees 
to private or government insurers. Government insurers or guarantors 
include the FHA, USDA, and VA. Go to #5. 

4.[B] Federal Home Loan Banks make advances to lenders to fund 
mortgages. Advances are often collateralized with previous mortgages. 
Go to #5. 

5.[A] Private and federal mortgage insurance Borrowers seeking 
mortgages with high loan-to-value ratios may be required to have 
mortgage insurance. Borrowers pay insurance premiums or guarantee fees 
to private or government insurers. Government insurers or guarantors 
include the FHA, USDA, and VA. Go to #'s 6, 7, or 8. 

6.[A] Borrowers use their mortgages to purchase a new home or 
refinance an existing mortgage. 

7.[B] Lenders' mortgage portfolios-—Lenders may hold the mortgages 
they originate in their own portfolios, and can retain or sell the 
servicing rights. Go to #9. 

8.[B] Secondary market—Lenders may sell their mortgages in the 
secondary market and can retain or sell the servicing rights. Go to #9. 

9.[A] Mortgage servicing-—Lenders and third-party financial 
institutions collect payments, provide borrowers with statements, and 
initiate foreclosures on delinquent loans. 

Legend: 

[A] Connections that consistently exist in the mortgage cycle. 

[B] Connections that may exist depending on the specific terms of the 
mortgage. 

Source: GAO. GAO-15-131. 

[End of figure] 

Mortgage originators offer a range of loan products to borrowers in 
the primary market, but most mortgages fall into one of two categories: 

* Fixed-rate mortgage loan--the interest rate does not change over the 
life of the loan. Fixed-rate loans generally have fully amortizing 
payment schedules, where equal monthly payments pay off the full 
principal balance over the term of the loan. 

* Adjustable-rate mortgage loan (ARM)--the interest rate changes 
periodically over the life of the loan based on changes in a specified 
index. Initial interest rates are generally lower on these mortgages 
than for fixed-rate loans but can rise or fall over the course of the 
term. Typically, an ARM's interest rate will adjust at agreed-upon 
intervals, adjustments to the interest rate will be based on a 
specific index rate, and the adjusted rate will fall within a maximum 
and minimum range. Prior to the financial crisis, the nonprime market 
began to offer a number of nontraditional products with adjustable 
rates that had previously been available only in the prime market. For 
example, the interest rates on hybrid ARM loans are fixed during an 
initial period and then become adjustable for the remaining term of 
the loan. Another type of loan, payment-option ARM loans, allowed 
borrowers to defer payment of the principal or the accrued interest, 
meaning that the balance of the loan could increase over time. 

Mortgages create a number of risks for market participants including: 

* Credit risk is the risk that a borrower will default on the mortgage 
by failing to make timely payments. Credit risk can vary based on 
borrower characteristics and the terms of the mortgage. For example, 
the lower the down payment made by a borrower relative to the value of 
the house, the higher the credit risk associated with the loan. 

* Interest-rate risk is the risk that an increase in interest rates 
will reduce the value of a loan. For example, if a mortgage lender is 
funded by short-term deposits, and interest rates rise, the cost of 
the lender's funds increase. If the lender had previously made a long-
term fixed-rate mortgage at a lower rate, the difference between the 
interest the lender receives from the mortgage payments and the 
interest the lender pays its depositors decreases. Fixed-rate loans 
have greater interest rate risk for lenders than ARMs. 

* Prepayment risk is the risk that mortgage borrowers will pay off the 
principal of the loan before the term of the mortgage ends. Prepayment 
of some or all of the principal balance reduces or eliminates future 
interest payments, and requires lenders to relend or reinvest the 
principal that was prepaid. Prepayment may be a result of borrowers 
refinancing when interest rates decrease, and in these cases, the 
lender may have only lower-interest options for lending or investing 
the funds. 

Mortgage lenders evaluate the creditworthiness of potential borrowers 
(called underwriting), and make mortgage loans using funds raised from 
deposits, securitization, and other sources. Borrowers generally 
access mortgage lenders through three major channels--mortgage 
brokers, loan correspondents, and retail lenders.[Footnote 7] Lenders, 
such as credit unions, banks, and thrifts, can fund their mortgages 
with deposits, but also may receive funding from the secondary market, 
discussed in greater detail later in this report, and the Federal Home 
Loan Bank (FHLBank) System. The FHLBank System is a government-
sponsored enterprise that consists of 12 FHLBanks and the Office of 
Finance, the FHLBanks' fiscal agent. Each FHLBank is cooperatively 
owned by member financial institutions, typically commercial banks and 
thrifts. The FHLBanks borrow funds by issuing debt securities in 
capital markets and provide low-cost, long-and short-term advances 
(loans) to member institutions, which use the loans to fund mortgages 
and maintain liquidity for their operations. Member institutions 
provide the FHLBanks with mortgages or other qualifying loans and 
securities, as collateral for the advances. If a member institution 
fails, the FHLBank generally gets repaid before many other creditors; 
depending on the agreement, the FHLBank may be able to draw on the 
majority of the financial institution's assets in addition to the 
collateral provided for the advances for repayment. 

Private financial institutions and the federal government facilitate 
mortgage lending by insuring mortgages that meet certain criteria 
against default or guaranteeing lenders payment of principal and 
interest.[Footnote 8] Generally, lenders require borrowers to purchase 
private mortgage insurance when the initial loan-to-value (LTV) ratio 
of the mortgage (the amount of the mortgage loan divided by the value 
of the home) exceeds 80 percent. The enterprises require that loans 
they purchase with LTV ratios in excess of 80 percent have a credit 
enhancement mechanism, such as private mortgage insurance. Generally, 
loans with higher LTV ratios have a greater risk of default and may 
experience greater loss severity in the event of a default.[Footnote 
9] FHA operates the largest federal mortgage insurance program, which 
is backed by the full faith and credit of the federal government. FHA 
insures the full value of mortgages made by private lenders for 
borrowers making down payments of at least 3.5 percent.[Footnote 10] 
The purpose of FHA's mortgage insurance is to encourage lenders to 
make mortgages available to borrowers, including those who would not 
otherwise qualify, such as low-income and first-time homebuyers. 
Congress has set limits on the size of loans eligible for FHA 
insurance, and these limits have varied over time. For example, when 
the recent financial crisis and economic recession set in and other 
segments of the mortgage market contracted, Congress increased the 
loan amounts eligible for FHA insurance. In 2014, FHA's mortgage 
limits for single-family houses ranged from the national standard of 
$271,050, to $625,500 for other higher cost areas, and to $938,250 for 
certain areas outside of the 48 contiguous states such as Alaska, 
Hawaii, and Guam. Borrowers pay up-front and ongoing insurance 
premiums that go to FHA's Mutual Mortgage Insurance Fund to cover the 
estimated long-term costs of the program. In fiscal year 2013, FHA 
reported that it insured more than 1.3 million new mortgages 
representing approximately $240 billion in mortgage insurance coverage 
on forward mortgages. This brought the total loans insured to more 
than 7.8 million, and FHA reported that its total amortized insurance-
in-force on mortgages at the end of fiscal year 2013 was $1.09 
trillion.[Footnote 11] 

The federal government also administers two other mortgage insurance 
programs, through VA and USDA. The VA Home Loan Guaranty program 
provides financial incentives for private lenders to offer eligible 
servicemembers and veterans of the U.S. armed forces mortgages with 
certain favorable terms, such as not requiring a down payment or 
private mortgage insurance. Depending on the size of the loan, VA 
guarantees between 25 and 50 percent of the mortgage loan in the event 
that a borrower defaults, providing lenders with protection against 
some of the losses that may be associated with making these loans. 
[Footnote 12] Most veterans receiving guaranteed loans pay a funding 
fee of up to 3.3 percent of the loan amount, but the program also 
receives funding through federal appropriations.[Footnote 13] As of 
September 30, 2013, the outstanding principal of VA's guaranteed loans 
was $339 billion, but VA had only guaranteed $89 billion of that 
amount. USDA administers the Section 502 Guaranteed Rural Housing Loan 
Program, which is designed to serve rural residents who have low or 
moderate incomes and are able to afford mortgage payments but are 
unable to obtain adequate housing through conventional financing, by 
guaranteeing loans made by commercial lenders. In 2013, the principal 
of new loans supported by USDA guarantees was $22.3 billion and the 
outstanding principal of all guaranteed loans was $89.7 billion. 
[Footnote 14] 

Borrowers can also take advantage of tax exclusions and deductions 
(including the mortgage interest deduction) to facilitate the purchase 
of a home. Because of the total dollar amounts provided, these tax 
expenditures represent a major element of the federal government's 
role in the markets for housing finance. The most significant of these 
tax expenditures is the deduction for mortgage interest, through which 
taxpayers who itemize deductions may deduct the interest they pay on 
loans secured by qualified homes--either their primary residence or 
their primary residence and a second home.[Footnote 15] Generally, 
taxable income may be reduced by the amount of interest paid on first 
and second mortgages of up to $1 million, plus home equity 
indebtedness of up to $100,000.[Footnote 16] The mortgage interest 
deduction has been estimated to result in $67.8 billion in forgone tax 
revenue in 2014.[Footnote 17] 

The federal government has established regulatory standards, which are 
enforced by federal regulators, for mortgage lending in the primary 
market. CFPB and the federal banking regulators are involved in the 
examination and enforcement of these regulatory requirements.[Footnote 
18] Significant examples of federal statutes in the mortgage market 
include: 

* The Truth in Lending Act (TILA), which was designed to provide 
consumers with accurate information about the cost of credit.[Footnote 
19] Among other things, TILA requires lenders to disclose information 
about the terms of loans--including the amount financed, the finance 
charge, and the annual percentage rate--that can help borrowers 
understand the overall costs of their loans. The Dodd-Frank Act 
reformed mortgage lending by amending TILA to include, among other 
things, provisions affecting (i) underwriting (for example, the 
ability of borrowers to repay their loans); (ii) servicing; (iii) loan 
originator compensation; and (iv) escrows and appraisals.[Footnote 20] 

* The Real Estate Settlement Procedures Act of 1974 (RESPA), which was 
enacted to provide more effective advance disclosure regarding 
mortgage loan settlement costs to homebuyers and sellers, requires 
lenders to provide consumers with certain disclosures during the 
mortgage application and closing transaction.[Footnote 21] These 
disclosures previously included a Good Faith Estimate form given 
within three days after a mortgage application is received and a 
uniform settlement statement given at the loan closing. Regulations 
implementing RESPA were revised in 2008.[Footnote 22] The Dodd-Frank 
Act also made significant changes to RESPA, including transferring 
rulemaking authority for RESPA from HUD to CFPB and requiring CFPB to 
issue rules to integrate the disclosures required by TILA and RESPA. 
[Footnote 23] 

The Secondary Market Provides Liquidity and Reduces Risk for Mortgage 
Lenders: 

In the secondary market, institutions purchase loans from primary 
market originators and then either hold the loans in their own 
portfolios or bundle the loans into MBS that are sold to investors. 
Mortgage originators may sell their loans to transfer risk (especially 
interest rate risk in the case of fixed-rate mortgages) or to increase 
liquidity. When loans are sold, they are generally packaged together 
into pools and held in trusts pursuant to terms and conditions set out 
in an underlying pooling and servicing agreement. Pools of loans are 
the assets backing securities that are issued and sold to investors, 
who are entitled to the cash flow generated by loans in the trust. The 
terms of the contracts defining the rights associated with MBS 
typically include representations and warranties about the mortgage 
loans that have been securitized.[Footnote 24] The investors assume 
the interest rate, prepayment, and credit risk associated with the 
loans (to the extent that credit losses are not covered by mortgage 
insurance or guarantees of MBS). The enterprises are the two largest 
participants in the secondary market. Other participants include 
Ginnie Mae (a federal agency within HUD that guarantees the timely 
payment of principal and interest on MBS backed by government-insured 
mortgages), issuers of Ginnie Mae-backed MBS, issuers of private label 
MBS, and investors. (Figure 3 provides an overview of mortgage 
securitization in the secondary mortgage market.) 

Figure 3: Mortgage Securitization: 

[Refer to PDF for image: flow chart] 

1. Mortgage origination. Go to #'s 2, 3, or 4. 

2.[B] Enterprise securitization—-Fannie Mae and Freddie Mac purchase 
conforming and government-insured loans from the primary market. The 
enterprises guarantee the timely payment of principal and interest for 
securities backed by these loans. Go to #5. 

3.[B] Ginnie Mae supported securitization—-Ginnie Mae guarantees 
securities that are issued by approved private institutions and backed 
by government-insured mortgages. Go to #'s 5 or 6. 

4.[B] Private label securitization-—Private financial institutions 
purchase jumbo, Alt-A, and subprime mortgage loans. These institutions 
issue “private label” securities backed by pools of these loans. Go to 
#5 or 7. 

5.[A] Mortgage servicing. Go to #6. 

6.[A] Mortgage pools backing securities are held in trusts. Trustees 
act as custodians of the mortgage pools, receiving payments from 
mortgage servicers and passing these on to investors. Go to #8. 

7.[A] Financial instruments such as subordinate tranches and other 
credit enhancements are used to reduce risk. Go to #5. 

8.[A] Credit ratings agencies assess and rate the creditworthiness of 
securities. Go to #10. 

9.[B] To-Be-Announced market facilitates the advance sales of 
enterprise securities and those with Ginnie Mae guarantees. Go to #'s 
10 or 11. 

10.[A] Underwriters market and sell securities. Go to #11. 

11.[A] Securities are sold to investors, who receive payments passed 
from servicers (lenders or third-party institutions) through mortgage 
trusts. 

Source: GAO. GAO-15-131. 

Legend: 

[A] Connections that consistently exist in the mortgage cycle. 

[B] Connections that may exist depending on the specific terms of the 
mortgage. 

[End of figure] 

The enterprises are congressionally chartered, for-profit, shareholder-
owned companies that have been under federal conservatorship since 
2008.[Footnote 25] Generally the enterprises purchase mortgage loans 
that meet certain criteria for size, features, and underwriting 
standards known as "conforming" loans.[Footnote 26] However, prior to 
the crisis, the enterprises purchased a large volume of loans that did 
not meet these standards. After purchasing mortgages, the enterprises 
create MBS and guarantee investors in these securities that they will 
receive timely payments of principal and interest. These bonds have 
generally paid a lower rate of interest than corporate bonds that 
posed comparable risks, in part, because investors generally believed 
that these bonds had an implicit guarantee by the federal government. 
Prior to being placed into conservatorship in 2008, the enterprises 
raised capital through the issuance of common and preferred stock. In 
conjunction with the conservatorships, Treasury entered into 
agreements to provide capital support to the enterprises to enable 
them to continue to provide liquidity and stability to the mortgage 
market. As of March 31, 2014, Treasury had outlays of $187.5 billion 
to the enterprises through purchases of senior preferred stock. 
Through its Senior Preferred Stock Purchase Agreements, Treasury 
collects dividend payments from the enterprises, which have reported 
paying $202.9 billion in dividend payments from 2008 through March 31, 
2014.[Footnote 27] 

Private institutions are also involved in the creation of MBS. These 
institutions, primarily investment banks, purchase mortgages that do 
not conform to the enterprises' purchase requirements because the 
mortgages are too large or do not meet specified underwriting 
criteria, and loans that are federally insured. Securities issued by 
these institutions that are backed by loans that do not meet the 
enterprises' loan limits or quality standards are called "private-
label securities." Such loans may include subprime and Alt-A 
mortgages. Other securities issued by approved private financial 
institutions are backed by government-guaranteed mortgages, such as 
those insured by FHA, and Ginnie Mae guarantees the timely payment of 
principal and interest of these MBS. Ginnie Mae's guarantee is 
explicitly backed by the full faith and credit of the federal 
government. 

MBS issued by the enterprises or guaranteed by Ginnie Mae trade in 
different segments of the secondary market from private-label 
securities. MBS issued by the enterprises or guaranteed by Ginnie Mae 
are typically purchased by investors through the to-be-announced (TBA) 
market. A TBA trade is a forward contract in which the specific 
mortgages in the MBS that are being purchased are not known until 2 
days before the trade is settled.[Footnote 28] TBA trades allow the 
enterprises and issuers of Ginnie Mae guaranteed securities to provide 
lenders with the sale price at which they will purchase conforming and 
government guaranteed loans, prior to the mortgages being originated. 
This allows mortgage lenders essentially to sell the loans they intend 
to fund even before the loans are closed. In turn this allows lenders 
to lock in the mortgage rate for the borrower before the loan is 
finalized. Private-label MBS are traded in the "specified pool" 
segment of the secondary market, where the exact securities to be 
delivered are known at the inception of the trade. Investors in MBS 
include financial institutions, pension funds, and other institutional 
investors, such as insurance companies and managers of other complex 
structured finance products known as collateralized debt obligations 
(CDO), which consist of MBS and other securities. 

The federal government regulates the enterprises and private issuers 
of MBS are subject to federal securities laws and regulations. FHFA 
was created by the Housing and Economic Recovery Act of 2008 (HERA) to 
supervise and regulate the enterprises and the FHLBank System. 
[Footnote 29] FHFA is an independent agency that took over the 
oversight of the enterprises from the Office of Federal Housing 
Enterprise Oversight, formerly an independent entity within HUD. 
[Footnote 30] FHFA has a statutory responsibility to ensure that the 
enterprises operate in a safe and sound manner and that the operations 
and activities of each regulated entity foster liquid, efficient, 
competitive, and resilient national housing finance markets. FHFA is 
managing the conservatorship of the enterprises. FHFA also took over 
the responsibilities of the Federal Housing Finance Board that oversaw 
the FHLBanks. Private issuers of MBS must either file a registration 
statement that meets SEC's disclosure requirements or rely on an 
exemption from registration. Securities issued by the enterprises or 
guaranteed by Ginnie Mae are exempt from these registration 
requirements. Ginnie Mae has processes in place to oversee issuers of 
securities eligible for Ginnie Mae guarantees that include approval, 
monitoring, and enforcement. The Dodd-Frank Act also created new 
requirements for issuers of MBS related to conflicts of interest, 
credit risk retention, disclosures and reporting, reviews of 
underlying assets, and representations and warranties. SEC has 
proposed or finalized rules addressing these areas, jointly with other 
agencies when directed by the act.[Footnote 31] 

Mortgage Servicers Manage Loans After Origination: 

After they are originated, mortgages are serviced until they are 
either paid in full or closed as a result of nonpayment. Servicing can 
involve sending borrowers monthly account statements and tax 
documents, answering customer service inquiries, collecting monthly 
mortgage payments, maintaining escrow accounts for property taxes and 
hazard insurance, and forwarding proper payments to the mortgage 
owners. Figure 4 provides an overview of the mortgage servicing 
process. In the event that a borrowers becomes delinquent on their 
loan payments, servicers may initiate a workout option to allow the 
borrower to stay in the home or conduct a foreclosure to obtain the 
proceeds from the foreclosure sale on behalf of the owners of the 
loans. In some cases, the servicer is the same institution that 
originated the loan. However, servicers may change over the life of 
the mortgage, as servicers sell servicing rights to other 
institutions. Third-party mortgage servicers, which can be mortgage 
finance companies or commercial banks that are also originators, earn 
a fee for acting as the servicing agent on behalf of the owner of a 
loan. If a mortgage originator sells its loans to an institution that 
will securitize them, another financial institution or other entity is 
usually appointed as the servicer to manage payment collections and 
other activities associated with these loans. 

Figure 4: Mortgage Servicing: 

[Refer to PDF for image: flow chart] 

1. Mortgage servicing is arranged by the owner of the mortgage. Go to 
#'s 2 or 3. 

2.[B] In-house mortgage servicing-—Financial institutions may service 
mortgages that they hold in their portfolios. Go to #4. 

3.[B] Independent mortgage servicing-—Third-party servicers, often 
large banks or nonbank institutions, service mortgages for mortgage 
trusts or lenders. Go to #5. 

4.[A] Borrowers send payments to servicers and receive account 
statements. Go to # 6 or 7. 

5.[A] Borrowers send payments to servicers and receive account 
statements. Go to # 6, 8 or 10. 

6.[B] Poor mortgage performance-—Loans not paid on time may go into 
default and be foreclosed. Repayment plans, forbearance plans, and 
loan modifications can help some borrowers avoid foreclosure. Go to # 
1 or 9. 

7.[A] In-house servicers own the mortgage and receive payments 
directly from borrowers. Go to #9. 

8.[A] Payments less servicer compensation are passed on to mortgage 
trustees. Go to #9 or 10. 

9.[A] Mortgage termination. 

10.[A] Mortgage trustees pass on payments and interest to investors in 
the secondary market. 

Source: GAO. GAO-15-131. 

Legend: 

[A] Connections that consistently exist in the mortgage cycle. 

[B] Connections that may exist depending on the specific terms of the 
mortgage. 

[End of figure] 

The duties of servicers are specified through several means. The 
enterprises specify in servicing guidelines what they expect of 
servicers for loans backing their MBS. Also, servicing requirements 
for some government-backed loans are specified by the federal agencies 
backing the mortgages. Finally, as part of private-label 
securitizations, investors and servicers enter into pooling and 
servicing agreements that specify what investors expect of servicers. 
These pooling and servicing agreements can vary widely, but may mirror 
the servicing guidelines issued by the enterprises. However, there is 
no standard pooling and servicing agreement that is used for all 
private-label MBS. CFPB, which was created by the Dodd-Frank Act, has 
primary enforcement authority to assess compliance with mortgage 
servicing rules under TILA and RESPA with regard to large depository 
institutions and credit unions and their affiliates. FDIC, the Federal 
Reserve, National Credit Union Administration, and OCC are responsible 
for enforcing the mortgage servicing rules under TILA with respect to 
depository institutions and credit unions that have $10 billion or 
less in assets. The Federal Trade Commission and CFPB generally both 
have enforcement authority over nondepository institutions for 
mortgage servicing rules under TILA. 

Mortgages Terminate When They Are Paid in Full or After They Go into 
Default: 

Generally, mortgages terminate when borrowers pay off their mortgage 
debt or after borrowers default on their loans (see figure 5). 
Borrowers can pay off the mortgage debt by making payments of 
principal and interest or by refinancing the mortgage for a new loan, 
usually with lower interest rates. Generally, if a borrower fails to 
make a payment for 90 days, mortgage loans go into default. When a 
borrower defaults on a mortgage loan, the mortgage note holder is 
entitled to pursue foreclosure for the property, obtain title to the 
property, and sell it on behalf of the mortgage owner to repay the 
loan. However, under CFPB rules issued in 2013, servicers, with 
limited exceptions, cannot initiate a foreclosure until a borrower is 
more than 120 days delinquent.[Footnote 32] Once the borrower is in 
default, the servicer must decide whether to pursue a home retention 
workout or other foreclosure alternative or to initiate foreclosure. 
[Footnote 33] Home retention workouts include loan modifications, 
through which temporary or permanent changes are made to the terms of 
the existing loan agreement, either by capitalizing the past due 
amounts, reducing the interest rate, extending the loan term, reducing 
the total amount of the loan through principal forgiveness or 
forbearance, or a combination of these actions. Foreclosure 
alternatives include short sales, in which a house is sold through a 
real estate agent or other means rather than through foreclosure, even 
if the proceeds of the sale are less than what the borrower still owes 
on the mortgage. Mortgage holders may agree to accept the proceeds of 
a short sale and may waive any deficiency. Under a deed-in-lieu of 
foreclosure, the homeowner voluntarily conveys the interest in the 
home to the lender to satisfy a loan that is in default as an 
alternative to foreclosure proceedings. Mortgage holders may opt to 
accept ownership of the property in place of the money owed on the 
mortgage and may waive any deficiency. Deeds-in-lieu will generally 
not be accepted by a mortgage holder if there are other liens on the 
property, as foreclosure may be necessary for the mortgage holder to 
gain clear title. 

Figure 5: Circumstances under Which Mortgages Terminate: 

[Refer to PDF for image: flow chart] 

1. Mortgage servicing of performing and nonperforming loans. Go to # 
2,3, 4, or 5. 

2.[A] Paid in full-—all principal, interest, and fees are paid when 
the mortgage term ends. 

3.[A] Prepaid—-a mortgage is prepaid when the owner sells the home, 
refinances into a new mortgage, or pays off the loan in advance of the 
mortgage term. When a mortgage is prepaid, any expected payments and 
interest end. 

4.[A] Mortgage foreclosed—-the home is repossessed by the mortgage 
holder or sold to repay the outstanding debt. The sale may be at a 
loss for the lender or investors. 

5.[A] Deeds-in-lieu and short sales-—the home is voluntarily conveyed 
to the lender, or is sold to a new owner to avoid foreclosure. These 
processes may cause a loss for the lender or investors. 

Legend: 

[A] Connections that consistently exist in the mortgage cycle. 

Source: GAO. GAO-15-131. 

[End of figure] 

Market Developments since 2000 Have Changed the Government's Role in 
Housing Finance: 

Since 2000, home prices have fluctuated dramatically, in part 
reflecting developments in the underlying housing finance market such 
as the growth of nonprime mortgages. These developments led to changes 
in the government's role throughout the period and ultimately to a 
significant increase in that role. In 2000, the federal government 
directly supported about $118 billion (11 percent) of the estimated 
value of new mortgage originations for home purchase and mortgage 
refinancing through government-insured or -guaranteed loans in the 
primary market.[Footnote 34] In that same year, the enterprises 
supported about $376 billion (36 percent), of the estimated value of 
new mortgage originations through their guarantees on MBS they issued. 
These roles declined in the years just prior to the 2007-2009 
financial crisis when government-insured or -guaranteed mortgages made 
up about 3 percent of the market and those supporting enterprise MBS 
about 27 percent. During the crisis, the government's role in 
supporting mortgage originations expanded and has remained relatively 
high. The share of the primary market insured or guaranteed by the 
federal government grew and the share of mortgages backing MBS 
securitized by the enterprises also grew, reaching highs in 2009 of 
about 25 and 67 percent, respectively. As mentioned earlier in this 
report, the federal government also placed the enterprises into 
conservatorship in 2008. As a result, by 2009, mortgages supported by 
the federal government, directly or indirectly, reached a peak of 
about $1.7 trillion (93 percent) of the total value of new 
originations. By 2013, the market share of those mortgages supported 
by the federal government had dropped to 81 percent--about 20 percent 
guaranteed or insured directly by the government and about 61 percent 
backing enterprise MBS. However, the percentage of loans supported by 
the federal government was still well above the 47 percent of the 
value of new mortgage originations supported by government-guaranteed 
or -insured loans and those backing enterprise MBS in 2000. In 
addition, in response to the financial crisis, the Federal Reserve has 
provided additional support for the mortgage market by becoming one of 
the largest purchasers of enterprise MBS. 

Home Prices and Homeownership Rates Fluctuated since 2000: 

Nationally, U.S. home prices nearly doubled between January 2000 and 
their peak in April 2006 (see figure 6). However, price changes varied 
across local markets. For example, home prices rose by more than 174 
percent in the Los Angeles metropolitan area and by 27 percent in the 
Detroit metropolitan from 2000 to their respective peaks in 2006 and 
2005, according to data from the S&P/Case-Shiller Home Price Indexes. 
[Footnote 35] The volume of home sales rose rapidly during this period 
as overall homeownership rose and many people purchased homes other 
than their primary residences, some for investment purposes. 
Researchers and others have noted that the increases in house prices 
prior to the financial crisis may have reflected an asset 
bubble.[Footnote 36] Beginning in May 2006, however, prices began 
falling, and across the country tumbled by nearly 33 percent from peak 
to trough. Prices fell even further in some areas such as the Los 
Angeles metropolitan area, which experienced a 42 percent decline from 
peak to trough. National average home prices began rising in 2011 and 
continued rising through 2013, bolstered by low interest rates and 
housing inventories as well as improving economic factors. 

Figure 6: CoreLogic National Home Price Index, 1976-2013: 

[Refer to PDF for image: line graph] 

1976; 
Percentage: 23.4%. 

1977; 
Percentage: 24.3%. 

1978; 
Percentage: 29.3%. 

[Begin recession period] 

1979; 
Percentage: 33.7%. 

1980; 
Percentage: 39.1%. 

[End recession period] 

[Begin recession period] 

1981; 
Percentage: 43.9% 

1982; 
Percentage: 45.4%. 

[End recession period] 

1983; 
Percentage: 45.9%. 

1984; 
Percentage: 48.3%. 

1985; 
Percentage: 50.6%. 

1986; 
Percentage: 54.1%. 

1987; 
Percentage: 59.0%. 

1988; 
Percentage: 64.9%. 

1989; 
Percentage: 71.1%. 

[Begin recession period] 

1990; 
Percentage: 75.0%. 

[End recession period] 

1991; 
Percentage: 74.4%. 

1992; 
Percentage: 74.2%. 

1993; 
Percentage: 74.5%. 

1994; 
Percentage: 76.7%. 

1995; 
Percentage: 77.6%. 

1996; 
Percentage: 79.7%. 

1997; 
Percentage: 81.7%. 

1998; 
Percentage: 86.0%. 

1999; 
Percentage: 92.5%. 

2000; 
Percentage: 100%. 

[Begin recession period] 

2001; 
Percentage: 110.5%. 

[End recession period] 

2002; 
Percentage: 119.7%. 

2003; 
Percentage: 131.6%. 

2004; 
Percentage: 147.3%. 

2005; 
Percentage: 171.8%. 

2006; 
Percentage: 197.0%. 

2007; 
Percentage: 195.7%. 

[Begin recession period] 

2008; 
Percentage: 175.3%. 

2009; 
Percentage: 144.6%. 

[End recession period] 

2010; 
Percentage: 142.9%. 

2011; 
Percentage: 136.9%. 

2012; 
Percentage: 134.6%. 

2013; 
Percentage: 147.3%. 

Source: CoreLogic House Price Index and National Bureau of Economic 
Research. GAO-15-131. 

[End of figure] 

The homeownership rate generally increased between 2000 and 2004 but 
has fallen steadily since the financial crisis due to fewer potential 
homeowners entering the market and an increase in home foreclosures. 
In the fourth quarter of 2000 the homeownership rate was 67.5 percent. 
The rate peaked in the fourth quarter of 2004 at 69.2 percent and has 
fallen steadily since. As of the end of 2013, the homeownership rate 
was 65.2 percent. According to The State of the Nation's Housing 2013, 
the declines in homeownership rates have been more pronounced among 
certain groups, in particular, families with children and within the 
African-American and Hispanic communities.[Footnote 37] 

Home prices and homeownership rates are influenced, in part, by 
demographic and economic trends.[Footnote 38] According to some 
housing market experts, some of the demographic and economic trends 
influencing the housing market in 2013 include later household 
formation, stagnant incomes, and changes in the demand for rental 
housing. However, an FDIC official noted that the timing of household 
formation and demand for rental housing may be the result of changes 
in the for-sale market. Experts also suggest that longer demographic 
trends, such as increases in the proportion of the population that is 
65 or over and those classified as minorities, may affect 
homeownership rates in the future. For example, minorities will make 
up an increasing share of young households but face greater 
constraints than other groups due to lower income and wealth.[Footnote 
39] As a result, demand for first homes may decrease. A former 
Chairman of the Federal Reserve also noted in 2012 that some potential 
minority borrowers also may face discrimination either because lenders 
discriminate against minority neighborhoods or charge minorities 
higher loan prices than they would comparable nonminority borrowers. 
Other factors such as high unemployment and student loan debt could 
also have an impact on the housing market and homeownership. The U.S. 
average unemployment rate rose to over 9 percent in 2009 and 2010 
before beginning to decline; in 2013, the average unemployment rate 
was 7.4 percent. The percentage of students with student debt as well 
as the average size of that debt has increased over the period since 
2003, potentially making it more difficult for younger borrowers to 
qualify for a mortgage loan or afford to own a home.[Footnote 40] 

Developments in the Primary Market since 2000 Have Affected the 
Government's Role in Housing Finance: 

Changes in home prices and changes in the housing finance market have 
affected the government's role in housing finance. Changes in the 
primary market generally fell into three time periods: 2000-2003, 2004-
2006, and 2007 and thereafter (see figure 7). In the first period, a 
period of low interest rates, prime mortgages made up the vast 
majority of all mortgages. However, in the second period the market 
share of nonprime mortgages increased dramatically to a peak of 34 
percent of all mortgage originations in 2006, including purchases and 
refinancing. The value and market share of mortgages insured or 
guaranteed by the U.S. government also fell during this period, 
largely due to the availability of nonprime mortgages.[Footnote 41] 
Specifically, the share of government-insured or -guaranteed 
mortgages--those directly supported by the government--fell from 11 
percent in 2000 to less than 3 percent of the value of all new 
mortgage originations in 2006. From 2008 through 2013, average total 
originations declined to around $1.7 trillion per year from more than 
$2.7 trillion per year on average between 2000 and 2006. However, 
prime and government insured or - guaranteed mortgages have dominated 
the market since 2008. In 2013, prime mortgages accounted for 76 
percent of the value of all mortgage originations and government-
insured mortgages for 20 percent of the value of all mortgage 
originations.[Footnote 42] 

Figure 7: Value of Mortgage Loan Originations by Product Type and 
Distribution of Market Share, 2000-2013: 

[Refer to PDF for image: 2 vertical bar graphs] 

Dollars: 

Calendar year: 2000; 
Government insured: $118 billion; 
Prime: $755 billion; 
Nonprime: $125 billion; 
Home Equity Line of Credit (HELOC): $53 billion. 

Calendar year: 2001; 
Government insured: $178 billion; 
Prime: $1.725 trillion; 
Nonprime: $200 billion; 
Home Equity Line of Credit (HELOC): $115 billion. 

Calendar year: 2002; 
Government insured: $179 billion; 
Prime: $2.277 trillion; 
Nonprime: $267 billion; 
Home Equity Line of Credit (HELOC): $165 billion. 

Calendar year: 2003; 
Government insured: $224 billion; 
Prime: $3.110 trillion; 
Nonprime: $395 billion; 
Home Equity Line of Credit (HELOC): $220 billion. 

Calendar year: 2004; 
Government insured: $139 billion; 
Prime: $1.725 trillion; 
Nonprime: $730 billion; 
Home Equity Line of Credit (HELOC): $330 billion. 

Calendar year: 2005; 
Government insured: $94 billion; 
Prime: $1.660 trillion; 
Nonprime: $1.005 trillion; 
Home Equity Line of Credit (HELOC): $365 billion. 

Calendar year: 2006; 
Government insured: $84 billion; 
Prime: $1.470 trillion; 
Nonprime: $1.000 trillion; 
Home Equity Line of Credit (HELOC): $430 billion. 

Calendar year: 2007; 
Government insured: $121 billion; 
Prime: $1.499 trillion; 
Nonprime: $466 billion; 
Home Equity Line of Credit (HELOC): $349 billion. 

Calendar year: 2008; 
Government insured: $302 billion; 
Prime: $1.026 trillion; 
Nonprime: $65 billion; 
Home Equity Line of Credit (HELOC): $116 billion. 

Calendar year: 2009; 
Government insured: $472 billion; 
Prime: $1.298 trillion; 
Nonprime: $10 billion; 
Home Equity Line of Credit (HELOC): $81 billion. 

Calendar year: 2010; 
Government insured: $393 billion; 
Prime: $1.196 trillion; 
Nonprime: $8 billion; 
Home Equity Line of Credit (HELOC): $49 billion. 

Calendar year: 2011; 
Government insured: $313 billion; 
Prime: $1.133 trillion; 
Nonprime: $18 billion; 
Home Equity Line of Credit (HELOC): $50 billion. 

Calendar year: 2012; 
Government insured: $411 billion; 
Prime: $1.663 trillion; 
Nonprime: $23 billion; 
Home Equity Line of Credit (HELOC): $44 billion. 

Calendar year: 2013; 
Government insured: $388 billion; 
Prime: $1.446 trillion; 
Nonprime: $18 billion; 
Home Equity Line of Credit (HELOC): $60 billion. 

Percentage: 

Calendar year: 2000; 
Government insured: 11%; 
Prime: 72%; 
Nonprime: 12%; 
Home Equity Line of Credit (HELOC): 5%. 

Calendar year: 2001; 
Government insured: 8%; 
Prime: 78%; 
Nonprime: 9%; 
Home Equity Line of Credit (HELOC): 5%. 

Calendar year: 2002; 
Government insured: 6%; 
Prime: 79%; 
Nonprime: 9%; 
Home Equity Line of Credit (HELOC): 6%. 

Calendar year: 2003; 
Government insured: 6%; 
Prime: 78%; 
Nonprime: 10%; 
Home Equity Line of Credit (HELOC): 6%. 

Calendar year: 2004; 
Government insured: 5%; 
Prime: 59%; 
Nonprime: 25%; 
Home Equity Line of Credit (HELOC): 11%. 

Calendar year: 2005; 
Government insured: 3%; 
Prime: 53%; 
Nonprime: 32%; 
Home Equity Line of Credit (HELOC): 12%. 

Calendar year: 2006; 
Government insured: 3%; 
Prime: 49%; 
Nonprime: 34%; 
Home Equity Line of Credit (HELOC): 14%. 

Calendar year: 2007; 
Government insured: 5%; 
Prime: 62%; 
Nonprime: 19%; 
Home Equity Line of Credit (HELOC): 14%. 

Calendar year: 2008; 
Government insured: 20%; 
Prime: 68%; 
Nonprime: 4%; 
Home Equity Line of Credit (HELOC): 8%. 

Calendar year: 2009; 
Government insured: 25%; 
Prime: 70%; 
Nonprime: 1%; 
Home Equity Line of Credit (HELOC): 4%. 

Calendar year: 2010; 
Government insured: 24%; 
Prime: 73%; 
Nonprime: 0; 
Home Equity Line of Credit (HELOC): 3%. 

Calendar year: 2011; 
Government insured: 21%; 
Prime: 75%; 
Nonprime: 1%; 
Home Equity Line of Credit (HELOC): 3%. 

Calendar year: 2012; 
Government insured: 19%; 
Prime: 78%; 
Nonprime: 1%; 
Home Equity Line of Credit (HELOC): 2%. 

Calendar year: 2013; 
Government insured: 20%; 
Prime: 76%; 
Nonprime: 1%; 
Home Equity Line of Credit (HELOC): 3%. 

Source: GAO analysis of Inside Mortgage Finance and USDA Rural Housing 
Service data. GAO-15-131. 

Note: For purposes of this figure, we include direct loans made by 
federal agencies in "government insured." 

[End of figure] 

In addition to changes in the market shares of mortgage products, the 
overall size of the mortgage market and the division between loans for 
new mortgages and those that were refinancing existing mortgages 
shifted between 2000 and 2013. Early in the period, the overall value 
of mortgages rose because, from 2000 through 2003, many homeowners 
refinanced their existing mortgages to take advantage of falling 
mortgage rates (see figure 8). As the decline in mortgage rates 
slowed, and then began to rise, refinances declined and purchase loans 
for new homes grew as a percentage of the value of all originations. 
After 2007, the overall value and number of mortgage originations 
declined. To encourage spending, the Federal Reserve lowered interest 
rates, which in turn lowered mortgage rates and spurred refinancing 
activity. In 2013, refinancing volumes decreased as mortgage rates 
rose. However, refinances continued to represent the majority of 
origination activity, accounting for about 43 percent of the value of 
FHA originations and about 71 percent of the value of originations 
securitized by the enterprises in 2013. 

Figure 8: Refinance and Home Purchase Rates and Mortgage Rates, 2000-
2013: 

[Refer to PDF for image: combined vertical bar and line graph] 

Refinances as percentage of total mortgage originations; 
New purchases as percentage of total mortgage originations. 

Calendar year: 2000; 
Mortgage rate: 7.79%; 
New purchases: 54%; 
Refinances: 46%. 

Calendar year: 2001; 
Mortgage rate: 6.62%; 
New purchases: 38%; 
Refinances: 62%. 

Calendar year: 2002; 
Mortgage rate: 6.13%; 
New purchases: 33%; 
Refinances: 67%. 

Calendar year: 2003; 
Mortgage rate: 5.49%; 
New purchases: 24%; 
Refinances: 76%. 

Calendar year: 2004; 
Mortgage rate: 5.48%; 
New purchases: 42%; 
Refinances: 58%. 

Calendar year: 2005; 
Mortgage rate: 5.41%; 
New purchases: 43%; 
Refinances: 57%. 

Calendar year: 2006; 
Mortgage rate: 5.95%; 
New purchases: 43%; 
Refinances: 57%. 

Calendar year: 2007; 
Mortgage rate: 5.95%; 
New purchases: 39%; 
Refinances: 61%. 

Calendar year: 2008; 
Mortgage rate: 5.92%; 
New purchases: 45%; 
Refinances: 55%. 

Calendar year: 2009; 
Mortgage rate: 5.19%; 
New purchases: 28%; 
Refinances: 72%. 

Calendar year: 2010; 
Mortgage rate: 4.79%; 
New purchases: 31%; 
Refinances: 69%. 

Calendar year: 2011; 
Mortgage rate: 4.46%; 
New purchases: 32%; 
Refinances: 68%. 

Calendar year: 2012; 
Mortgage rate: 3.67%; 
New purchases: 27%; 
Refinances: 73%. 

Calendar year: 2013; 
Mortgage rate: 4.05%; 
New purchases: 34%; 
Refinances: 66%. 

Source: GAO analysis of Bloomberg and Inside Mortgage Finance data. 
GAO-15-131. 

Note: Mortgage rate is the 30-year conventional fixed-rate mortgage 
rate. 

[End of figure] 

Before the financial crisis, many borrowers withdrew equity from their 
homes. HELOCs, which draw down the home's equity when borrower's use 
them, were popular (see figure 7), and some borrowers refinanced with 
cash-out refinance mortgages with which they converted increased 
equity into cash by taking out a loan larger than the remaining loan 
balance. Data from Freddie Mac for a sample of loans retained in their 
portfolio show that between 2004 and 2007, homeowners cashed out 
approximately $966 billion in home equity and that in 2006, cash-out 
refinances accounted for nearly 30 percent of all refinances in 
Freddie Mac's portfolio.[Footnote 43] At the same time, many new 
nonprime mortgages had features that made it more difficult to 
accumulate home equity and to refinance with new loans.[Footnote 44] 

The years from 2008 through 2011 were the first in which aggregate 
home mortgage debt exceeded home equity since the data were first 
collected in 1945 (see figure 9). During this period a significant 
number of homeowners found themselves underwater on their mortgages--
in a situation in which they owed more than the home was worth--
because of the substantial decline in home prices and trailing 
declines in mortgage debt. The fall in mortgage debt since 2009 has 
been attributed to defaults on existing mortgage loans by financially 
distressed borrowers, consumers generally paying down debt, and 
tightened lending standards that contributed to a decline in home 
purchases and less accumulation of debt.[Footnote 45] As of December 
2011, national home equity (the difference between aggregate home 
value and mortgage debt owned by homeowners) was approximately $3.7 
trillion less than total home mortgage debt. In 2013 home equity rose 
past home mortgage debt again, and, as of the end of 2013, aggregate 
home equity exceeded aggregate home mortgage debt by approximately 
$655 billion. 

Figure 9: Value of Home Equity and Aggregate Mortgage Debt and 
Recession Periods, 1945-2013: 

[Refer to PDF for image: multiple line graph] 

Year: 1945; 
Aggregate mortgage debt: $0.24 trillion; 
Home equity: $1.26 trillion; 
Period of recession. 

Year: 1946; 
Aggregate mortgage debt: $0.28 trillion; 
Home equity: $1.32 trillion. 

Year: 1947; 
Aggregate mortgage debt: $0.29 trillion; 
Home equity: $1.56 trillion. 

Year: 1948; 
Aggregate mortgage debt: $0.32 trillion; 
Home equity: $1.61 trillion; 
Period of recession. 

Year: 1949; 
Aggregate mortgage debt: $0.37 trillion; 
Home equity: $1.7 trillion5; 
Period of recession. 

Year: 1950; 
Aggregate mortgage debt: $0.44 trillion; 
Home equity: $1.92 trillion. 

Year: 1951; 
Aggregate mortgage debt: $0.46 trillion; 
Home equity: $1.97 trillion. 

Year: 1952; 
Aggregate mortgage debt: $0.51 trillion; 
Home equity: $2.07 trillion. 

Year: 1953; 
Aggregate mortgage debt: $0.57 trillion; 
Home equity: $2.17 trillion; 
Period of recession. 

Year: 1954; 
Aggregate mortgage debt: $0.65 trillion; 
Home equity: $2.28 trillion; 
Period of recession. 

Year: 1955; 
Aggregate mortgage debt: $0.76 trillion; 
Home equity: $2.43 trillion. 

Year: 1956; 
Aggregate mortgage debt: $0.85 trillion; 
Home equity: $2.53 trillion. 

Year: 1957; 
Aggregate mortgage debt: $0.89 trillion; 
Home equity: $2.57 trillion; 
Period of recession. 

Year: 1958; 
Aggregate mortgage debt: $0.95 trillion; 
Home equity: $2.59 trillion; 
Period of recession. 

Year: 1959; 
Aggregate mortgage debt: $1.04 trillion; 
Home equity: $2.67 trillion. 

Year: 1960; 
Aggregate mortgage debt: $1.11 trillion; 
Home equity: $2.72 trillion; 
Period of recession. 

Year: 1961; 
Aggregate mortgage debt: $1.2 trillion; 
Home equity: $2.78 trillion; 
Period of recession. 

Year: 1962; 
Aggregate mortgage debt: $1.3 trillion; 
Home equity: $2.81 trillion. 

Year: 1963; 
Aggregate mortgage debt: $1.41 trillion; 
Home equity: $2.8 trillion. 

Year: 1964; 
Aggregate mortgage debt: $1.52 trillion; 
Home equity: $2.84 trillion. 

Year: 1965; 
Aggregate mortgage debt: $1.62 trillion; 
Home equity: $2.86 trillion. 

Year: 1966; 
Aggregate mortgage debt: $1.67 trillion; 
Home equity: $2.99 trillion. 

Year: 1967; 
Aggregate mortgage debt: $1.72 trillion; 
Home equity: $3.07 trillion. 

Year: 1968; 
Aggregate mortgage debt: $1.76 trillion; 
Home equity: $3.38 trillion. 

Year: 1969; 
Aggregate mortgage debt: $1.77 trillion; 
Home equity: $3.52 trillion; 
Period of recession. 

Year: 1970; 
Aggregate mortgage debt: $1.72 trillion; 
Home equity: $3.53 trillion; 
Period of recession. 

Year: 1971; 
Aggregate mortgage debt: $1.78 trillion; 
Home equity: $3.73 trillion. 

Year: 1972; 
Aggregate mortgage debt: $1.91 trillion; 
Home equity: $4.21 trillion. 

Year: 1973; 
Aggregate mortgage debt: $2.01 trillion; 
Home equity: $4.56 trillion; 
Period of recession. 

Year: 1974; 
Aggregate mortgage debt: $1.98 trillion; 
Home equity: $3.98 trillion; 
Period of recession. 

Year: 1975; 
Aggregate mortgage debt: $1.99 trillion; 
Home equity: $4.13 trillion; 
Period of recession. 

Year: 1976; 
Aggregate mortgage debt: $2.12 trillion; 
Home equity: $4.39 trillion. 

Year: 1977; 
Aggregate mortgage debt: $2.32 trillion; 
Home equity: $4.93 trillion. 

Year: 1978; 
Aggregate mortgage debt: $2.53 trillion; 
Home equity: $5.36 trillion. 

Year: 1979; 
Aggregate mortgage debt: $2.65 trillion; 
Home equity: $5.7 trillion. 

Year: 1980; 
Aggregate mortgage debt: $2.62 trillion; 
Home equity: $5.7 trillion; 
Period of recession. 

Year: 1981; 
Aggregate mortgage debt: $2.56 trillion; 
Home equity: $5.88 trillion; 
Period of recession. 

Year: 1982; 
Aggregate mortgage debt: $2.49 trillion; 
Home equity: $5.83 trillion; 
Period of recession. 

Year: 1983; 
Aggregate mortgage debt: $2.61 trillion; 
Home equity: $5.82 trillion. 

Year: 1984; 
Aggregate mortgage debt: $2.79 trillion; 
Home equity: $6.47 trillion. 

Year: 1985; 
Aggregate mortgage debt: $3.14 trillion; 
Home equity: $7.04 trillion. 

Year: 1986; 
Aggregate mortgage debt: $3.5 trillion; 
Home equity: $7.44 trillion. 

Year: 1987; 
Aggregate mortgage debt: $3.75 trillion; 
Home equity: $7.73 trillion. 

Year: 1988; 
Aggregate mortgage debt: $4.05 trillion; 
Home equity: $8 trillion. 

Year: 1989; 
Aggregate mortgage debt: $4.25 trillion; 
Home equity: $8.23 trillion. 

Year: 1990; 
Aggregate mortgage debt: $4.44 trillion; 
Home equity: $7.69 trillion; 
Period of recession. 

Year: 1991; 
Aggregate mortgage debt: $4.56 trillion; 
Home equity: $7.36 trillion; 
Period of recession. 

Year: 1992; 
Aggregate mortgage debt: $4.72 trillion; 
Home equity: $7.34 trillion. 

Year: 1993; 
Aggregate mortgage debt: $4.84 trillion; 
Home equity: $7.28 trillion. 

Year: 1994; 
Aggregate mortgage debt: $4.97 trillion; 
Home equity: $7.26 trillion. 

Year: 1995; 
Aggregate mortgage debt: $5.07 trillion; 
Home equity: $7.24 trillion. 

Year: 1996; 
Aggregate mortgage debt: $5.25 trillion; 
Home equity: $7.26 trillion. 

Year: 1997; 
Aggregate mortgage debt: $5.45 trillion; 
Home equity: $7.4 trillion. 

Year: 1998; 
Aggregate mortgage debt: $5.79 trillion; 
Home equity: $8.06 trillion. 

Year: 1999; 
Aggregate mortgage debt: $6.2 trillion; 
Home equity: $8.69 trillion. 

Year: 2000; 
Aggregate mortgage debt: $6.51 trillion; 
Home equity: $9.99 trillion. 

Year: 2001; 
Aggregate mortgage debt: $7 trillion; 
Home equity: $10.84 trillion; 
Period of recession. 

Year: 2002; 
Aggregate mortgage debt: $7.81 trillion; 
Home equity: $11.43 trillion. 

Year: 2003; 
Aggregate mortgage debt: $8.75 trillion; 
Home equity: $12.1 trillion. 

Year: 2004; 
Aggregate mortgage debt: $9.69 trillion; 
Home equity: $13.69 trillion. 

Year: 2005; 
Aggregate mortgage debt: $10.63 trillion; 
Home equity: $15.62 trillion. 

Year: 2006; 
Aggregate mortgage debt: $11.45 trillion; 
Home equity: $14.67 trillion. 

Year: 2007; 
Aggregate mortgage debt: $11.92 trillion; 
Home equity: $11.32 trillion; 
Period of recession. 

Year: 2008; 
Aggregate mortgage debt: $11.44 trillion; 
Home equity: $7.41 trillion; 
Period of recession. 

Year: 2009; 
Aggregate mortgage debt: $11.31 trillion; 
Home equity: $7.05 trillion; 
Period of recession. 

Year: 2010; 
Aggregate mortgage debt: $10.58 trillion; 
Home equity: $6.88 trillion. 

Year: 2011; 
Aggregate mortgage debt: $10.02 trillion; 
Home equity: $6.48 trillion. 

Year: 2012; 
Aggregate mortgage debt: $9.57 trillion; 
Home equity: $8.07 trillion. 

Year: 2013; 
Aggregate mortgage debt: $9.37 trillion; 
Home equity: $10.03 trillion. 

Source: Federal Reserve, Flow of Funds Accounts of the United States; 
Bureau of Labor Statistics; and National Bureau of Economic Research. 
GAO-15-131. 

[End of figure] 

The financial crisis resulted in increased mortgage defaults and 
foreclosures. From 1979 until 2007, mortgage performance had been 
relatively stable and the rates of default and foreclosure inventory--
the percentage of total mortgage loans in foreclosure--were below 1 or 
2 percent, respectively (see figure 10). But after the financial 
crisis, the rates of default and foreclosure rose to historic levels--
defaults peaked at 5 percent of mortgages at the end of 2009 and the 
foreclosure inventory peaked at 4.6 percent of mortgages in the first 
quarter of 2010--before beginning to decline. While defaults and 
foreclosures have declined, more than 1.15 million homes were in 
foreclosure at the end of 2013, according to data from the Mortgage 
Bankers Association. 

Figure 10: Percentage of Mortgage Loans in Default 90 Days or More or 
in Foreclosure and Recession Periods, 1979-2013: 

[Refer to PDF for image: multiple line graph] 

The figure is a line graph with the year on the x axis (1979 through the second quarter 
of 2013) and the percentage of mortgage loans on the y axis. The graph has three trend 
lines, one for defaults, a second for foreclosure starts, and a third for foreclosure 
inventory. Periods of economic recession are represented by shaded areas.

Source: GAO analysis of Mortgage Bankers Association data, National 
Bureau of Economic Research. GAO-15-131. 

[End of figure] 

Although the government's role in the primary market had declined 
between 2004 and 2006, reaching a low of less than 3 percent of 
originations in 2006, the 2007-2009 financial crisis and the 
accompanying rapid increase in foreclosures reversed this trend. The 
government took steps to mitigate the effect of the economic downturn 
and increase access to mortgage credit by increasing loan limits for 
FHA-insured mortgages and mortgage loans eligible for securitization 
by the enterprises. Considering only new mortgage originations, the 
share of mortgages that were federally insured grew relative to those 
that were privately insured or uninsured from 2007 to 2009 (see figure 
11). By 2009, over 85 percent of all new insured mortgages were 
insured by FHA or guaranteed by VA and USDA. In an effort to help 
troubled homeowners and stem the increase in foreclosures, the 
government also introduced several emergency programs, including the 
Home Affordable Modification Program.[Footnote 46] As of November 
2013, about 1.3 million borrowers had entered into a permanent loan 
modification through this program, and, to increase participation, the 
program deadline has been extended through December 2016. As of the 
end of 2013, defaults and foreclosure rates were continuing to 
improve, but many homeowners continued to be at risk for foreclosure, 
and government-guaranteed and -insured mortgages and mortgages 
eligible for securitization by the enterprises continued to be the 
primary options for borrowers. 

Figure 11: Value of New Insured Mortgage Originations and Distribution 
of Market Share, 2000-2013: 

[Refer to PDF for image: 2 vertical bar graphs] 

Calendar year: 2000; 
Uninsured Mortgages (estimated): $766.3 million; 
Privately Insured Mortgages: $163.2 million; 
Government Insured or Guaranteed Mortgages: $118.5 million. 

Calendar year: 2001; 
Uninsured Mortgages (estimated): $1.8 billion; 
Privately Insured Mortgages: $283.0 million; 
Government Insured or Guaranteed Mortgages: $170.0 million. 

Calendar year: 2002; 
Uninsured Mortgages (estimated): $2.358 billion; 
Privately Insured Mortgages: $337.1 million; 
Government Insured or Guaranteed Mortgages: $190.4 million. 

Calendar year: 2003; 
Uninsured Mortgages (estimated): $3.305 billion; 
Privately Insured Mortgages: $404.6 million; 
Government Insured or Guaranteed Mortgages: $235.8 million. 

Calendar year: 2004; 
Uninsured Mortgages (estimated): $2.523 billion; 
Privately Insured Mortgages: $263.8 million; 
Government Insured or Guaranteed Mortgages: $133.3 million. 

Calendar year: 2005; 
Uninsured Mortgages (estimated): $2.766 billion; 
Privately Insured Mortgages: $267.5 million; 
Government Insured or Guaranteed Mortgages: $86.6 million. 

Calendar year: 2006; 
Uninsured Mortgages (estimated): $2.631 billion; 
Privately Insured Mortgages: $266.1 million; 
Government Insured or Guaranteed Mortgages: $82.5 million. 

Calendar year: 2007; 
Uninsured Mortgages (estimated): $1.963 billion; 
Privately Insured Mortgages: $357.1 million; 
Government Insured or Guaranteed Mortgages: $109.9 million. 

Calendar year: 2008; 
Uninsured Mortgages (estimated): $1.003 billion; 
Privately Insured Mortgages: $193.3 million; 
Government Insured or Guaranteed Mortgages: $304.2 million. 

Calendar year: 2009; 
Uninsured Mortgages (estimated): $1.288 billion; 
Privately Insured Mortgages: $81.7 million; 
Government Insured or Guaranteed Mortgages: $470.7 million. 

Calendar year: 2010; 
Uninsured Mortgages (estimated): $1.177 billion; 
Privately Insured Mortgages: $70.2 million; 
Government Insured or Guaranteed Mortgages: $382.7 million. 

Calendar year: 2011; 
Uninsured Mortgages (estimated): $1.105 billion; 
Privately Insured Mortgages: $84.5 million; 
Government Insured or Guaranteed Mortgages: $306.0 million. 

Calendar year: 2012; 
Uninsured Mortgages (estimated): $1.551 billion; 
Privately Insured Mortgages: $174.9 million; 
Government Insured or Guaranteed Mortgages: $394.5 million. 

Calendar year: 2013; 
Uninsured Mortgages (estimated): $1.296 billion; 
Privately Insured Mortgages: $212.1 million; 
Government Insured or Guaranteed Mortgages: $381.9 million. 

Percentage: 

	Uninsured Mortgages (estimated)	Privately Insured 
Mortgages	Government Insured or Guaranteed Mortgages 

Calendar year: 2000; 
Uninsured Mortgages (estimated): 73%; 
Privately Insured Mortgages: 16%; 
Government Insured or Guaranteed Mortgages: 11%. 

Calendar year: 2001; 
Uninsured Mortgages (estimated): 80%; 
Privately Insured Mortgages: 13%; 
Government Insured or Guaranteed Mortgages: 8%. 

Calendar year: 2002; 
Uninsured Mortgages (estimated): 82%; 
Privately Insured Mortgages: 12%; 
Government Insured or Guaranteed Mortgages: 7%. 

Calendar year: 2003; 
Uninsured Mortgages (estimated): 84%; 
Privately Insured Mortgages: 10%; 
Government Insured or Guaranteed Mortgages: 6%. 

Calendar year: 2004; 
Uninsured Mortgages (estimated): 86%; 
Privately Insured Mortgages: 9%; 
Government Insured or Guaranteed Mortgages: 5%. 

Calendar year: 2005; 
Uninsured Mortgages (estimated): 89%; 
Privately Insured Mortgages: 8.575; 
Government Insured or Guaranteed Mortgages: 3%. 

Calendar year: 2006; 
Uninsured Mortgages (estimated): 88%; 
Privately Insured Mortgages: 9%; 
Government Insured or Guaranteed Mortgages: 3%. 

Calendar year: 2007; 
Uninsured Mortgages (estimated): 81%; 
Privately Insured Mortgages: 15%; 
Government Insured or Guaranteed Mortgages: 5%. 

Calendar year: 2008; 
Uninsured Mortgages (estimated): 67%; 
Privately Insured Mortgages: 13%; 
Government Insured or Guaranteed Mortgages: 20%. 

Calendar year: 2009; 
Uninsured Mortgages (estimated): 70%; 
Privately Insured Mortgages: 4%; 
Government Insured or Guaranteed Mortgages: 26%. 

Calendar year: 2010; 
Uninsured Mortgages (estimated): 72%; 
Privately Insured Mortgages: 4%; 
Government Insured or Guaranteed Mortgages: 23%. 

Calendar year: 2011; 
Uninsured Mortgages (estimated): 74%; 
Privately Insured Mortgages: 6%; 
Government Insured or Guaranteed Mortgages: 20%. 

Calendar year: 2012; 
Uninsured Mortgages (estimated): 73%; 
Privately Insured Mortgages: 8%; 
Government Insured or Guaranteed Mortgages: 19%. 

Calendar year: 2013; 
Uninsured Mortgages (estimated): 69%; 
Privately Insured Mortgages: 11%; 
Government Insured or Guaranteed Mortgages: 20%. 

Source: GAO analysis of Inside Mortgage Finance data. GAO-15-131. 

[End of figure] 

Developments in the Secondary Market Have Also Affected the 
Government's Role in Housing Finance: 

Until 2009 the securitization rate of mortgage originations generally 
had been increasing. Over the period from 2000 through 2013, the rate 
began at 50 percent in 2000, peaked at 84 percent in 2009, and ended 
at 79 percent in 2013 (see figure 12).[Footnote 47] 

Figure 12: Distribution of Mortgage Originations between Securities 
and Held-in Portfolio, 2000-2013: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 2000; 
Securitized Originations: 50%; 
Originations Held In Portfolio (Estimated): 50%. 

Calendar year: 2001; 
Securitized Originations: 60%; 
Originations Held In Portfolio (Estimated): 40%. 

Calendar year: 2002; 
Securitized Originations: 63%; 
Originations Held In Portfolio (Estimated): 37%. 

Calendar year: 2003; 
Securitized Originations: 67%; 
Originations Held In Portfolio (Estimated): 33%. 

Calendar year: 2004; 
Securitized Originations: 63%; 
Originations Held In Portfolio (Estimated): 37%. 

Calendar year: 2005; 
Securitized Originations: 68%; 
Originations Held In Portfolio (Estimated): 32%. 

Calendar year: 2006; 
Securitized Originations: 68%; 
Originations Held In Portfolio (Estimated): 32%. 

Calendar year: 2007; 
Securitized Originations: 74%; 
Originations Held In Portfolio (Estimated): 26%. 

Calendar year: 2008; 
Securitized Originations: 78%; 
Originations Held In Portfolio (Estimated): 22%. 

Calendar year: 2009; 
Securitized Originations: 84%; 
Originations Held In Portfolio (Estimated): 16%. 

Calendar year: 2010; 
Securitized Originations: 82%; 
Originations Held In Portfolio (Estimated): 18%. 

Calendar year: 2011; 
Securitized Originations: 75%; 
Originations Held In Portfolio (Estimated): 25%. 

Calendar year: 2012; 
Securitized Originations: 76%; 
Originations Held In Portfolio (Estimated): 24%. 

Calendar year: 2013; 
Securitized Originations: 78%; 
Originations Held In Portfolio (Estimated): 22%. 

Source: GAO analysis of Inside Mortgage Finance data. GAO-15-131. 

Note: Originations held in portfolio were estimated from data on the 
value of mortgages originated and the value of mortgages securitized. 

[End of figure] 

Over that same period, FHLBank advances, which can be an alternative 
to securitizations as a source of liquidity for mortgage originations, 
also varied.[Footnote 48] According to the FHLBanks' financial 
statements, advances, which had been rising prior to the financial 
crisis, rose by over 35 percent between 2006 and 2007 and continued to 
rise into 2008, reaching an end of year value of about $929 billion. 
Since the crisis, advances have generally declined to levels 
consistent with those in the early 2000s. At the end of 2013 advances 
were almost $500 billion. According to the Council of Federal Home 
Loan Banks, outstanding advances rose during the crisis to meet 
liquidity needs. However, since the height of the economic crisis, 
advances have declined as reduced loan demand and excess liquidity 
have reduced members' need for advances. 

The rapid expansion of nonprime lending and private-label MBS 
contributed to the increase in securitization between 2000 and 2009 
(see figure 13). Specifically, the market share of private-label MBS, 
which typically pool jumbo and nonprime mortgages, grew rapidly from 
2004 to 2006.[Footnote 49] During this time, the market share of the 
enterprises' MBS, which pool eligible prime mortgages, and MBS 
guaranteed by Ginnie Mae decreased. However, there have been almost no 
new issuances of private-label MBS since the onset of the financial 
crisis.[Footnote 50] As illustrated in figure 13, since 2008, the 
market shares of the enterprises, which were in conservatorship, and 
Ginnie Mae have increased. Thus, the government supported almost all 
of the value of new MBS securities issued in 2008 and continued to do 
so through 2013. 

Figure 13: Value of Mortgage-Backed Securities Issued and Distribution 
of Market Share, 2000-2013: 

[Refer to PDF for image: 2 vertical bar graphs] 

Dollars: 

Calendar year: 2000; 
Fannie Mae and Freddie Mac (enterprises): $379 billion; 
Ginnie Mae: $103 billion; 
Private-label jumbo: $45 billion; 
Private-label nonprime: $56 billion. 

Calendar year: 2001; 
Fannie Mae and Freddie Mac (enterprises): $915 billion; 
Ginnie Mae: $173 billion; 
Private-label jumbo: $142 billion; 
Private-label nonprime: $98 billion. 

Calendar year: 2002; 
Fannie Mae and Freddie Mac (enterprises): $1.270 trillion; 
Ginnie Mae: $172 billion; 
Private-label jumbo: $172 billion; 
Private-label nonprime: $176 billion. 

Calendar year: 2003; 
Fannie Mae and Freddie Mac (enterprises): $1.912 trillion; 
Ginnie Mae: $219 billion; 
Private-label jumbo: $238 billion; 
Private-label nonprime: $269 billion. 

Calendar year: 2004; 
Fannie Mae and Freddie Mac (enterprises): $892 billion; 
Ginnie Mae: $126 billion; 
Private-label jumbo: $233 billion; 
Private-label nonprime: $521 billion. 

Calendar year: 2005; 
Fannie Mae and Freddie Mac (enterprises): $879 billion; 
Ginnie Mae: $86 billion; 
Private-label jumbo: $281 billion; 
Private-label nonprime: $797 billion. 

Calendar year: 2006; 
Fannie Mae and Freddie Mac (enterprises): $817 billion; 
Ginnie Mae: $83 billion; 
Private-label jumbo: $219 billion; 
Private-label nonprime: $814 billion. 

Calendar year: 2007; 
Fannie Mae and Freddie Mac (enterprises): $1.062 trillion; 
Ginnie Mae: $99 billion; 
Private-label jumbo: $178 billion; 
Private-label nonprime: $433 billion. 

Calendar year: 2008; 
Fannie Mae and Freddie Mac (enterprises): $900 billion; 
Ginnie Mae: $269 billion; 
Private-label jumbo: $7 billion; 
Private-label nonprime: $2 billion. 

Calendar year: 2009; 
Fannie Mae and Freddie Mac (enterprises): $1.107 trillion; 
Ginnie Mae: $446 billion. 

Calendar year: 2010; 
Fannie Mae and Freddie Mac (enterprises): $953 billion; 
Ginnie Mae: $365 billion. 

Calendar year: 2011; 
Fannie Mae and Freddie Mac (enterprises): $833 billion; 
Ginnie Mae: $285 billion; 
Private-label jumbo: $1 billion. 

Calendar year: 2012; 
Fannie Mae and Freddie Mac (enterprises): $1.231 trillion; 
Ginnie Mae: $366 billion; 
Private-label jumbo: $4 billion. 

Calendar year: 2013; 
Fannie Mae and Freddie Mac (enterprises): $1.110 trillion; 
Ginnie Mae: $361 billion; 
Private-label jumbo: $13 billion. 

Percentage: 

Calendar year: 2000; 
Fannie Mae and Freddie Mac (enterprises): 65%; 
Ginnie Mae: 18%; 
Private-label jumbo: 8%; 
Private-label nonprime: 10%. 

Calendar year: 2001; 
Fannie Mae and Freddie Mac (enterprises): 69%; 
Ginnie Mae: 13%; 
Private-label jumbo: 11%; 
Private-label nonprime: 7%. 

Calendar year: 2002; 
Fannie Mae and Freddie Mac (enterprises): 71%; 
Ginnie Mae: 10%; 
Private-label jumbo: 10%; 
Private-label nonprime: 10%. 

Calendar year: 2003; 
Fannie Mae and Freddie Mac (enterprises): 73%; 
Ginnie Mae: 8%; 
Private-label jumbo: 9%; 
Private-label nonprime: 10%. 

Calendar year: 2004; 
Fannie Mae and Freddie Mac (enterprises): 50%; 
Ginnie Mae: 7%; 
Private-label jumbo: 13%; 
Private-label nonprime: 29%. 

Calendar year: 2005; 
Fannie Mae and Freddie Mac (enterprises): 43%; 
Ginnie Mae: 4%; 
Private-label jumbo: 14%; 
Private-label nonprime: 39%. 

Calendar year: 2006; 
Fannie Mae and Freddie Mac (enterprises): 42%; 
Ginnie Mae: 4.3%; 
Private-label jumbo: 11%; 
Private-label nonprime: 42%. 

Calendar year: 2007; 
Fannie Mae and Freddie Mac (enterprises): 60%; 
Ginnie Mae: 6%; 
Private-label jumbo: 10%; 
Private-label nonprime: 24%. 

Calendar year: 2008; 
Fannie Mae and Freddie Mac (enterprises): 76%; 
Ginnie Mae: 23%; 
Private-label jumbo: 1%. 

Calendar year: 2009; 
Fannie Mae and Freddie Mac (enterprises): 71%; 
Ginnie Mae: 29%. 

Calendar year: 2010; 
Fannie Mae and Freddie Mac (enterprises): 72%; 
Ginnie Mae: 28%. 

Calendar year: 2011; 
Fannie Mae and Freddie Mac (enterprises): 75%; 
Ginnie Mae: 25%. 

Calendar year: 2012; 
Fannie Mae and Freddie Mac (enterprises): 77%; 
Ginnie Mae: 23%. 

Calendar year: 2013; 
Fannie Mae and Freddie Mac (enterprises): 75%; 
Ginnie Mae: 24%; 
Private-label jumbo: 1%. 

Source: GAO analysis of Inside Mortgage Finance data. GAO-15-131. 

[End of figure] 

The increasing reliance on securitization that began around 1980, the 
rapid increase and subsequent decline in private-label securities that 
reasserted the market dominance of the enterprises and Ginnie Mae, and 
the change in the status of the enterprises combined to increase the 
government's role in the secondary market. The percentage of the 
secondary market controlled by Ginnie Mae and the enterprises has 
grown since the onset of the crisis, in part, because Congress 
increased loan limits for FHA-insured loans and loans eligible for 
enterprise securitization. The government's role has also changed as a 
result of placing the enterprises into conservatorship in 2008. The 
Senior Preferred Stock Purchase Agreements, which provide capital 
support from the Treasury to the enterprises, are the federal 
government's single largest risk exposure remaining from its emergency 
actions to assist the financial sector after the financial crisis. 
[Footnote 51] Given the government investment in the enterprises and 
variations in the secondary market over the period, the government 
supported almost all of the value of new MBS issued in 2013.[Footnote 
52] Because of this support, the government indirectly supports the 
mortgages backing the MBS. In response to the financial crisis, the 
Federal Reserve and Treasury have provided additional support for the 
mortgage market by purchasing MBS issued by the enterprises and those 
that have Ginnie Mae guarantees.[Footnote 53] As of the end of 2013, 
the Federal Reserve, which was one of the largest purchasers of 
enterprise and Ginnie Mae MBS, held approximately $1.5 trillion of 
these securities, but announced in January 2014 that it planned to 
decrease purchases due to improvements in the economy.[Footnote 54] 
Treasury had completed the sale of its MBS investments in fiscal year 
2012. 

Market Developments since 2000 Have Challenged the Single-Family 
Housing Finance System: 

Market developments since 2000 have challenged the single-family 
housing finance system and revealed some key weaknesses in that 
system, including misaligned incentives, an overall lack of reliable 
information or transparency, and excessive risk taking. These 
developments are evident throughout the phases of the mortgage 
lifecycle--origination, securitization, and mortgage servicing. 

Key Weaknesses in the Housing Finance System Have Been Revealed since 
2000: 

Some market developments that occurred prior to the financial crisis 
may have contributed directly to it, revealing weaknesses in the 
housing finance system. However, some weaknesses--in particular those 
related to mortgage servicing--were revealed only after the onset of 
the crisis when mortgage defaults and foreclosures rose. These 
interrelated weaknesses include misaligned incentives, lack of 
information or transparency, and excessive risk taking (See table 1). 

Table 1: Some Weaknesses in the Housing Finance System Revealed Since 
2000: 

Weakness: Misaligned incentives; 
Definition: Individual interests or interests of some groups do not 
align with the interests of other groups or a system; 
often long-and short-term interests of individuals or groups differ, 
as well. Misaligned incentives are closely tied to a lack of 
accountability; 
Examples: 
* Originators' incentives were not aligned with those of borrowers 
because the former tended to sell mortgages in the secondary market 
and did not retain credit risk. This may have led to the origination 
of mortgages with higher potential default rates; 
* The structure of the enterprises as for-profit entities provided 
them with incentives that were not well-aligned with their public 
missions; 
* Because private-label securitizers generally did not retain credit 
risk their incentives may have differed from those of investors; 
* Individual compensation for originators and securitizers that were 
focused on the short term was often misaligned with the longer terms 
interests of firms, investors, and borrowers. 

Weakness: Lack of information or transparency; 
Definition: Adequate information to weigh risks related to products is 
not shared between one party and another or parties do not have 
information that would allow them to respond effectively to adverse 
market developments; 
Examples: 
* Some borrowers lacked reliable and relevant information to 
adequately understand risks associated with nonprime loans because 
originators were not required to disclose certain features to 
borrowers in a readily understandable manner; 
* Investors may have lacked reliable and relevant information to 
adequately assess credit risk because they did not receive adequate 
data and relied on MBS credit ratings that may not have represented 
actual risk levels. 

Weakness: Excessive risk taking; 
Definition: When the costs of the risk taking do not fall solely on or 
are not well understood by the person or entity taking the risk. 
Excessive risk taking can occur when checks on such risk taking, such 
as internal controls or regulation, are lacking; 
Examples: 
* Lenders loosened underwriting standards during the housing bubble, 
likely leading to excessive risk taking by borrowers; 
* The enterprises structures provided them with incentives to engage 
in potentially profitable business practices that were risky without 
taking precautions such as holding capital commensurate with those 
risks. 

Source: GAO. GAO-15-131. 

[End of table] 

Developments in the Mortgage Origination Process Revealed Many 
Weaknesses: 

A number of developments in the mortgage origination process for home 
purchases and mortgage refinancing may have contributed to the housing 
bubble and, therefore, to the financial crisis. These market 
developments challenged the housing finance system and revealed 
weaknesses in that system. For example, prior to the financial crisis: 

* Originators' incentives were not aligned with the long-term 
interests of borrowers because originators did not retain credit risk. 
Mortgage originators lowered underwriting standards, enabling less-
qualified borrowers to access mortgage credit.[Footnote 55] These 
changes included reducing or eliminating requirements for 
documentation of borrowers' incomes and assets. Originators lowered 
underwriting standards, in part to respond to demand for new mortgage 
originations in the secondary market. In addition, originators and 
brokers may have focused on increasing loan volume in the short-term, 
and thereby their fees, rather than originating loans more suitable 
for borrowers. 

* Similarly, with the ability to pass on credit risk and compensation 
structures that rewarded them in the short term, mortgage originators 
offered nonprime mortgages that included high-risk features. Features 
of nonprime mortgages, such as loans with high LTV ratios and interest-
only payments, have been found to increase the likelihood of default. 
[Footnote 56] However, during periods of rapid house price 
appreciation, such as that experienced during the housing bubble, 
these risks were mitigated. Some mortgage originators may have steered 
borrowers who were qualified for less risky products to these nonprime 
mortgages. Some mortgage brokers received yield spread premiums 
(bonuses or extra compensation) for referring borrowers to high-
interest loans. Some consumer advocates have noted that compensating 
brokers this way may have resulted in some borrowers receiving loans 
with higher interest rates and fees.[Footnote 57] These mortgages were 
not in the best interest of some borrowers. 

* Many borrowers may have lacked information or may not have fully 
understood the risks associated with the features of nonprime loans. 
Prior to the crisis, because mortgage originators were not required to 
disclose completely all of the features of nonprime loans, some 
mortgage originators may not have disclosed some high-risk features, 
contributing to borrowers assuming excessive risk. For example, 
borrowers may have agreed to such loans without understanding the 
potential for substantial increases in monthly payments.[Footnote 58] 
A Treasury official noted that many lenders expected that these loans 
would be refinanced and fees would be paid for by extracting expected 
increases in equity before the loans got into trouble. 

* Borrowers took on excessive risk, and when house prices fell, 
foreclosures rose and homeowners, communities, the housing market, and 
the overall economy experienced adverse effects. The Financial Crisis 
Inquiry Commission Report suggested that the relatively inexpensive 
mortgage credit available during the housing bubble and expectations 
that home prices would continue to rise may have caused borrowers to 
take on more debt than they would have otherwise. Some borrowers may 
have taken on excessive risk by investing in homes they planned to 
sell for a profit or by withdrawing equity from their homes. 

Developments in the mortgage market prior to the financial crisis also 
revealed gaps in the financial regulatory system. As we have 
previously found, the activities of nonbank mortgage lenders were 
generally subject to little or no direct oversight by federal 
regulators.[Footnote 59] We also found that nonbank mortgage lenders 
played a substantial role in the nonprime mortgage market and 
contributed to a dramatic loosening in underwriting standards leading 
up to the crisis. Although these lenders were subject to certain 
federal consumer protection and fair lending laws, they generally have 
not been subject to the same routine monitoring and oversight by 
federal agencies that their bank counterparts were. In addition, the 
complexity and expanded use of nonprime mortgage products made it 
difficult for the current regulatory system to adequately protect 
individual consumers and investors. 

The financial crisis also resulted in new challenges for FHA. During 
the crisis, FHA's market presence expanded as private sector lenders 
exited nonprime markets and tightened credit standards. In response, 
Congress increased the limits on the size of mortgages available for 
FHA insurance in 2008. With increased demand for FHA-insured mortgages 
and higher-than-expected insurance claims and losses, FHA has not met 
its 2 percent statutory minimum capital ratio for its insurance fund 
since 2009. In addition, in 2013, FHA needed funding from the Treasury 
to ensure it had sufficient resources for all future insurance claims 
on its existing portfolio. This funding reflected updated estimates of 
cash flows into and out of the fund over the term of the mortgages in 
its portfolio, rather than an inability to pay current claims. We have 
found previously that tightening underwriting standards, enhancing 
enforcement powers, and improving loss mitigation efforts are among 
options that could help strengthen FHA's financial condition.[Footnote 
60] Consistent with recommendations we made in a 2001 report, we 
stated in our 2013 high-risk update that Congress or FHA needed to 
specify the economic conditions that FHA's insurance fund would be 
expected to withstand without drawing on the Treasury.[Footnote 61] We 
concluded that implementing this prior recommendation would be an 
important step not only in addressing FHA's long-term financial 
viability but also in clarifying FHA's role. The 107th Congress 
considered this matter and did not enact legislation. HUD has not 
implemented our recommendation, but it has adopted modeling techniques 
that can better predict the soundness of the insurance fund. 

While national average home prices began to increase in 2011, 
challenges to the primary market remain. In particular, after the 
crisis hit, mortgage originators tightened underwriting standards, 
which had weakened during the crisis, reducing credit availability and 
limiting opportunities for some borrowers, and constraints for some 
borrowers persist. According to The State of the Nation's Housing 
2013, Ellie Mae reported that lenders have denied mortgages to many 
applicants who had good credit scores but would have been required to 
purchase mortgage insurance because their LTVs were above 80 percent. 
Some government agencies have also acknowledged constraints facing 
some creditworthy borrowers. FHA imposed minimum underwriting 
standards in September 2010 requiring that new borrowers have a 
minimum Fair Isaac Corporation (FICO) credit score of 580 to qualify 
for its 3.5 percent down payment program.[Footnote 62] However, in its 
May 2014 Blueprint for Access, FHA expressed concern about credit 
continuing to be constrained for borrowers with credit scores between 
580 and 680. Similarly, in its strategic plan for the conservatorship 
of the enterprises, issued in May 2014, FHFA expressed concern about 
access for some creditworthy borrowers. FHFA noted that some 
originators and private mortgage insurers require higher minimum 
credit score requirements than would be required by the enterprises, 
resulting in the rejection of many loans that would otherwise meet 
enterprise credit standards. The FHFA Director acknowledged that these 
higher credit standards were the result of lender uncertainty about 
having to repurchase these loans in the future. Nonetheless, the 
enterprises reported data in 2014 showing that while average FICO 
scores remained higher for acquired mortgages than before the 
financial crisis, average origination LTV ratios have steadily 
increased or stayed steady since 2009, indicating that opportunities 
for borrowers with less equity might be improving.[Footnote 63] 

The Secondary Market Helped Fuel Nonprime Mortgage Originations and 
Spread Risks through Complex Products: 

Increases in demand for private-label MBS, which occurred primarily 
between 2004 and 2006, helped fuel the housing bubble and the spike in 
nonprime mortgage originations. In addition, complex financial 
products such as credit default swaps, which were designed to reduce 
the risk associated with MBS for investors, spread risk throughout the 
financial markets and contributed to the onset of the financial 
crisis. Developments prior to the financial crisis also highlighted 
similar weaknesses in the secondary market, such as misaligned 
incentives, lack of transparent information, and excessive risk 
taking. In addition, markets were challenged by gaps in regulation. 
For example: 

* The enterprises' structures included misaligned incentives and led 
to excessive risk taking. We concluded in 2009 that the enterprises' 
structures as for-profit corporations with government sponsorship 
provided them with incentives to engage in potentially profitable 
business practices that were risky and not necessarily supportive of 
their public missions.[Footnote 64] For example, prior to 
conservatorship, the enterprises' retained mortgage portfolios that 
were complex to manage and exposed them to losses resulting from 
changes in interest rates. Further, the enterprises made substantial 
investments in private-label MBS, and the enterprises' management did 
not hold capital commensurate with this additional risk. These 
investments in private-label MBS contributed to losses that led to the 
conservatorship. In addition, the enterprises had a lower cost of 
capital than other for-profit corporations, including private-label 
MBS issuers, because market participants assumed that the federal 
government would support the enterprises if they experienced financial 
distress. This kind of support, referred to as a perceived implicit 
guarantee, likely contributed to the enterprises' taking of excessive 
risk. 

* Similar to the misaligned incentives of lenders and borrowers, 
incentives of issuers of private-label MBS and investors were also 
misaligned because the former generally did not retain the increased 
credit risk associated with lower quality loans. These increased risks 
were passed onto investors who may not have been aware that they were 
taking on increased risk. A lack of information on the part of 
investors likely contributed to their taking on this excessive risk. 

* Increased competition may have led issuers of MBS to accept lower 
quality mortgages for securitization, resulting in higher risk 
securities. Historically, the enterprises issued the vast majority of 
MBS, and we have found that this led to their underwriting guidelines 
becoming the industry standard. Research has suggested that the 
enterprises were able to maintain tighter control over underwriting 
standards for the loans they purchased because of their market share. 
[Footnote 65] The rapid growth of nonprime mortgage lending and 
private-label MBS in the early part of the decade led to increased 
market competition among private-label issuers and the enterprises. 
Competition for market share led issuers of private-label MBS and the 
enterprises to relax underwriting standards and accept riskier 
mortgages. 

* Investors may not have understood the risks of MBS, ultimately 
leading them to take on excessive risk. Prior to the financial crisis, 
investors seeking higher yields invested in private-label MBS because 
these securities offered higher returns than other highly rated 
assets, such as enterprise MBS. While increased yields over other 
highly rated securities should have indicated increased risk, the use 
of complex financial instruments such as credit default swaps allowed 
investors to transfer the credit risk of these investments, and led to 
excessive risk taking.[Footnote 66] Further, some researchers and 
industry representatives have noted the lack of appropriate data made 
it difficult for investors to analyze complex private-label 
securities. In addition, the common expectation that home prices were 
expected to continue to rise further minimized any perceived risks 
associated with MBS. 

* The risks related to private-label MBS also may not have been fully 
understood because most of these securities had received investment 
grade ratings from independent credit ratings agencies that did not 
adequately reflect the risk that these products ultimately posed. We 
have found that leading up to the crisis, some investors had come to 
rely heavily on these ratings rather than conducting independent 
analyses on the quality of assets.[Footnote 67] Further, we found that 
although ratings downgrades for investment grade securities are 
generally infrequent, many of the private-label MBS issued with 
investment grade ratings were later downgraded. In addition, others 
have found that credit-rating agencies used models based, in part, on 
periods of relatively strong credit performance and did not consider 
the possibility of dramatic declines in home prices. We have also 
noted that concerns have been raised over the way in which ratings of 
some private-label MBS may have been influenced by compensation 
arrangements between the issuers and ratings agencies--that is, the 
issuers paid the rating agencies to rate the securities. Prior to the 
crisis, investors who viewed ratings agencies as independent 
evaluators of securities may not have appreciated the potential impact 
on credit ratings posed by apparent conflicts of interest created by 
the relationship between private-label MBS issuers and ratings 
agencies. 

* Incentives provided to individual employees of the enterprises and 
issuers of private-label MBS were often based on short-term results 
and were not well-aligned with the longer term interests of the firms 
that employed them or investors. Prior to the crisis, some employees 
received bonuses based on the volume of MBS issued, which were not 
related to the long-term performance of the securities. This gave 
these employees the incentive to take on excessive risk, and when home 
prices began to fall, firms failed and investors experienced losses. 

* We have previously found that there were gaps in the regulatory 
system related to the secondary market for private-label MBS and that 
market participants and regulators did not fully understand the 
complex financial instruments that were intended to transfer risk. 
[Footnote 68] The complexity and expanded use of these products made 
it difficult for the regulatory system to oversee risk management at 
financial institutions. Many of these institutions, including large 
commercial and investment banks, appeared to have underestimated the 
amount of risk and potential losses that they could face from creating 
and investing in private-label MBS and more complex financial 
instruments. For example, among other factors, the variation and 
complexity of CDO structures, and the underlying assets they contain, 
may explain why institutions--and regulators--did not effectively 
monitor and limit the risk that CDOs represented. 

The High Number of Defaults and Foreclosures Revealed Weaknesses in 
Mortgage Servicing: 

Mortgage securitization, in general, relies on mortgage servicers to 
manage individual mortgages, but the financial crisis revealed the 
mortgage servicing industry's lack of capacity to respond adequately 
to the increased number of mortgage defaults and foreclosures. We have 
reported previously on challenges in mortgage servicing after the 
crisis, such as improper documentation used in foreclosures and the 
difficulty of implementing government foreclosure mitigation programs. 
[Footnote 69] For example, we previously found there were pervasive 
problems with servicer document preparation and oversight of 
foreclosure processes. We also found that servicers faced challenges 
related to implementing the government's first and second lien 
modification programs and that investors were concerned about the lack 
of transparency of modifications. 

In addition, the increase in defaults and foreclosures also revealed 
misaligned incentives, as well as gaps in regulatory oversight that 
might have addressed such weaknesses. For example: 

* Research suggests that while loan modifications can be in the 
financial best interest of investors and borrowers, it can be in the 
financial best interest of servicers to foreclose rather than modify 
mortgages.[Footnote 70] Thus incentives for borrowers, investors, and 
servicers were not always aligned. While servicers were entitled to 
reimbursement of costs related to foreclosures, they may not have been 
entitled to the reimbursement of all costs related to pursuing 
foreclosure alternatives, creating the incentive for servicers to 
pursue foreclosure. Further, servicer reimbursement of costs related 
to foreclosures took precedence over investor claims. In addition, 
servicers had an incentive to charge borrowers additional fees related 
to defaulted loans and, if homeowners lacked the equity to cover these 
fees, proceeds for investors would be decreased to cover the fees. 

* Similarly, the securitization system created additional misaligned 
incentives between servicers and borrowers, and borrowers had little 
ability to hold servicers accountable. As CFPB has noted, mortgage 
servicers that are hired by the owners of mortgage loans face 
competitive pressure to reduce the costs of servicing, and, as a 
result, some servicers provided limited customer service.[Footnote 71] 
For example, some servicers did not provide information on fees 
imposed in borrowers' billing statements. Further, servicers earned 
revenue from fees assessed on borrowers and, as a result, had an 
incentive to look for opportunities to impose fees on borrowers to 
enhance revenues. Borrowers generally did not have the ability to 
change mortgage servicers, unless they refinanced their mortgages. 

* Some breaches of representations and warranties in pooling and 
servicing agreements may not have been identified because of mortgage 
servicers' potential conflicts of interest. Pooling and servicing 
agreements contain representations and warranties that require 
originators to repurchase loans from issuers of MBS if the loans do 
not meet underwriting requirements or in some cases default within a 
certain time period. These representations and warranties are one 
mechanism for aligning the incentives of originators, investors, and 
servicers. However, in some cases, when servicers and originators were 
affiliated, servicers may have had a disincentive to identify loans 
that breached representations and warranties because such loans would 
need to be repurchased by the affiliated originators. 

* Although not directly related to the role of servicers, SEC has 
noted that transaction agreements typically have not included specific 
mechanisms to identify breaches of representations and warranties or 
to resolve a question as to whether a breach of the representations 
and warranties has occurred. Thus, these contractual agreements have 
frequently been ineffective because without access to documents 
relating to each pooled asset, it can be difficult for the trustee, 
who typically notifies the responsible party of an alleged breach, to 
identify a breach. In addition, addressing representation and warranty 
breaches can require that a minimum percentage of investors act 
together. However, investors have noted that it is difficult for them 
to locate other investors so they can jointly exercise their rights. 

* Industry representatives and researchers have noted that although 
loss mitigation actions taken by servicers affect investors, investors 
do not receive adequate and consistent information from servicers that 
would allow them to compare servicer performance in these areas. 

* Oversight of servicers' foreclosure activities and of nonbank 
servicers was limited prior to and during the financial crisis. We 
previously found federal agencies' past oversight of servicers' 
foreclosure activities had been limited and fragmented.[Footnote 72] 
Similarly, nonbank mortgage servicers, especially those that were not 
affiliated with banks or other regulated financial institutions, were 
historically subject to little or no direct oversight by federal 
regulators. Prior to and during the financial crisis, state banking 
regulators generally oversaw independent mortgage servicers by 
requiring business licenses that mandated meeting net worth, funding, 
and liquidity thresholds. Nonetheless, according to VA officials, when 
borrowers in its Home Loan program are experiencing financial 
hardship, VA provides direct oversight of entities servicing those 
loans to ensure that all reasonable effort has been made to help those 
veterans avoid foreclosure. 

The Government Has Taken Some Steps to Address Housing Finance Market 
Challenges through Regulation and Enforcement: 

The federal government revised guidance and regulations and enacted 
legislation designed to address adverse developments or weaknesses 
related to the housing finance market that contributed to the 
financial crisis. For example, in 2006 to better protect borrowers and 
address the safety and soundness of banks, the bank regulators issued 
Interagency Guidance on Nontraditional Mortgage Product Risks. In 
2008, HUD revised the rules implementing RESPA so that the required 
forms would provide additional disclosures, including clear summaries 
of loan terms and conspicuous information about yield spread premiums 
designed to make it easier for potential borrowers to compare 
originators when shopping for a mortgage loan. Also in 2008, Congress 
passed HERA, which created FHFA to address the safety and soundness 
issues and weak oversight at the enterprises.[Footnote 73] HERA also 
gave FHFA responsibility for overseeing the FHLBank System. 

To address challenges related to limitations on mortgage information, 
HERA required FHFA to collect market data.[Footnote 74] To fulfill 
this requirement, in 2012, FHFA and CFPB announced an agreement to 
partner on the creation of a National Mortgage Database to include 
detailed loan information. In addition, the Dodd-Frank Act amended the 
Home Mortgage Disclosure Act of 1975, the main mechanism for 
collecting loan origination data prior to the financial crisis, to 
require additional reporting of loan level mortgage data.[Footnote 75] 
The act transferred Home Mortgage Disclosure Act rulemaking authority 
from the Federal Reserve to CFPB on July 21, 2011. Although these data 
are not yet being collected by CFPB, officials at CFPB noted that the 
agency has taken steps in the rulemaking process. On February 7, 2014, 
CFPB convened a panel to discuss potential changes in the Home 
Mortgage Disclosure Act, and in July 2014, the agency issued a notice 
of proposed rulemaking regarding new and revised mortgage disclosure 
reporting requirements.[Footnote 76] 

The Dodd-Frank Act includes many other provisions to address market 
challenges in the areas of consumer protection, mortgage underwriting, 
and investor protection.[Footnote 77] For example: 

* To protect consumers, the act established CFPB and authorized it to 
supervise certain nonbank financial companies including mortgage 
servicers and brokers, regardless of size, and large banks and credit 
unions for consumer financial protection purposes.[Footnote 78] The 
act transferred to CFPB rulemaking and enforcement authority over many 
previously enacted consumer financial protection laws and requires 
that CFPB track consumer complaints.[Footnote 79] 

* To protect mortgage borrowers, the act requires, among other things, 
that servicers take timely action to respond to borrower requests to 
correct errors in connection with payment allocation, final balances, 
or avoiding foreclosure, or other standard servicer duties. The act 
also requires that servicers provide notices in advance of initial 
interest-rate resets for adjustable-rate mortgages. Further, the act 
requires that servicers credit mortgage payments promptly. CFPB has 
issued rules to implement these provisions as well as to address other 
weaknesses in servicing standards. Specifically, CFPB adopted rules to 
address servicers' obligations to correct errors raised by borrowers; 
provide certain information requested by borrowers, including loss 
mitigation options available to delinquent borrowers; and provide 
borrowers with continuity of contact with appropriate servicer 
personnel. CFPB also adopted rules to require servicers to provide 
borrowers with enhanced information, including notices regarding 
interest rate adjustments. The new rules took effect January 10, 2014. 

* To improve mortgage underwriting and protect borrowers, the act 
amended TILA by prohibiting creditors from making mortgage loans 
without regard to a consumer's ability to repay the loan.[Footnote 80] 
According to the act, a lender is presumed to have satisfied the 
ability-to-repay requirement when it originates a "qualified mortgage" 
(QM).[Footnote 81] CFPB had the responsibility to define QM generally 
and has included a requirement that loans not guaranteed or insured by 
the government not exceed a debt-to-income ratio of 43 percent. 
However, this requirement does not apply to small creditors.[Footnote 
82] HUD had responsibility to define QM for loans insured by FHA. Both 
CFPB's and HUD's QM-definition rules went into effect on January 10, 
2014. In May 2014, to comply with the requirements of the Dodd-Frank 
Act, VA published an interim final rule amending its loan guaranty 
regulations that implement provisions to define QM for VA-guaranteed 
loans for the purpose of the new ability-to-pay provision of TILA. In 
this rule, VA defines the types of VA-guaranteed loans that are 
qualified mortgages for the purpose of the new ability-to-pay 
provision of TILA. USDA also has authority under the Dodd-Frank Act to 
define QM for its loans, but has not yet done so. The Dodd-Frank Act 
also prohibits mortgage originators from "steering" borrowers to 
mortgages that exhibit certain predatory features, restricts the use 
of prepayment penalties, and requires increased consumer disclosures 
related to certain mortgage features. In addition, the act established 
appraisal independence requirements to reduce conflicts of interest 
between appraisers and parties of interest in the transaction. 
Further, the act required that HUD establish an Office of Housing 
Counseling, which, according to HUD officials, began operating in 
October 2012. 

* To protect investors, the act includes provisions related to new 
disclosures for asset-backed securities (ABS) including MBS.[Footnote 
83] The act requires SEC to prescribe regulations to require ratings 
agencies to disclose in their ratings the use of representations and 
warranties and enforcement mechanisms available to investors. The act 
also requires ABS issuers filing a registration statement to review 
the securities' underlying assets and disclose the nature of the 
review in the registration statement.[Footnote 84] It also requires 
SEC to adopt regulations for MBS issuers to make additional 
disclosures of loan-level or asset-level data if such data are 
necessary for investors to independently perform due diligence. Such 
data are to include, among other things, the amount of risk retention 
by the originator and the securitizer of such assets.[Footnote 85] In 
addition, the act prohibits conflicts of interest between individuals 
responsible for developing ABS and investors.[Footnote 86] The act 
also requires that SEC, among other things, issue regulations 
requiring credit rating agencies registered with SEC to address 
conflicts of interest arising from sales and marketing and to disclose 
performance statistics.[Footnote 87] 

* To protect investors further, the act generally includes provisions 
related to risk retention requiring MBS securitizers to retain a 
financial exposure of no less than 5 percent of the credit risk of any 
securitized residential mortgage that does not meet criteria 
associated with a lower risk of default.[Footnote 88] Securitized 
mortgages meeting the criteria--referred to as a "qualified 
residential mortgages (QRM)--are exempt from this risk retention 
requirement; the QRM criteria are to be defined jointly by several 
agencies. The risk retention provision is designed to protect 
investors by providing an incentive for securitizers of non-QRMs to 
ensure that the assets underlying a securitization transaction are 
well-underwritten. 

Since many of the regulatory actions required by the Dodd-Frank Act 
and other legislative actions are not yet complete or have been 
recently implemented, their impact on the marketplace remains to be 
seen. Representatives of market participants have said that they faced 
uncertainties because some regulations had not been implemented and 
that these uncertainties could limit the return of private capital to 
the secondary market. 

In addition to legislative changes, federal and state agencies have 
taken action to enforce consumer protections including legal and 
regulatory enforcement actions against mortgage servicers and other 
industry participants. The Department of Justice (DOJ) has pursued a 
number of mortgage securities and mortgage fraud cases. For example, a 
settlement was reached in February 2012 between DOJ, HUD, Treasury and 
49 state Attorneys General, with the nation's five largest mortgage 
servicers to address mortgage servicing and foreclosure abuses. 
[Footnote 89] A large share of the $25 billion settlement is dedicated 
to financial relief for homeowners including mortgage principal 
reduction and refinancing for underwater homeowners.[Footnote 90] In 
addition, SEC has pursued a number of enforcement actions related to, 
among other areas, improper disclosure of investor risks related to 
CDOs, mortgage-related risks and exposure, and concealment of the 
extent of mortgage-related risks in mutual funds and other investment 
products. For example, in August 2012 SEC charged Wells Fargo's 
brokerage firm and a former vice president with selling investments 
tied to mortgage-backed securities without fully understanding their 
complexity or disclosing the risks to investors. Wells Fargo agreed to 
pay SEC more than $6.5 million to settle the charges; this settlement 
will go to an SEC fund for harmed investors. 

A Framework for Assessing Potential Changes to the Housing Finance 
System: 

We have identified the role played by the federal government in the 
housing finance system as a high-risk area for the government and have 
also noted that the Dodd-Frank Act did not fully address weaknesses in 
the housing finance system.[Footnote 91] Attention has now turned in 
Congress and elsewhere to considering other significant changes to the 
housing finance system (see appendix III for a list of legislative 
proposals introduced in the 113th Congress). Some experts and 
interested parties believe that the current system is unsustainable 
and warrants reform, while others believe that certain features of the 
current system should be maintained because they have served the 
United States well. 

We are providing a framework consisting of nine elements that Congress 
and others can use to assess or craft proposals as they consider 
changes to the housing finance system (see table 2). Similar elements 
appear throughout the literature we analyzed on the housing finance 
system, including our prior reports (see related list of reports at 
the end of this report) and, to some extent, in proposals to change 
the system. We sought the input of a broad range of government 
officials, experts from academia and research organizations, consumer 
advocates, and industry representatives on this framework and have 
included their comments related to the nine elements as appropriate. 
We believe each element in the framework is critically important in 
establishing the most effective and efficient housing finance system. 
Applying the elements of this framework would help policymakers 
identify the relative strengths and weaknesses of any proposals they 
are considering. Similarly, the framework can be used to craft 
proposals or to identify changes to existing proposals to make them 
more effective and appropriate for addressing any limitations of the 
current system. However, any viable proposal for change will involve 
choices that recognize that sometimes trade-offs will exist among and 
within the nine elements. In addition, proposals will need to take 
into consideration certain characteristics--transparency, 
accountability, aligned incentives, and efficiency and effectiveness--
associated with appropriate controls and high-quality government 
performance that run through each element. 

Table 2: Elements of a Housing Finance Framework: 

Element: Clearly defined and prioritized housing finance system goals; 
Description: Broad goals for the housing finance system should be 
clearly articulated and relevant so that government and market 
participants can effectively conduct activities to implement their 
missions. Additionally, market and government performance can be 
assessed against those broad goals. These goals should recognize 
broader housing policy objectives, as well. Where trade-offs among the 
broad goals exist, the goals should be prioritized. 

Element: Policies and mechanisms that are aligned with goals and other 
economic policies; 
Description: Housing finance policies and mechanisms should be aligned 
with the broader goals of housing finance. Changes in housing finance 
should consider the full range of options for government actions--such 
as direct participation in markets through government guarantees, 
oversight and regulation, data collection and dissemination, and tax 
or other federal incentives to promote greater private market 
participation--and show how policies and mechanisms interact to 
achieve the goals on a comprehensive basis, while minimizing 
fragmentation, overlap, and duplication. In light of weaknesses 
exposed during the financial crisis these policies and mechanisms 
should help to align incentives, provide more information and 
transparency, and restrain excessive risk taking. Proposals should 
also reflect how these mechanisms will interact with broader economic 
policies. 

Element: Adherence to an appropriate financial regulatory framework; 
Description: In 2009, GAO proposed such a framework for a financial 
regulatory system that included some of the elements listed here as 
well as ensuring that regulation was appropriately comprehensive, 
consistent, flexible, adaptable, and had a systemwide focus (GAO-09-
216). A regulatory system should also ensure that regulators have 
independence from inappropriate influence; have sufficient resources, 
clout, and authority to carry out and enforce statutory missions; 
and are clearly accountable for meeting regulatory goals. 

Element: Government entities that have capacity to manage risks; 
Description: Government entities will need adequate skills and 
resources to understand, price, and manage risks. These entities would 
also need the capacity to ensure that their counterparties in the 
private sector have the capacity to manage the risks inherent in their 
activities. 

Element: Mortgage borrowers are protected and barriers to mortgage 
market access are addressed; 
Description: Borrowers need consistent, useful information, as well as 
legal protections, including disclosures, sales practice standards, 
and suitability requirements, throughout the lifecycle of a mortgage 
product. Any barriers facing creditworthy borrowers in accessing 
mortgage markets should be addressed. Key issues will be to encourage 
innovation to reduce barriers while ensuring that products are easily 
understood, such as through standardization and developing better 
tools to assess creditworthiness. 

Element: Protection for mortgage securities investors; 
Description: Investors in the secondary market require adequate, 
reliable information to assess secondary-market risks. This would 
include providing clear information on securitizer and trustee 
responsibilities as they relate to investors. As with borrower 
protection, some standardization may be useful; 
however, care must be taken to ensure that certain protections do not 
discourage beneficial innovation. 

Element: Consideration of cyclical nature of housing finance and 
impact of housing finance on financial stability; 
Description: Housing finance has been characterized by cycles that 
have alternated between loose credit standards and those that are 
tight. Because housing is a significant part of the economy, these 
cycles may pose risks to financial and economic stability. Government 
should determine whether actions related to housing finance are 
procyclical or countercyclical and consider making actions less 
procyclical. Government may also want to consider the appropriateness 
of countercyclical measures. Actions also should address the threat 
housing finance poses for financial stability when there are 
incentives for excessive risk taking. 

Element: Recognition and control of fiscal exposure and mitigation of 
moral hazard; 
Description: Choices about policies and mechanisms will result in 
different levels of fiscal exposure. Wherever possible, exposures 
should be made explicit and costs recognized. Actions should be taken 
to minimize unexpected costs and to mitigate any moral hazard created 
by government policies and support. 

Element: Emphasis on implications of the transition; 
Description: Because changing the housing finance system may lead to 
substantial changes in the marketplace, issues related to 
transitioning from the current system to a new one should be 
emphasized in any proposal for change. Any action that would severely 
limit market liquidity during the transition should be of particular 
concern. 

Source: GAO. GAO-15-131. 

[End of table] 

Element 1: Clearly Defined and Prioritized Housing Finance System 
Goals: 

For some time, we have noted the importance of having clearly 
articulated goals when considering federal intervention in and 
regulation of market activities, and such requirements would apply to 
housing finance as well. In our work on the Troubled Asset Relief 
Program, for instance, we built on lessons learned from the financial 
crises of the 1970s and 1980s to identify guiding principles to help 
serve as a framework for evaluating large-scale federal assistance 
efforts and provide guidelines for assisting failing companies. 
[Footnote 92] As part of that work, one of the key principles we 
developed was that national interests should be determined and clear 
goals and objectives set that reflect those interests. Further, in 
2009 we identified clearly defined goals and objectives as essential 
to reforming the financial regulatory system.[Footnote 93] For housing 
finance, such goals include the general purpose of any government 
guarantees in housing finance markets or other rules and regulations 
governing activities in housing finance markets. Goals for housing 
finance have also included goals relative to the housing market and to 
the overall functioning of the financial and economic systems 
including maintaining financial stability or creating jobs. 

More generally, we have found that clear goals can help guide agency 
activities and establish agency accountability. For example, clear 
goals help agencies identify and achieve their missions, establish 
priorities, and define responsibility and accountability for 
identifying risks.[Footnote 94] As part of their strategic planning, 
agencies are expected to link their staffing, activities, and budgets 
to their missions and goals.[Footnote 95] In addition, in our work on 
government performance, we have concluded that agency missions should 
begin with statutory requirements and that agencies should coordinate 
with Congress when setting agency goals.[Footnote 96] Without clearly 
stated goals, agency activities may lack focus and consistency. For 
example, the lack of clearly stated goals for FHFA that recognize the 
potential trade-off between bringing private capital back into the 
market and making mortgage credit available has led to inconsistency 
in its policy on the level of guarantee fees on MBS issued by the 
enterprises. In 2012, under an acting director, FHFA increased 
guarantee fees and planned further increases to encourage private 
capital back into the market. However, when FHFA's new director took 
over in 2014, he put further increases on hold expressing concern 
about the implications an increase would have for mortgage credit 
availability. FHFA has also reached out for direction on its goals. In 
June 2014, FHFA issued a request for public input on further changes 
to these fees including input on what goals FHFA should seek to meet 
in setting guarantee fees. Additionally, the Director noted in a 
speech on the strategic plan for the enterprises that Congress and the 
Administration, not FHFA, have the important job of deciding on 
housing finance reform legislation. A housing finance policy goal that 
clearly identifies the importance of bringing private capital back 
into the market relative to other goals of that system would help 
guide FHFA activities. In addition, we have previously found that 
clearly stated missions help to hold agencies accountable because they 
facilitate the clear statement of agency objectives and the 
measurement of agency performance.[Footnote 97] 

Addressing weaknesses in the single-family housing finance system 
could result in conflicting goals. The 2007-2009 financial crisis left 
the government more involved in housing finance than it had been 
traditionally. As a result, one potential goal of changes to the 
housing finance system could be to reduce the government's role. 
However, doing so could conflict with a number of other potential 
goals, such as keeping the cost of housing finance affordable or 
providing liquidity and stability during market downturns. We have 
previously concluded that choosing clearly among potentially 
conflicting objectives is important. Therefore, it is important to 
first identify the primary objective, otherwise, deciding what steps 
are appropriate and judging whether a program has succeeded will be 
difficult.[Footnote 98] 

Participants in our discussion groups stressed the importance of 
setting appropriate goals, and some participants noted that divisions 
among proponents of change generally stemmed from differences in 
goals. Several of the participants or the groups they represented had 
published lists of principles for or goals of housing reform prior to 
the meeting.[Footnote 99] For example, one group's goals can be 
summarized as including: the market should principally function 
without direct government financial support; programs for assisting 
low-income families to become homeowners should be on budget and 
should limit risks to homeowners and taxpayers; and the enterprises 
should be eliminated. While another group's goals are that the 
enterprises be phased out over an appropriate period: the private 
sector play a far greater role; government-insured MBS play a 
continued but more limited role for government-insured MBS; FHA play a 
continued but more targeted role; and borrowers have access to safe 
and affordable mortgages based on sound underwriting and risk 
management throughout economic cycles. Some participants agreed that 
policymakers need to be aware of trade-offs among goals when setting 
priorities. However, one participant noted that having to be explicit 
about goals could limit the opportunity for change. This view raises 
the question of how much specificity any legislation should include 
and how much should be left to entities responsible for implementing 
the rules. While having clearly articulated goals is important, in 
prior work we have noted that regulators also need the ability to be 
flexible and adaptable when implementing financial reform.[Footnote 
100] This is also important with housing finance reform because these 
markets also evolve over time. 

Proposals have defined goals for housing finance reform as well. One 
set of goals includes maintaining access to the 30-year fixed-rate 
mortgage, protecting taxpayers, providing stability and liquidity, 
requiring transparency and standardization, and ensuring access to 
affordable rental housing. However, goals sometimes conflict and their 
priority is unclear. For example, one proposal includes a goal of 
protecting taxpayers from bearing the cost of a housing downturn and a 
goal of promoting a sound, stable, and liquid housing market. However, 
these goals may conflict during an economic downturn, and the proposal 
does not discuss priorities. 

Element 2: Policies and Mechanisms That Are Aligned with Goals and 
Other Economic Policies: 

We have reported that aligning policies and mechanisms with the 
relevant goals and priorities helps to achieve accountability and 
efficiency. In addition, we have noted that housing reform needs to be 
considered on a comprehensive basis, which could better control risks 
and reduce any unnecessary overlap and duplication. For example, in 
our 2013 high-risk report we concluded that decisions about the future 
role of the enterprises should consider impacts on other parts of the 
housing finance system, including FHA's single-family mortgage 
insurance programs.[Footnote 101] Efforts to reduce the market 
presence of the enterprises could shift some borrowers currently 
served by that market segment to FHA, and the resulting impacts on 
FHA's risk exposure should be considered. Moreover, we have noted the 
overlap between FHA insurance programs for single-family mortgages and 
USDA's loan guarantee program and the potential for consolidation of 
these programs.[Footnote 102] In 2012, we noted that the 
administration announced in 2011 the creation of a task force to 
evaluate the potential for coordinating or consolidating homeownership 
loan programs at HUD, USDA, and VA. Although a working group that 
includes these agencies has been meeting and considering ways to 
better coordinate, it is not considering program consolidation. 
[Footnote 103] 

Proposals for policy changes would need to consider the full range of 
options for government action, such as direct participation in markets 
through government guarantees, oversight and regulation, data 
collection and dissemination, and tax and other federal incentives to 
promote greater private market participation. As a first step, 
proposals would need to look across current policies and mechanisms to 
determine whether they are achieving their purpose, whether that 
purpose is consistent with proposed housing finance policy goals, and 
whether the purpose might be achieved more effectively through some 
alternative policy or mechanism. As this report has shown, the U.S. 
government uses a range of policies and mechanisms in the single-
family housing finance area, including insurance and guarantees in 
both the primary and secondary market; tax expenditures such as the 
mortgage interest deduction; and data collection and dissemination, 
primarily under the Home Mortgage Disclosure Act.[Footnote 104] New 
proposals would need to consider whether these are still viable or 
could be altered to produce a better result. For instance, some 
research suggests that rather than increasing the number of home 
buyers, the mortgage interest deduction provides an incentive for 
people to buy larger homes than they otherwise would, an outcome that 
may conflict with current policy goals. In addition, proposals would 
need to show how suggested policies and mechanisms will interact, both 
among themselves and with broader macroeconomic policies, to achieve 
goals on a comprehensive basis while minimizing fragmentation, 
overlap, and duplication.[Footnote 105] In light of weaknesses exposed 
during the financial crisis, these policies and mechanisms would help 
align incentives, provide more information and transparency, and 
restrain excessive risk taking. 

Participants across the stakeholder groups at our panel discussions 
noted that housing finance reform should be considered as a whole. 
Some participants noted specifically that reforming one part of the 
housing finance system, such as the secondary market, could create 
additional risks elsewhere in the system, such as in the primary 
market. An official at Treasury noted that reforming the housing 
finance system should include a discussion of how the key risks of 
mortgage lending (credit, interest rate, and prepayment risk) should 
be distributed between households, governments, and private lenders, 
and investors. 

One proposal for change addresses reform on a comprehensive basis 
including a range of policies and mechanisms. That proposal includes 
FHA reform along with reform of the secondary market and considers 
alternatives to the latter, such as developing a market for covered 
bonds.[Footnote 106] That same proposal also addresses an opportunity 
to reduce overlap and duplication by recognizing the potential for 
efficiencies that could be achieved by requiring that FHA develop and 
maintain appropriate financial, underwriting, and operations systems 
that USDA can also use for its rural housing programs. Proposals also 
contain policies and mechanisms intended to address weaknesses exposed 
during the financial crisis. For example, one proposal to change the 
housing finance system would better align incentives and limit risk by 
requiring that some lenders making FHA-insured loans take greater 
responsibility for errors or fraud and abuse and consider borrowers' 
ability to repay. To facilitate public access to more mortgage 
information, at least three proposals would establish new databases to 
store uniform loan-level data. These proposals also aim to improve 
transparency in market operations through uniform securitization 
agreements for covered securities, to include standard documents such 
as pooling and servicing agreements, representations and warranties, 
and loss mitigation procedures. To better manage risk, some proposals 
also would require that credit risk-sharing structures be established 
wherein private market participants share or assume the credit risk 
associated with mortgage securities. 

Element 3: Adherence to an Appropriate Financial Regulatory Framework: 

In 2009, GAO proposed a framework for crafting or assessing proposals 
to modernize the financial regulatory system that included some of the 
elements listed here, along with others that were designed to help 
ensure that regulation was appropriately comprehensive, consistent, 
flexible and adaptable, and had a systemwide focus.[Footnote 107] We 
also found that a regulatory system should ensure that regulators have 
independence from inappropriate influence; have sufficient resources, 
clout, and authority to carry out and enforce statutory missions; and 
are clearly accountable for meeting regulatory goals. To strengthen 
decision-making and accountability, regulators will need access to the 
best reasonably obtainable scientific, technical, economic, and other 
information. Given the market weaknesses we noted earlier in this 
report, and consistent with our previous framework, regulators under a 
new housing finance system should consider how their activities could 
better identify and address any systemic risks posed by the housing 
finance system. We also have previously found that any financial 
regulatory reform needed to address gaps, overlapping missions, and 
fragmentation in the regulatory system. 

These elements would be applicable to any regulatory system developed 
to make rules and oversee the housing finance system. For example: 

* A comprehensive, systemwide focus. Any proposed regulatory system 
for single-family housing finance would need to have a systemwide 
focus that addresses the complexity of the housing finance system on a 
comprehensive basis. For example, proposals would need to consider how 
any new regulatory entities will interact with existing regulators, 
such as CFPB, FHFA, and the Financial Stability Oversight Council. A 
systemwide focus would also increase the attention given to the 
effects of incentives and constraints that regulations place on market 
participants' risk taking and to actions regulators can take to 
anticipate and mitigate any such risk taking. 

* Consistency. Regulatory consistency across relevant federal agencies 
would help ensure that market participants are better able to 
understand the rules governing their behavior. Although there are 
similarities among the various rules creating safe harbors for 
regulatory treatment of mortgages including CFPB's QM rule, HUD's QM 
rule, VA's QM rule, and multiagency rules being developed for QRM, 
some participants in our discussions, including regulators, noted the 
lack of regulatory consistency. CFPB officials noted that CFPB has 
consulted with other agencies and given them opportunities to identify 
inconsistencies before issuing proposed and final QM rules. In 
addition, CFPB officials noted that the Dodd-Frank Act specifically 
allowed for differences across the agencies issuing these rules. A 
consumer advocate who attended our group discussions also noted 
possible inconsistencies in regulatory oversight that could occur as 
mortgage servicing moves from banks to nonbanks. This move may be 
driven, in part, by heightened capital and liquidity requirements for 
banks that engage in mortgage servicing. Nonbanks would not have these 
requirements, but CFPB oversees compliance with consumer financial 
protection regulations at nonbanks as well as banks. As noted earlier 
in this report, CFPB's servicing rules apply to all mortgage 
servicers, including non-depository institutions, regardless of size. 

* Flexibility and adaptability. Designing a system to be flexible and 
proactive involves determining how much of the system would need to be 
dictated by law and how much would need to be left to federal entities 
responsible for implementing the law. Flexibility and adaptability may 
be particularly important during a transition from the current system 
to a new housing finance system. 

* Accountability. As noted earlier, any housing finance system would 
need to ensure that regulators are accountable to the public and to 
Congress for meeting clearly stated regulatory goals. The Government 
Performance and Results Act (GPRA) of 1993 requires agencies to 
clarify their missions, set strategic and annual performance goals, 
and measure and report on performance toward those goals.[Footnote 
108] Congress may also require regulators to submit annual reports, 
performance audits, and testify before Congress. The GPRA 
Modernization Act of 2010 further requires that agencies disclose more 
information about the accuracy and validity of their performance 
information in their performance plans and reports, including the 
sources for their data and actions to address any data limitations. 
[Footnote 109] Additionally, in 2009 in our report on a regulatory 
framework, we concluded that policymakers may want to consider how to 
ensure that agencies are recognized for successes and held accountable 
for failures to act in accordance with regulatory goals as part of any 
reform effort.[Footnote 110] The housing finance system is somewhat 
fragmented, with multiple agencies responsible for regulating various 
aspects of the housing finance system. The International Monetary 
Fund, in its 2010 review of the U.S. bank regulatory system, found 
that a multiplicity of regulatory agencies can lead to overlap that 
dilutes accountability. When regulation and missions overlap, defining 
the specific responsibilities of each entity is critical for ensuring 
that each regulator can be accountable for its defined mission. In 
addition, in a fragmented system, collaboration among regulators may 
help ensure that agencies are accountable by helping to define the 
roles and responsibilities of each regulator. We also have found that 
fragmented regulation can make more challenging the identification of 
systemwide risks.[Footnote 111] Therefore, all regulators under a new 
system for housing finance would need to consider how their activities 
could better identify and address any systemic risks posed by the 
housing finance system. 

Proposals vary in the extent to which they address the regulatory 
elements noted above. Few proposals have a comprehensive, systemwide 
focus. For example, one proposal addresses changes in both the primary 
and secondary markets, while other proposals focus on regulation of 
the secondary market. At least two proposals address regulation of the 
broader housing finance system and how the new regulatory entities may 
interact with existing regulators. For example, one proposal would 
establish a new independent government agency to regulate all of the 
participants in the housing finance system, insure eligible mortgage 
securities in a system similar to FDIC's deposit insurance in the 
banking system, and assume FHFA's seat on the Financial Stability 
Oversight Council, an organization created by the Dodd-Frank Act to 
identify risks and respond to threats to financial stability. At least 
one proposal calls for the director of the new regulatory agency to 
share information with other federal regulatory agencies regarding the 
financial condition and risk management practices of market 
participants, thereby potentially enabling federal regulators to 
better identity systemic risks. Consistent with existing QM 
underwriting standards recently established by CFPB, four proposals 
recommend the same QM standards for the secondary market platform. At 
least four proposals would require regulatory coordination among the 
newly established secondary market regulatory bodies and existing 
regulators. For example, one of these proposals specifically requires 
that the new regulator coordinate standards for approval of servicers 
and mortgage servicing standards with CFPB and the federal banking 
regulators, respectively. Another proposal would permit the new 
regulator to consult with other federal agencies as appropriate, and 
avoid duplication with the regulatory activities of other agencies, 
such as examination activities and reporting requirements. At least 
one proposal would create an advisory committee to provide a mechanism 
for stakeholders to provide input to the regulatory entity, which 
could potentially help the regulator adapt to developments in the 
primary and secondary mortgage markets. Some proposals would also 
establish accountability mechanisms for the regulator, including 
annual reporting to Congress by key agencies and officials of proposed 
regulatory structures including an Office of Inspector General. 

Element 4: Government Entities That Have Capacity to Manage Risk: 

We have previously stated that government agencies should assess risks 
associated with both internal management factors and external sources. 
[Footnote 112] We have also identified strategic human capital 
management as a high-risk area because for agencies to cost-
effectively carry out their missions and respond to emerging 
challenges, they will need to take a strategic and efficient approach 
to acquiring, developing, and retaining individuals with needed 
skills.[Footnote 113] Government entities in the housing finance 
system that make loans or provide insurance or guarantees on loans or 
MBS will need adequate skills and resources to understand, price, and 
manage risks to the housing finance system. These government entities 
will also need the capacity to ensure that their counterparties in the 
private sector are able to manage the risks inherent in their 
activities. For example, when government entities act to insure 
mortgages or guarantee MBS, they need the capacity to manage their own 
credit and operational risks and to ensure that their counterparties, 
such as lenders, servicers, and investors, can manage their respective 
risks. We have found previously that agencies with loan insurance 
programs, such as FHA, face credit risks including borrower default 
risk, which arises as borrowers become unable to make payments on 
insured mortgages.[Footnote 114] Agencies also face counterparty risk. 
That is, an agency may suffer losses due to weaknesses or 
uncertainties in the work of its counterparties, including lenders and 
appraisers for FHA and issuers for Ginnie Mae. At the enterprises, 
private mortgage insurer counterparties have historically provided the 
main mechanism to help reduce credit risk exposure for the 
enterprises. Generally, we have found that private mortgage insurers 
experienced weakened financial conditions during the financial crisis. 
[Footnote 115] In May 2014, FHFA's Office of Inspector General 
reported that 5 of the 10 private mortgage insurers eligible to 
conduct business with the enterprises are considered financially 
weakened.[Footnote 116] And all agencies face operational risks--that 
is, the risk of loss resulting from inadequate or failed internal 
processes; deficiencies in staff numbers, training, and skills; or 
external events. For example, between 2002 and 2004, the enterprises 
were cited for failures in their accounting systems that did not 
adequately capture their risk-taking activities. We have made a number 
of recommendations aimed at improving FHA's risk assessment and human 
capital management, as well as HUD's information technology systems. 
[Footnote 117] 

FHA and FHFA have considered risk-sharing strategies as a way to help 
manage risk at FHA and the enterprises. FHA officials have told us in 
the past that FHA would need to increase its staff and analytic 
capacity to safely implement risk-sharing agreements.[Footnote 118] 
Ginnie Mae officials told us that any FHA risk-sharing agreements that 
shift additional credit risk to servicers would increase the agency's 
counterparty risk and noted that Ginnie Mae would probably require 
issuers to hold more capital to mitigate this risk. They further noted 
that Ginnie Mae's counterparty risk would not increase if FHA shifted 
risk to a third party in a way that is similar to the way the 
enterprises shift risks to third parties. In The 2014 Strategic Plan 
for the Conservatorships of Fannie Mae and Freddie Mac, FHFA noted 
that the enterprises have completed several risk-sharing transactions, 
which support FHFA's plan to reduce the enterprises' presence in the 
housing finance market. Specifically, the 2014 strategic plan requires 
each enterprise to transfer a substantial portion of the credit risk 
on $90 billion of new MBS--a three-fold increase over the amount 
required in 2013.[Footnote 119] FHFA's 2014 strategic plan also 
states, upon FHFA's direction, the enterprises would take steps to 
strengthen counterparty standards for private mortgage insurers to 
ensure that the insurers are able to fulfill their intended role of 
providing private capital. As part of this effort, on July 10, 2014, 
FHFA requested input on draft eligibility requirements the enterprises 
would use to approve private mortgage insurers that provide mortgage 
insurance on loans owned or guaranteed by the enterprises.[Footnote 
120] According to FHFA, these new standards are designed to ensure 
that approved insurers maintain sufficient financial and operational 
capacity to withstand a severe stress event. Any proposal for sharing 
risks between public and private entities requires careful 
consideration, not only of the capacity of these entities to 
understand and manage risks, but also to ensure that the risk-sharing 
structure does not create incentives for either party to engage in 
excessive risk taking. 

Proposals to change the housing finance system address capacity to 
manage risk in a number of ways. In the primary market, two proposals 
would provide FHA with increased capability to manage risk. One of the 
proposals would allow FHA and USDA to share risk-management expertise. 
One proposal for changing the secondary market would authorize FHFA to 
regulate and examine contractual counterparties, and another proposal 
would require FHFA to report annually to Congress on risk-sharing 
structures. Proposals calling for a single government-owned 
independent corporation to support the secondary market recognize that 
the corporation's director would need technical expertise in mortgage 
securities and housing finance. These proposals also would establish 
boards of directors and advisory committees comprised of members with 
diverse housing finance expertise, including asset management. Some 
proposals for changing the primary and secondary markets would 
establish salary structures that are competitive with those of 
existing federal financial regulators for any new federal agencies 
overseeing the markets. 

Element 5: Mortgage Borrowers Are Protected and Barriers to Mortgage 
Market Access Addressed: 

In our 2009 report presenting a framework for assessing or crafting a 
financial regulatory system, we found that it is important for market 
participants to receive consistent, useful information, as well as to 
have legal protections, including disclosures, sales practices for 
similar financial products and services, and suitability requirements. 
[Footnote 121] Similarly, a housing finance system should provide 
borrowers with the information to determine the loan product best 
suited to their needs, and the system should include borrower 
financial protections over the lifecycle of a mortgage loan--
origination, securitization, and servicing. In September 2011, we 
reported that homeownership counseling could help borrowers learn 
about buying a home and could improve outcomes for delinquent 
borrowers.[Footnote 122] In June 2012, we found that reaching 
delinquent borrowers early, when they had missed fewer payments, 
resulted in more successful loan modifications.[Footnote 123] And in 
April 2014, we recommended that regulatory agencies strengthen 
oversight activities to determine the extent to which servicers are 
implementing foreclosure prevention principles and protecting 
borrowers.[Footnote 124] Housing finance system reforms will also need 
to address any barriers that creditworthy borrowers face in accessing 
the housing finance market. Key issues include encouraging innovation 
to reduce barriers to mortgage credit while ensuring that mortgage 
products are suitable for borrowers, and developing alternative tools 
to assess creditworthiness for broader market access. 

Federal agencies have taken some steps designed to better protect 
borrowers throughout the mortgage loan lifecycle and improve mortgage 
market access; many of these actions have been discussed earlier in 
this report. For example, 

* Origination. CFPB, HUD, and VA have issued rules related to 
assessing borrowers' ability to repay their loans, which addresses 
some aspects of suitability. CFPB also finalized loan originator 
compensation rules designed to reduce incentives for loan originators 
to steer borrowers to unaffordable mortgages.[Footnote 125] As 
previously noted in this report, in 2008, HUD revised the rules 
implementing RESPA so that the required forms would provide additional 
disclosures at origination. In November 2013, CFPB issued final rules 
consolidating the disclosures required by TILA and RESPA for 
applicants considering a home mortgage loan. These rules take effect 
on August 1, 2015. In its Blueprint for Access issued in March 2014, 
FHA outlined steps the agency is taking to expand access to credit for 
underserved borrowers, including encouraging broader use of housing 
counseling intended to ensure that borrowers are well-educated about 
the home-buying and mortgage finance process. For example, in May 
2014, the agency began soliciting comment on a 4-year pilot program 
that would provide FHA insurance pricing incentives to first-time 
homebuyers who participate in housing counseling and education that 
covers how to evaluate housing affordability and mortgage 
alternatives, better manage their finances, and understand the rights 
and responsibilities of homeownership.[Footnote 126] HUD officials 
told us that housing counseling can divert consumers who are not ready 
for homeownership from entering into a contract for an unaffordable 
home, and also bring consumers to the housing finance system who might 
otherwise be afraid of being denied. 

* Securitization. FHFA has specified the need for greater clarity 
about requirements for loans to be securitized by the enterprises, 
saying that the lack of clarity was likely restricting access for some 
creditworthy borrowers. FHFA noted in its 2014 Strategic Plan that 
some originators and mortgage insurers have been requiring higher 
minimum credit score requirements than would be required by the 
enterprises, resulting in the rejection of many loans that would 
otherwise meet enterprise credit standards. The FHFA Director 
acknowledged that these higher credit standards were the result of 
lender uncertainty about having to repurchase these loans in the 
future if they were found to violate enterprise requirements for 
securitization. 

* Servicing. CFPB established new mortgage servicing rules that took 
effect in January 2014 requiring servicers to follow certain standards 
and procedures when working with troubled borrowers in an effort to 
avoid unnecessary foreclosures.[Footnote 127] According to VA, the VA 
Home Loan program oversees mortgage servicers by reviewing every loan 
to ensure that the servicer has made all reasonable efforts to help 
the veteran avoid foreclosure. In cases of mortgage default, VA 
employees in regional offices serve as intermediaries between the 
veteran and servicer to negotiate a resolution to the default. FHA 
requires servicers to address delinquencies through an early 
intervention process, which could include default counseling, prior to 
engaging in formal foreclosure mitigation actions.[Footnote 128] A 
2012 HUD study found that 69 percent of housing counseling clients 
enrolled in foreclosure and prepurchase counseling obtained a mortgage 
remedy, and 56 percent were able to become current on their mortgages 
with a counselor's help.[Footnote 129] In The 2014 Strategic Plan for 
the Conservatorships of Fannie Mae and Freddie Mac, FHFA requires the 
enterprises to continue, and improve upon servicing standards and loss 
mitigation outcomes for borrowers. 

Some participants in our discussion groups noted that CFPB's Ability-
to-Repay and Qualified Mortgage Standards Rule, which went into effect 
on January 10, 2014, promotes borrower protection by requiring 
mortgage lenders to consider borrowers' ability to repay the loans 
before extending them credit.[Footnote 130] However, some participants 
have noted the rule could limit access to the housing finance market 
for some creditworthy borrowers who do not satisfy certain QM 
standards, such as the 43 percent debt-to-income ratio for private 
loans.[Footnote 131] Several industry groups that participated in our 
discussions jointly submitted a letter to CFPB and HUD regarding their 
concerns about potential liability for fair lending violations based 
on disparate impact; they expressed concern that the QM criteria may 
tighten credit and inadvertently exclude a disproportionate number of 
minorities and protected classes.[Footnote 132] In an interagency 
statement about fair lending compliance and the Ability-to-Repay Rule 
issued in October 2013, five federal agencies noted that they do not 
anticipate that a creditor's decision to offer only QM mortgage loans 
would, absent other factors, elevate a supervised institution's fair 
lending risk.[Footnote 133] The agencies counseled creditors to 
continue to evaluate fair lending risk for QM loans as they would for 
other types of product selections, including by carefully monitoring 
policies and practices and implementing effective compliance 
management systems. 

In our discussions, some participants expressed additional concerns 
about access to housing finance for some borrowers and overall access 
to housing. For example, two consumer advocates who attended our 
discussions have noted that standard underwriting criteria and down-
payment thresholds reflect accumulated wealth that can differ across 
groups and may be a barrier to accessing housing finance.[Footnote 
134] Other group discussion participants noted that as a result of the 
financial crisis, many borrowers have lost their homes through 
foreclosure and experienced periods of unemployment, and consequently, 
they will have difficulty qualifying for loans in the future unless 
underwriting standards are more flexible. One industry representative 
also noted that prospective first-time homebuyers who have accumulated 
large student debt will have difficulty qualifying for a mortgage 
under the debt-to-income ratios required by QM. Some participants at 
our discussions said that the housing finance system should promote 
broader market access through flexible underwriting standards that 
include innovations in the way creditworthiness is assessed, such as 
alternative credit scoring, consideration of compensating factors, and 
no-or low-down payment requirements. Other participants emphasized the 
role that small lenders play in providing credit to those who might 
otherwise not have access to it, and said that a housing finance 
system needs to include secondary market access to all lenders. For 
those who are not prospective mortgage borrowers, participants across 
our group discussions emphasized the need for affordable housing 
options and the importance of including financing for rental housing 
in any housing finance system. Consumer advocates noted specifically 
that a comprehensive housing finance system should include a steady, 
reliable, and liquid source of capital to support rental housing. 

Participants at our discussion groups also noted the benefits of home 
ownership counseling and the need for protection for those borrowers 
facing mortgage default. Participants noted that homeownership 
counseling should be included in a new housing finance system. They 
said that it was helpful in educating borrowers about the risks they 
are assuming and which products are best suited for them. Some 
participants in our discussions also noted that borrower protections 
in any housing finance system should cover the entire mortgage 
lifecycle, including setting stringent loan modification requirements 
for servicers who had sometimes benefited from pursuing foreclosure 
over loss mitigation efforts. 

Some participants at our discussion groups also discussed how 
standardization of mortgage products may promote borrower protection 
and access to credit, but also may limit beneficial innovation. Some 
participants at our discussions noted that the 30-year fixed-rate 
mortgage is a product that borrowers have long understood. Several 
participants also noted that the TBA market should be maintained as 
the conduit for the 30-year fixed-rate mortgage, because it makes 
mortgage credit widely available by ensuring a predictable path to 
securitization for small lenders as well as larger institutions. Other 
participants who attended our group discussions have proposed that in 
a reformed system, borrowers would have a variety of well-underwritten 
mortgage loan choices. As with standardized underwriting, some 
participants noted that standardizing products may limit innovation 
that could benefit some potential homeowners. Two housing finance 
experts who attended our group discussions noted that certain 
innovations to the standard mortgage contract could increase the 
affordability of home ownership. For example, under a shared 
appreciation mortgage the borrower gives the lender a share of any 
increase in home value in exchange for lower interest rates and 
monthly mortgage payments. The Dodd-Frank Act required HUD to conduct 
a study to determine statutory and regulatory requirements for 
widespread use of shared appreciation mortgages within 6 months after 
the act was enacted, but as of June 1, 2014, this study had not been 
completed.[Footnote 135] 

Several proposals provide for borrower protections and promote 
mortgage market access. One proposal calling for FHA reform would 
require lenders to provide each borrower at origination with a 
disclosure detailing the likelihood of default for a borrower with a 
similar risk profile and mortgage product. Some proposals would 
preserve the existing QM criteria, and explicitly authorize the 
development of standards to ensure access for affordable mortgage 
credit, including maintaining the 30-year fixed-rate mortgage. At 
least one of these proposals would explicitly preserve the TBA market. 
However, a press release accompanying another proposal says that it is 
based on a previously issued set of principles that include ensuring 
the continued, smooth operation of the TBA market through any 
transition and after, so that market participants do not lose the 
ability to lock in a price for securities before loans are sold. Some 
proposals address secondary market access by smaller lenders. For 
example, at least one proposal would authorize the creation of a 
mutually owned company to facilitate small lenders' access to the 
secondary market, and another proposes that the FHLBanks facilitate 
that access, by creating a TBA market for those lenders. Some 
proposals promote lending innovations to address the needs of 
underserved markets and populations. For example, some proposals would 
create a mechanism to support innovation in responsible lending 
products, underwriting, and servicing specifically targeted to 
underserved groups. Another proposal would require mortgage servicing 
standards to include foreclosure loss mitigation programs. Some 
proposals address the trade-off between consumer protection and 
innovation. For example, they include mechanisms whereby the impact on 
consumers of new mortgage products would be evaluated during a trial 
period. At least one proposal preserves the Housing Trust Fund to 
increase the supply of affordable rental housing for extremely low-, 
very low-, and low-income families in rural and urban areas and the 
Capital Magnet Fund at Treasury to develop, rehabilitate, or purchase 
affordable housing for these households.[Footnote 136] 

Element 6: Protection for Mortgage Securities Investors: 

In any housing finance system, investors in the secondary mortgage 
market require adequate, reliable information to assess risks related 
to mortgage-backed securities, and incentives need to be better 
aligned across market participants. In our 2009 report presenting a 
framework for assessing or crafting a financial regulatory system, we 
found that investors need to receive consistent, useful information as 
well as legal protections.[Footnote 137] As we noted earlier in this 
report, prior to and during the financial crisis, investors lacked 
reliable information, and the securitization process displayed 
misaligned incentives between investors and other parties. For 
example, investors did not have access to the same information about 
the assets collateralizing MBS as did the originators of securitized 
loans. Moreover, before the crisis some investors did not 
independently assess asset risk but relied instead on ratings provided 
by credit rating agencies. As we have previously reported, some of the 
ratings agencies had conflicts of interest and provided ratings that 
did not adequately reflect the risks posed by MBS and CDOs.[Footnote 
138] In a study mandated by the Dodd-Frank Act, we identified seven 
alternative models for compensating credit rating agencies that were 
designed to address the conflict of interest inherent in having 
issuers-pay for ratings, better align credit rating agencies' interest 
with users of ratings, or improve incentives credit rating agencies 
have to produce reliable and high-quality ratings.[Footnote 139] 

As required by the Dodd-Frank Act, SEC, which is generally responsible 
for investor protection, has taken steps designed to provide investors 
with more information to evaluate risks. For example, in 2011, SEC 
adopted rules related to the disclosure of information on breaches of 
representations and warranties in ABS transaction documents.[Footnote 
140] Specifically, securitizers must provide the history of repurchase 
or replacement requests if the transaction agreements include 
repurchase or replacement rights for breaches of representations and 
warranties.[Footnote 141] The rules also require registered credit 
rating agencies to include in any report accompanying the credit 
rating information regarding the representations and warranties and 
enforcement mechanisms available to investors.[Footnote 142] SEC has 
also engaged in rulemakings designed to provide investors with the 
information they would need to compare the performance of different 
MBS and better evaluate investment risk. SEC officials with whom we 
spoke noted that providing investors with better information helps 
improve transparency thus enabling more effective monitoring and 
investor decision making. In September 2014, SEC adopted a rule 
governing the disclosure, reporting, and offering process for ABS, 
including those backed by residential mortgages.[Footnote 143] Among 
other things, the rule requires ABS issuers to provide standardized 
loan-level information, such as borrowers' credit and mortgage payment 
terms, at the time the ABS is offered and in ongoing reports. 
According to SEC, providing investors with access to such information 
will allow them to better understand, analyze, and track the 
performance of ABS. The rule also provides additional time for 
investors to analyze the specific structure, assets, and contractual 
rights for certain ABS transactions.[Footnote 144] In August 2014, SEC 
also adopted a rule that addresses new requirements for credit rating 
agencies, which, according to SEC, is designed, in part, to increase 
transparency and credit rating agency accountability.[Footnote 145] 
Among other things, the rule requires a number of credit rating 
agencies to provide certain disclosures including credit rating 
performance statistics and credit rating methodologies.[Footnote 146] 

As required by the Dodd-Frank Act, SEC has taken some actions designed 
to protect investors from misaligned incentives related to credit 
rating agencies. In June 2012, SEC established an Office of Credit 
Ratings as required by the act, and completed its required study of 
alternative means for compensating rating agencies intended to create 
incentives for accurate credit ratings later that year.[Footnote 147] 
In its August 2014 credit rating agency rule, SEC took actions 
designed to address credit rating agencies' conflicts of interest. 

Regulators have taken some additional actions designed to better align 
incentives, as required by the Dodd-Frank Act. For example, FDIC, the 
Federal Reserve, FHFA, HUD, OCC, and SEC have jointly proposed a rule 
to implement credit risk retention requirements.[Footnote 148] 
Specifically, the proposed credit risk retention rule would require 
that the securitizer retain at least 5 percent of the credit risk of 
the assets they securitize so they would have an incentive to exercise 
due care in selecting assets for securitization. The proposed rule 
includes an exemption for QRM loans, which are defined based on CFPB's 
definition for QM loans.[Footnote 149] CFPB's QM rule also includes a 
temporary QM definition for loans eligible for purchase or guarantee 
by an enterprise. The temporary definition expires once the 
enterprises exit conservatorship or no later than 7 years after 
January 10, 2014.[Footnote 150] In addition, the agencies responsible 
for the QRM rule expect to revisit and, if appropriate, modify the 
proposed rule after the future of the enterprises and any related 
statutory and regulatory framework becomes clearer.[Footnote 151] The 
extent of the impact of credit risk retention on housing finance 
market participants, however, may, depend on the final definition of 
QRM and the percentage of the market that is non-QRM. 

To further protect investors, FHFA and others have recommended that 
the enterprises or any subsequent securitizer create a standard 
securitization platform. FHFA is developing an infrastructure for 
single-family mortgage securitization that it says is aimed at 
standardizing practices and helping achieve investor certainty and 
confidence through uniform contractual terms and standards for 
transparency. The infrastructure also includes a common securitization 
platform with design principles intended to help align and standardize 
existing practices, including issuance, master servicing, bond 
administration, collateral management, and data integration. In March 
2014, FHFA and the enterprises began an initiative intended to improve 
and standardize the collection of mortgage servicing data. 

Representatives of investors at our discussion groups noted the 
importance of robust, loan-level disclosure requirements and of timely 
and reliable information for appropriately pricing risk. One 
representative of investors said that risk retention was the single 
most important way to repair the misalignment of incentives in the 
securitization market and promote investor protection. As discussed 
earlier in this report, misalignment of incentives in the 
securitization market occurred when, for example, originators lowered 
underwriting standards but did not retain the risk and passed on the 
risks of these mortgage loans to the secondary market. He noted that 
while aligning the QRM definition with CFPB's QM definition in the 
proposed joint credit risk retention rule, would streamline regulatory 
certainty and compliance with underwriting standards, it may exempt 
some risky loans from risk retention requirements, including those 
with low down payments and high LTVs and debt-to-income ratios. 
Another investor representative who attended our discussions later 
noted at a panel on bringing private capital back to the mortgage 
market that including government-insured loans and loans securitized 
by the enterprises in the definition of QRM would result in too few 
non-QRM loans to make their securitization economical. As noted 
earlier in this report, the five agencies that have issued the 
proposed credit risk retention rule recognize that modifications to 
the proposed rule may be necessary depending on changes in the current 
housing finance system. 

In addition to better aligning incentives through risk retention 
initiatives, some participants at our discussions noted that more 
effective resolution of representations and warranties issues would 
protect investors. SEC has noted that without access to documents 
relating to each pool asset, determining whether or not a 
representation or warranty relating to a pool asset has been breached 
can be difficult for the trustees that typically notify sponsors of 
alleged breaches. One investor representative at our discussions, has 
noted that a third party mechanism for investigating and resolving 
breaches of representations and warranties concerning the pool assets 
could help serve the interests of investors.[Footnote 152] The 
September 2014 rule governing ABS disclosure includes such a third-
party mechanism for reviewing pool assets and providing certain 
information from the review to the trustee who would decide whether to 
pursue actions based on a breach of the representations and 
warranties.[Footnote 153] In May 2014 FHFA announced increased efforts 
to improve the enterprises' representation and warranty framework in 
the agency's strategic plan for the conservatorships of the 
enterprises. One participant at our group discussions has recognized 
that while standardization of securitization generally provides 
investors with greater protection, it may inhibit beneficial 
innovation in the secondary market. 

Many of the proposals for changing the housing finance system include 
a standardized platform and some address issues of transparency in 
market operations, including making improvements in loan document 
disclosures for investors. These proposals also would require the 
development and adoption of standard uniform securitization 
agreements, which would include terms relating to representation and 
warranty violations and trustee responsibilities. One of these 
proposals requires that the secondary market regulator submit a report 
to Congress on any effects such trustee responsibilities would have on 
market liquidity and additional costs and expenses to borrowers. 

Element 7: Consideration of Cyclical Nature of Housing Finance and 
Impact of Housing Finance on Financial Stability: 

We have identified financial system stability and reforms related to 
promoting that stability as a key issue.[Footnote 154] We have also 
issued several reports on the ways the Dodd-Frank Act attempted to 
address market weaknesses leading up to the 2007-2009 financial crisis 
and the extent to which requirements of the act related to financial 
stability have been implemented.[Footnote 155] However, we have found 
that the housing finance system, which is characterized by cyclical 
fluctuations, still poses risks to financial stability. We noted 
earlier in this report a number of weaknesses in the housing finance 
system including the weakening of underwriting standards during the 
economic expansion and the tightening after the onset of the financial 
crisis. These weaknesses contribute to cyclical fluctuations in 
housing finance. According to the former Chairman of the Financial 
Stability Oversight Council, these cycles are to some extent related 
to the ability of originators and securitizers who do not retain risk, 
to, at least in the short run, maximize their own returns by lowering 
loan underwriting standards in ways that investors may have difficulty 
detecting, thus exposing investors and the overall economy to greater 
risks.[Footnote 156] Eventually, the accumulation of these risks 
during the housing bubble led to a downturn, with some participants 
leaving the market and those remaining imposing tighter credit 
standards. In addition, housing finance cycles may be amplified by 
expectations among all participants in the mortgage process that 
housing prices will continue to do what they have done in the recent 
past. When house prices have been rising, participants in the mortgage 
process may act on the assumption that prices will continue to rise 
and, thus for some time, perpetuate and amplify such increases. But if 
underlying factors, such as a growth in population or income, do not 
support the growth in the market, such increases will not be 
sustained. Because housing is a significant part of the economy, these 
cycles generally pose risks to overall financial and economic 
stability. 

Financial regulatory actions, or inaction, can exacerbate housing 
finance cycles, and the potential for these actions to do so should be 
considered and perhaps avoided. For example, while regulators did not 
take sufficient actions to stem a decline in underwriting standards 
during the run-up in house prices preceding the financial crisis, they 
did require regulated financial institutions to raise their capital 
levels during the downturn. The Ability to Repay and QM rules may play 
a countercyclical role by, as CFPB notes in its official 
interpretations of the final rules, setting a floor to the loosening 
of credit to prevent the deterioration of lending standards to 
dangerous levels and preventing a repeat of the deterioration of 
lending standards that contributed to the financial crisis. 
Researchers and government officials participating in a conference on 
regional housing finance cycles in the aftermath of the savings and 
loan crisis said that public policy should avoid reinforcing any 
speculative activity during the emergence of housing bubbles.[Footnote 
157] 

Government policies and practices can also be countercyclical. FHA has 
played a countercyclical role during the recent downturn but is 
sometimes criticized for doing so. For example, FHA lending standards 
remained relatively unchanged and its loan limits grew during the 
onset of the financial crisis when other market participants were 
tightening mortgage credit standards, resulting in the rapid growth of 
FHA's share of the market. Later FHA experienced higher-than-expected 
losses because of higher than expected defaults and, in response, 
tightened requirements for lender underwriting and raised its 
insurance premiums. As we have previously reported, mortgage industry 
observers have proposed options that would limit FHA's market presence 
as a way of either reducing FHA's liability or better ensuring that it 
serves a certain market--that is, low-or moderate-income borrowers and 
first-time homebuyers.[Footnote 158] Other government entities have 
taken countercyclical actions, such as varying loan-to-value ratios 
over the cycle. For example, according to a paper from the Hong Kong 
Monetary Authority, Hong Kong has varied the loan-to-value ratios for 
residential loans for depository institutions in response to cyclical 
changes. According to the Hong Kong Monetary Authority, this policy 
was introduced as an instrument for strengthening the banking system's 
resilience to asset price volatilities and reducing the risk of cycle 
amplification through bank credit, rather than as a means of managing 
asset price cycles and market activities or targeting asset prices. 
[Footnote 159] The paper also notes a number of special circumstances 
facing the Hong Kong Monetary authority, including that it is 
precluded from conducting independent monetary policy. Officials at 
one U.S. government agency noted that varying the loan-to-value ratio 
over the cycle would be less advantageous than setting these ratios at 
a level that would be sustainable over a cycle, and researchers have 
suggested that limits on certain loan-to-value ratios in Texas, that 
did not vary over a cycle, may have led that state to have fewer 
defaults during the financial crisis.[Footnote 160] 

Some participants at our discussion groups also noted that at times 
government actions may intensify housing finance cycles and that such 
actions should be avoided. For example, one participant noted that 
financial regulation encouraged the formation of the housing bubble 
and then government officials failed to act early enough to limit the 
impact of the crisis. Another noted that because policy responses to 
the crisis had been late in terms of moderating the downturn in the 
cycle, it would be better to rely on policies that change 
automatically over the cycle, such as requiring borrowers to make 
higher down payments on subsequent mortgage loans when they increase 
the number of mortgage loans they take out, rather than on 
discretionary government actions. Although some participants at our 
discussion groups acknowledged that FHA had played a countercyclical 
role, one participant noted that there will be lots of pressure to let 
the next housing bubble continue and that FHA may need flexibility, 
such as being able to vary down payment requirements, to provide a 
countercyclical force. However, one participant noted that FHA's goal 
of providing financing for lower-income homebuyers might lead it to 
use that flexibility to lower downpayments. Another participant at our 
discussion groups said that it would be difficult to design national 
countercyclical policies for the U.S. housing markets because of local 
variations in those markets. 

In proposals for changing the housing finance system and related 
research, policymakers and researchers have concentrated on 
countercyclical policies directed at severe downturns in the market. 
Some proposals to change the housing finance system provide a 
government backstop if losses exceed some threshold. The backstop 
generally consists of government mortgage guarantees that would be 
activated when mortgage losses reach a particular level. Those making 
proposals with a government backstop have said that it is unreasonable 
to assume that the federal government would not enter the market to 
soften a severe downturn in the future. 

Element 8: Recognition and Control of Fiscal Exposure and Mitigation 
of Moral Hazard: 

Recognition and control of fiscal exposures depends, in part, on the 
treatment of these exposures in the federal budget. In a 2013 report 
that discussed fiscal exposures in a number of programs, including the 
activities of the enterprises, we noted that fiscal exposures may be 
explicit in that the federal government is legally required to pay for 
the commitment; alternatively, they may be implicit in that the 
exposures arise from expectations based on current policy or past 
practices.[Footnote 161] In that report we concluded that the federal 
budget has not provided complete information about some significant 
fiscal exposures. Therefore, we continued to support many past 
recommendations to improve budget recognition of these exposures, both 
to increase the attention given to them and also to allow for more 
comparable cost information for decision makers to consider when 
determining the best way to achieve various policy goals or to design 
a program. These recommendations include incorporating measures of the 
full cost of programs into primary budget data. We have also noted in 
prior reports that government actions that respond to private sector 
losses may contribute to moral hazard--a situation in which private 
market parties may make decisions that affect certain risks believing 
that the federal government will ultimately bear the losses, and as a 
result, may take on excessive risk.[Footnote 162] Nonetheless, we have 
found that the government may choose to assist private companies or 
markets when that assistance would reduce the impact of systemic 
crises and have recommended that the government take actions to 
mitigate the effects of weakened market discipline when it provides 
certain kinds of assistance.[Footnote 163] 

The estimated cost for FHA, VA, and USDA direct loans and loan 
guarantees--generally referred to as credit subsidies--is explicitly 
recognized in the federal budget under the Federal Credit Reform Act 
of 1990.[Footnote 164] Agencies estimate their programs' credit 
subsidy costs based on estimated future cash flows on their 
guarantees, and reestimate the credit subsidy cost each year. The 
subsidies are explicitly accounted for in the federal budget and 
fiscal exposure as measured by those estimated costs is known. 
However, the ultimate subsidy costs may differ from the estimates. We 
have previously found challenges in estimating the cost of credit 
programs and made a number of recommendations for improving FHA's 
estimates.[Footnote 165] In addition, we found that FHA has taken 
actions to improve the models it uses for estimating its credit 
subsidy costs and other purposes.[Footnote 166] Nonetheless, 
estimating credit subsidy costs for a mortgage guarantee program can 
be difficult, in part, because the estimates are based on long-term 
assumptions about house prices and interest rates that are inherently 
uncertain. 

The activities of the enterprises have had limited transparency in the 
federal budget, despite a series of events that have led to 
significant fiscal exposure. Prior to 2008, the enterprises did not 
represent an explicit fiscal exposure. However, because of an 
assumption in financial markets of an implied federal guarantee, the 
enterprises were able to borrow at lower costs than other market 
participants. Implicit exposures can be difficult to estimate and do 
not appear in the federal budget. As noted earlier in this report, in 
2008, FHFA placed the enterprises into conservatorship and Treasury 
agreed to provide temporary capital assistance under the Senior 
Preferred Stock Purchase Agreements, creating a new explicit exposure. 
[Footnote 167] For budgetary purposes, Treasury recorded its 
assistance as budget outlays to the enterprises in the year Treasury 
made the actual disbursement.[Footnote 168] As this support for the 
enterprises did not represent a direct loan to the enterprises or a 
loan guarantee, Treasury deemed that the budgetary credit subsidy 
accounting (consistent with the Federal Credit Reform Act of 1990) did 
not apply. As noted earlier in this report, since entering the Senior 
Preferred Stock Purchase Agreements with the enterprises in September 
2008 through March 31, 2014, Treasury has disbursed $187.5 billion to 
the enterprises and received dividend payments of $202.9 billion. 
Treasury records these dividend receipts from the enterprises in the 
federal budget as reductions in budget outlays when received. While 
neither enterprise has needed additional funding from the Treasury 
since the second quarter of 2012, the remaining reported authorization 
available to the enterprises was about $258 billion as of March 31, 
2014. On April 14, 2014, FHFA published the results of stress tests 
designed to estimate fiscal exposure under a range of economic 
scenarios.[Footnote 169] They found that payments to the enterprises 
could range from $0 up to $190 billion under various economic 
assumptions. In addition, while recognizing that the federal 
government is not obligated to provide additional assistance beyond 
the scope of the Senior Preferred Stock Agreements, its past responses 
may influence expectations related to future support, representing an 
additional implicit exposure that is difficult to estimate. 

Some participants at our discussions noted the need to manage moral 
hazard saying that if there is another housing crisis, the government 
will step in. One participant said that we should admit first that 
there will be some type of catastrophic government backstop. The 
participant noted that we should define moral hazard and try to price 
it, saying that moral hazard is endemic, but we need to determine how 
to best control and manage it by determining how much capital is 
necessary. Another participant added that the cost of a government 
backstop is part of a discussion of trade-offs among the goals of the 
housing finance system. The participant also noted that private 
insurers tend to handle moral hazard better than public insurers. 

One proposal to change the housing finance system recognizes the 
possible fiscal exposure and therefore does not include a government 
guarantee in the secondary market. However, others have asserted that 
the government would step in if the housing sector faced a severe 
downturn and try to minimize fiscal exposure by having private capital 
assume some level of losses before any government guarantees would be 
activated. In addition, these proposals attempt to offset fiscal 
exposure and minimize moral hazard by assessing risk-based fees for 
market participants. However, as is evident in other government 
insurance programs, such as deposit or flood insurance, assessing 
appropriate fees outside of a market is difficult. In addition, 
pressure may develop to reduce the buildup of any fund that collects 
such insurance payments during the upswing of a cycle. One proposal 
that includes changes for FHA is designed to promote controls over 
lenders, such as explicitly requiring that lenders--whether operating 
under its direct endorsement program or delegated authority--that 
misrepresented loans repay FHA in cases where the loans default. 

Element 9: Emphasis on Implications of the Transition: 

Because reforming the housing finance system may represent substantial 
changes in the marketplace, policymakers should consider how best to 
ensure that the transition to any new system does not hamper the 
functioning of markets, individual institutions' ability to conduct 
their activities, and consumers' ability to access needed services. 
Any action that would severely limit market liquidity--negatively 
impacting mortgage borrower access--should be of particular concern. A 
transition period might allow for changes to be phased in at a pace 
that market participants could manage. In addition, we found in 2009 
that certain critical factors, such as effective communication 
strategies, could help to ensure that any large-scale transitions were 
implemented successfully.[Footnote 170] Further, attention should be 
paid to developing a sound human capital strategy to ensure that any 
new or consolidated agencies are able to retain and attract additional 
quality staff during the transition period, and policymakers should 
consider how best to retain and utilize the existing skills and 
knowledge base within agencies subject to changes as part of a 
transition.[Footnote 171] However, any housing finance reform policies 
should consider that there may be trade-offs between making smaller 
changes to help ensure a smooth transition in the short run and making 
more significant changes that would provide greater long-term benefits 
but might result in a more difficult transition. 

Because changes to the housing finance system may have large 
unintended consequences for housing finance markets, policymakers and 
federal officials would need to monitor the system during the 
transition and make any needed changes. Specifically, the impact on 
housing affordability would need to be monitored during the transition 
to ensure that effects are aligned with expectations. Such monitoring 
would permit adjustments to be made through flexibilities provided to 
government entities or legislation. No matter how the housing finance 
system is ultimately restructured, or even if it remains as is, 
mortgage rates are expected to be higher in the future. How much 
higher depends on numerous factors, including the sources and cost of 
private capital supporting the system and the extent and nature of any 
government guarantees. One researcher has estimated that in a new 
housing finance system, the cost of mortgages will rise depending on 
the extent of the federal role in the secondary market. Estimates of 
the increase in mortgage rates range from .1 to 1.8 percentage points, 
depending on borrower and loan characteristics.[Footnote 172] However, 
housing affordability rests on many factors other than mortgage rates, 
including the price of housing and the types of mortgage products 
available. 

Agency officials, industry representatives, consumer advocates, and 
researchers who attended our discussions emphasized the importance of 
a deliberate, well-defined transition from the current housing finance 
system to any new one that would minimize market disruption. In 
particular, they noted that ongoing mortgage liquidity would have to 
be maintained during the transition to ensure the availability of 
credit. Across stakeholder groups, participants also emphasized the 
need to maintain the smooth functioning of the TBA market during the 
transition and the availability of the 30-year-fixed rate mortgage. 
Some participants noted that a transfer of human capital from the 
enterprises to any new system set up in the secondary market would be 
helpful. Two consumer advocates also noted that monitoring of any 
increasing costs to potential borrowers during a transition is 
critical. One of these consumer advocates and several other group 
participants noted the importance of weighing the benefits and costs 
involved in a transition to a new system relative to maintaining the 
current housing finance system. 

Proposals to change the housing finance system include details on the 
transition to a new system, including time frames and operational 
issues such as the transfer of powers, personnel, and facilities from 
current entities to those that are proposed to replace them. At least 
two proposals provide for flexibility, such as allowing the 
enterprises to continue to operate past a proposed time limit even if 
certain conditions are not met. Two proposals include requirements for 
formal transition planning. For example, one proposal requires the new 
secondary market regulator to provide Congress with a plan that 
specifies all the legislative, administrative, and regulatory actions 
necessary to transition to a fully privatized secondary mortgage 
market. Some proposals also consider the impact of the transition on a 
range of other factors. For example, one proposal considers how 
transition options may affect housing prices and affordability, the 
effectiveness of borrower protections, small-lender participation in 
the secondary mortgage market, access to credit in rural and 
underserved communities, innovation among secondary market 
participants, and taxpayer repayment. It also provides for transition 
oversight, including annual testimonies before Congress on transition 
progress and reports to Congress on the status of the transition. 

Any Changes Will Involve Trade-offs and Should Consider 
Characteristics Associated with Controls and Performance: 

One of the most difficult parts of changing the single-family housing 
finance system will be to make choices when there are trade-offs among 
and within the elements. As we have noted, trade-offs and priorities 
need to be considered when the goals of the housing finance system are 
being defined. Establishing competing goals or principles, without an 
indication of their relative importance, will not provide government 
agencies with sufficient certainty as to what is expected of them 
going forward. Identifying these trade-offs and defining priorities 
are essential to developing policies and mechanisms to achieve goals. 
Within the elements related to protecting borrowers and investors, for 
example, the benefits of standardization will need to be weighed 
against possible limits to beneficial innovation and access to credit 
for people who do not meet the criteria for standardized products. 

In addition, any housing finance system should have appropriate 
controls and high-quality performance that are characterized by 
transparency and accountability and that align incentives and ensure 
efficiency and effectiveness. These interconnected characteristics 
apply to many of the nine elements that we laid out earlier in this 
report. 

Transparency. In prior reports, we have cited the value of 
transparency in such areas as improving program outcomes and 
strengthening oversight.[Footnote 173] In those reports, we have found 
that transparency is essential for Congress and the public to hold 
government agencies accountable and that transparency includes clarity 
of communications. We have also recognized that an appropriate level 
of transparency takes into account the need to maintain 
confidentiality and information security and must be balanced with the 
need for those involved in deliberations to be able to express their 
views. Transparency includes clearly communicating goals and trade-
offs to the public; ensuring that adequate data are disseminated; and 
ensuring that borrowers and investors have adequate information to 
assess risks. Clear communications will be especially important during 
any transition from the current system to a new one. As a result, any 
system that satisfies the elements will be one with appropriate levels 
of transparency. 

Accountability. Clarity of responsibility and transparency of actions 
taken by government entities is necessary for Congress and the public 
to hold them accountable--a key control for promoting an efficient and 
effective government. In housing finance, market participants must be 
accountable for their actions as well. Holding market participants 
accountable means that those making the decisions will be the ones who 
benefit or lose as a result of those decisions. Such accountability 
would reduce the moral hazard in the housing finance system. In 
addition, federal agencies will need to oversee market participants 
and enforce rules related to preventing fraud and abuse. Further, 
specifying goals and trade-offs is essential to holding federal 
agencies and the private sector accountable. Accountability is also 
important in elements related to policies and mechanisms, an effective 
regulatory system, and the capacity of federal agencies to understand 
and manage risk. Any system addressing the nine elements will have 
accountability embedded throughout. 

Aligned incentives. Holding the private sector accountable requires 
that incentives be better aligned and moral hazard minimized. As we 
have seen, misaligned incentives likely contributed to the financial 
crisis. The Dodd-Frank Act and some proposals seek to have 
participants in the mortgage process hold some of the risk associated 
with a mortgage. For example, the Dodd-Frank Act requires that, in 
certain circumstances securitizers retain some portion of the risk of 
their MBS, and some proposals want borrowers to have some equity in 
their property. Some proposals require market participants to pay for 
government insurance and guarantees, which could be used to recognize 
their contributions to systemic risk and reduce excessive risk taking, 
but determining appropriate pricing and reserving practices for 
providing this guarantee poses significant challenges. Aligning 
incentives means basing decisions, in part, on the ability of 
borrowers to repay rather than solely on the collateral of the house 
itself. Aligning incentives across the elements will help to mitigate 
moral hazard throughout the housing finance system. 

Efficiency and effectiveness. Changes in the single-family housing 
finance system should be made in ways that support efficiency and 
effectiveness. Policymakers and interested parties should consider the 
benefits and costs of making various changes in policies, mechanisms, 
or the regulatory systems relative to other alternatives and to 
allowing the current system to persist. They should also consider the 
extent to which the missions, goals, and programs of government 
entities may contribute to costly fragmentation, overlap, and 
duplication. Finally, policymakers and interested parties should 
recognize that changes to the single-family housing finance system 
that address weaknesses in the system while preserving its strengths 
are likely to have costs. Weighing potential benefits and costs of 
changes to the housing finance system, including costs and risk for 
the federal government, will require careful consideration. 

Agency Comments and Our Evaluation: 

We provided copies of this report to CFPB, FDIC, the Federal Reserve, 
FHFA, HUD, OCC, SEC, Treasury, USDA, and VA for review and comment. 
All but one of the agencies provided technical comments on the draft, 
and we addressed technical comments as appropriate. None of the 
agencies provided formal written comments on the draft. USDA, which 
did not provide technical comments on this draft, noted that it 
generally concurred with the information in the draft pertaining to 
its rural housing program. 

Some of the technical comments raised some higher level issues 
including the following: 

* CFPB noted that regulators need access to timely information for 
effective regulation. We agree and note in the final report that to 
strengthen decision-making and accountability, regulators will need 
access to the best reasonably obtainable scientific, technical, 
economic, and other information. 

* In response to a statement in the draft report saying that 
regulators did not take actions to stem the decline in underwriting 
standards prior to the financial crisis, FDIC noted that regulators 
had taken some actions beginning in 2006 to stem the decline in 
underwriting standards. We agree that the regulators did take some 
actions, and the final report says that regulators did not take 
sufficient actions to stem the decline in underwriting standards. 

* HUD noted that the draft report did not discuss improvements to 
borrower protection made prior to the Dodd-Frank Act, specifically 
changes made to rules implementing RESPA. As a result, we added 
information on 2008 revisions requiring that RESPA forms provide 
additional disclosures, including clear summaries of loan terms and 
conspicuous information about yield-spread premiums designed to make 
it easier for potential borrowers to compare originators when shopping 
for a mortgage loan. 

We will send copies of this report to the Chairs of FDIC, the Federal 
Reserve, and SEC; Comptroller of the Currency; Directors of CFPB and 
FHFA; and Secretaries of HUD, the Treasury, USDA, and Veterans 
Affairs; and other interested parties. In addition, the report will be 
available at no charge on GAO's website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs are listed 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix V. 

Signed by: 

Mathew J. Scirè: 
Director, Financial Markets and Community Investment: 

List of Addressees: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Mike Crapo: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Tom Coburn: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Jeb Hensarling: 
Chairman: 
The Honorable Maxine Waters: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Elijah E. Cummings: 
Ranking Member: 
Committee on Oversight and Government Reform: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

To help policymakers assess various proposals for changing the single-
family housing finance system and consider ways in which it could be 
made more effective and efficient, we prepared this report under the 
authority of the Comptroller General. Specifically, this report (1) 
describes market developments since 2000 that have led to changes in 
the federal government's role in single-family housing finance; (2) 
analyzes whether and how these market developments have challenged the 
housing finance system; and (3) presents an evaluation framework for 
assessing potential changes to the housing finance system. 

To meet these objectives, we reviewed literature, including existing 
GAO reports on housing finance and housing market developments, as 
well as prior GAO reports presenting frameworks for reform in the 
financial sector and reports that contain criteria for appropriate 
controls and high-quality government performance. These reports are 
referenced in footnotes throughout this report and some are included 
in a list of related GAO products at the end of the report. In 
addition to prior GAO reports, we conducted a literature review 
including academic and industry reports on housing finance and housing 
market developments; current and past financial and housing market 
events which have revealed limitations in our existing regulatory and 
housing finance system; and proposals for modifying the current 
housing finance system. To identify literature, other than GAO 
reports, included in this review, we relied, in part, on Internet and 
electronic database searches on housing finance. We also searched for 
literature written by those who had testified before Congress or 
participated in relevant conferences between September 1, 2013 and 
January 31, 2014. We also attended a number of conferences on housing 
finance reform. Further, we reviewed footnotes and bibliographies in 
the literature we reviewed to identify additional literature for 
review. We also relied on recommendations from GAO staff who worked in 
the area of housing finance and officials from other relevant 
government agencies. These agencies included the Board of Governors of 
the Federal Reserve System (Federal Reserve), Bureau of Consumer 
Financial Protection known as the Consumer Financial Protection 
Bureau, Departments of Agriculture (USDA), Housing and Urban 
Development, Treasury and Veterans Affairs (VA), Federal Deposit 
Insurance Corporation, Federal Housing Finance Agency, Office of the 
Comptroller of the Currency, and Securities and Exchange Commission. 

To provide input on a draft housing finance framework and key market 
developments, we convened seven discussion groups comprised of 
government officials, researchers, consumer advocates, and industry 
representatives. The participants were selected because they had made 
reform proposals, written or testified before Congress on housing 
finance reform issues, or been recommended by government officials or 
GAO staff who had participated in prior GAO studies of housing finance 
issues. Although we grouped the discussions into categories such as 
government officials, researchers, consumer advocates, and industry 
representatives, we chose the participants because they had a range of 
views. As a result, we were not expecting to find consensus about our 
framework or key market developments during the discussions. A list of 
the participants is included in appendix IV of this report. In a few 
cases where key participants could not attend our discussion groups, 
we interviewed them separately. How these discussions and interviews 
were used to address issues across the objectives is further discussed 
below. 

Specifically, to address our first objective, we identified relevant 
market developments from 2000 through 2013. To help identify pertinent 
market developments and relevant prior reports and analyses, we held 
an internal discussion with a broad group of GAO staff who had 
experience with housing finance issues. During our discussion groups 
with experts and other relevant parties, we also asked participants to 
identify the most important market development that housing finance 
reform would need to address. We relied primarily on prior GAO reports 
that identified and analyzed key national housing market indicators, 
including measures of home prices, loan performance, home equity, and 
unemployment.[Footnote 174] We used data that had been collected for 
these reports and reviewed the data reliability assessments that had 
been completed for those reports to determine if the data were 
reliable for our purposes. Based on these reviews, we determined that 
the data were reliable for our purposes. To update the data and 
analyses, we relied on several data sources including CoreLogic's Home 
Price Index, the National Delinquency Survey data issued by the 
Mortgage Bankers Association, data issued by the National Bureau of 
Economic Research, the Federal Reserve's statistical releases on the 
Flow of Funds Accounts of the United States and the 30-year 
conventional mortgage rate, and consumer price index data reported by 
the Bureau of Labor Statistics. Generally, we updated our assessments 
of the reliability of these data by reviewing existing information 
about data quality and corroborating key information. We determined 
that the data were sufficiently reliable for our purposes. 

To describe changes in market participants and products in the primary 
and secondary markets, we calculated the percentage of the dollar 
value of mortgage originations supported by the Federal Housing 
Administration, VA, and USDA and the percentage supported by Fannie 
Mae and Freddie Mac from 2000 through 2013. We relied on data 
published by Inside Mortgage Finance on new mortgage originations and 
issuances of mortgage-backed securities. To determine the reliability 
of these data, we reviewed publicly available information on the data 
source and queried a knowledgeable official about the accuracy of the 
data. We determined the data were sufficiently reliable for our 
purposes, which were to provide information about how the federal role 
changed over the relevant time period. 

To address our second objective, which describes weaknesses revealed 
by developments in the housing finance market beginning in 2000, we 
used information from our literature review and interviews. We 
identified developments based on available literature, interviews and 
discussions with external experts and other relevant parties, and 
internal suggestions. We determined which market developments revealed 
weaknesses based on which developments were most often cited as posing 
challenges for the market. For example, several developments were 
cited in our sources as contributing to the 2007-2009 financial 
crisis. Further, through our review of the literature, we defined 
certain weaknesses--misaligned incentives, lack of information or 
transparency, and excessive risk taking--and found that many of the 
identified market developments fell into these categories. In 
addition, we identified and described government legislative and legal 
enforcement responses to the identified weaknesses. 

To address our third objective, we reviewed the elements of frameworks 
in prior GAO reports including those for modernizing the financial 
regulatory framework, determining when the federal government should 
provide assistance to the private sector, and assessing catastrophic 
insurance programs.[Footnote 175] From these, an initial review of 
existing proposals to change the housing finance system, and meetings 
with government officials, we developed a list of potential elements 
of a framework that could be used by Congress and others to assess 
proposals. We then reviewed the literature to determine if these 
elements were relevant, useful, and appropriate for such a framework. 
As a result of this analysis, we were able to develop a draft 
framework that included a number of elements and certain 
characteristics associated with good governance--appropriate controls 
and high-quality performance. We then shared this draft framework with 
government officials, researchers, and other relevant parties at our 
discussion groups. During the discussions, we asked participants to 
exchange views on the usefulness, relevance, and appropriateness of 
the draft framework; any priorities and trade-offs among the framework 
elements and characteristics; and whether any elements or 
characteristics of good governance had not been included in the draft 
framework. Based on discussions at these meetings, we determined that 
certain aspects of the framework needed to be clarified by separating 
some of the elements that had originally been combined, and by 
reassessing the division of the framework between its elements and the 
characteristics of good governance. Where possible, we used the 
remarks of participants to help clarify and enrich the discussion of 
the framework elements. 

Throughout the engagement we reviewed proposals for changing the 
single-family housing finance system, including legislative proposals 
and those made by experts participating in our discussion groups. As 
noted earlier in this report, we used these proposals to help us 
develop an initial list of potential elements for our framework. We 
also used these proposals to help test the usefulness, relevance, and 
appropriateness of the elements. For each element in the framework, we 
used actual parts of proposals to illustrate how the element could be 
used to assess potential changes to the housing finance system. In 
addition, to help ensure that the framework was useful, relevant, 
appropriate, and sufficient, we applied it to a legislative proposal. 

We conducted this performance audit from August 2013 to October 2014 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: History of Federal Involvement in Housing Finance from 
1913 to 2014: 

Between 1913 and 2014, the federal government's role in the housing 
finance market has evolved, and these changes have influenced the 
types of mortgage products available to home buyers. The federal 
government employs multiple tools supporting homeownership and 
financing of homes. These tools include sponsorship of mortgage market 
entities, regulation of certain aspects of mortgage market operations, 
insurance and guarantees of mortgages and mortgage securities, direct 
lending, and favorable tax treatment.[Footnote 176] In some cases, 
these tools, for example, the federal tax deduction for mortgage 
interest, apply broadly and are designed generally to facilitate 
mortgage lending and homeownership. In other cases, tools have been 
designed to facilitate home ownership and housing opportunities for 
targeted populations and groups. For example, programs administered by 
the Department of Veterans Affairs (VA) and the Department of 
Agriculture's Rural Housing Service (RHS) are designed to facilitate 
homeownership and housing opportunities for veterans and residents of 
rural areas respectively. This appendix provides a brief overview of 
the developments that over time have led to the federal government's 
current role in the housing finance markets, and GAO's prior reviews 
of these topics as noted. 

First Steps: 

The federal government's current involvement in housing finance can be 
traced back to the 1913 Internal Revenue Act, which established the 
federal income tax. Under the Internal Revenue Act, taxpayers were 
allowed to deduct mortgage interest payments and property taxes from 
their taxable income when determining their federal tax liability. At 
that time, the deduction for home mortgage interest was part of the 
deduction allowed for any interest paid, and the deduction for 
property taxes was part of the deduction for all state, local, and 
federal taxes. The Congressional Research Service has noted that there 
is no evidence in the legislative history that these deductions were 
intended to encourage home ownership or to stimulate the housing 
industry when they were introduced. 

Prior to the Great Depression, mortgages featured short terms 
(typically 3 to 10 years), and loan-to-value ratios of less than 50 
percent. These loans also normally did not fully amortize, meaning 
that payments over the term of the loan did not reduce the principal 
balance to zero, and borrowers were left to pay off or refinance the 
balance of the loan at the end of the term. The market for mortgages 
was largely local, as banks and other lenders relied heavily on local 
deposits to fund mortgages. As a result, if savings in an area were 
too low to meet the local demand for mortgages, borrowers faced higher 
interest rates than in markets with a surplus of savings. The lack of 
a nationwide housing finance market created regional disparities in 
mortgage interest rates and credit availability. These structural 
features of the mortgage market made it susceptible to disruptions in 
the availability of funding. 

The Great Depression: 

During the Great Depression, thousands of thrifts and banks failed due 
to their credit losses, and housing finance generally became 
unavailable. The Congressional Budget Office noted that the steep 
declines in incomes during the Depression resulted in a surge of 
mortgage delinquencies and foreclosures. By 1934, roughly half of home 
mortgages in urban areas were delinquent, and the annual foreclosure 
rate was over 13 percent. 

The federal government began its response to the Great Depression 
housing crisis in 1932, with the enactment of the Federal Home Loan 
Bank Act, which created the Federal Home Loan Bank (FHLBank) System 
and the FHLBank Board as its regulator.[Footnote 177] The FHLBank 
System was designed to increase liquidity in the mortgage market and 
serve as a low-cost lender to thrifts to support housing finance, and 
continues to operate this way today. The FHLBank System consisted of 
12 FHLBanks and was cooperatively owned by its member institutions, 
which originally included only thrifts (also known as savings and 
loans) and insurers, before being expanded to include commercial banks 
and credit unions in 1989. The primary mission of the FHLBank System 
was to promote housing and community development by making loans, also 
known as advances, to member financial institutions, which used the 
funds to originate new mortgages. To raise the funds necessary to 
carry out its activities, the FHLBank System issued debt in the 
capital markets at favorable rates compared to those available to 
commercial borrowers. Investors were willing to purchase FHLBank bonds 
at these prices because they believed that the bonds were implicitly 
guaranteed by the federal government, because of the FHLBank System's 
government sponsorship. 

Fixed-rate mortgages were expanded in the 1930's by the Home Owners' 
Loan Corporation (HOLC), as the federal government sought to refinance 
the large numbers of delinquent mortgages. As part of the New Deal, 
President Roosevelt signed into law the Home Owners' Loan Act of 1933, 
which established HOLC.[Footnote 178] The HOLC raised funds with 
government-backed bonds, used the funds to purchase defaulted 
mortgages, and refinanced the mortgages with new interest rates and 
terms. The HOLC often converted variable-rate, short-term, non-
amortizing mortgages into fixed-rate, fully amortizing mortgages with 
terms as long as 15 years.[Footnote 179] Between August 1933 and June 
1936, when the corporation stopped making loans, the HOLC refinanced 
about 1 million loans--or roughly 20 percent of the outstanding 
mortgages on nonfarm, owner-occupied properties. In 1934, the HOLC 
accounted for about 70 percent of new mortgages originated. The HOLC 
was dissolved in 1953. 

While the HOLC addressed refinancing of existing home loans, the 
Federal Housing Administration (FHA) was created to encourage new 
lending for home purchases. FHA was established in 1934 under the 
National Housing Act to broaden homeownership, strengthen and protect 
lending institutions, and stimulate employment in the building 
industry.[Footnote 180] FHA's single-family mortgage insurance 
programs insured qualified private lenders against losses on home 
mortgage loans they originated. As the Federal Housing Finance 
Agency's (FHFA) Office of the Inspector General noted, FHA insurance 
gave lenders added security and expanded the pool of potential 
homebuyers for whom lenders were willing to underwrite loans. FHA 
financed its operations through insurance premiums charged to 
borrowers and interest earned on its reserves. The original FHA 
mortgage insurance contracts enabled borrowers to obtain financing 
with a minimum 20-percent down payment. The maximum mortgage was 
limited to $16,000, which enabled families to purchase up to a $20,000 
home with a minimum down payment. FHA further expanded the use of 
fixed-rate, long-term mortgages and changed mortgage underwriting 
standards to allow for a much broader segment of American households 
to qualify for mortgage finance. Further, FHA created new uniform 
construction and appraisal standards to be used by private sector 
practitioners in the building and finance industries so that FHA 
insured mortgages were available across the country, and homebuyers 
would have access to the lowest cost funds available nationally rather 
than locally. 

The National Housing Act gave FHA authority to create national 
mortgage associations for the purchase and sale of mortgages.[Footnote 
181] In 1938, FHA established a national mortgage association, which 
became the Federal National Mortgage Association (Fannie 
Mae).[Footnote 182] Originally, Fannie Mae was a federal agency with a 
mandate to purchase, hold, and sell FHA-insured loans. By purchasing 
FHA-insured loans from lenders, Fannie Mae created liquidity in the 
mortgage market, providing lenders with cash to fund new home loans. 
Because the loans were insured by FHA, the lenders did not face credit 
risk, but by selling their mortgages to Fannie Mae lenders were able 
to pass on their interest rate risk. Further, by selling loans to 
Fannie Mae, lenders could now make loans with FHA insurance and 
replenish their funds to lend again. 

World War II and Post-War Era: 

In response to a serious housing shortage, the federal government 
expanded its role in the housing finance markets during and following 
World War II. Researchers have noted that the return of millions of 
veterans at the end of the war, created an acute housing shortage. 
Expansions in the federal government's role in housing finance were 
included in provisions of the Revenue Act of 1951, the Servicemen's 
Readjustment Act of 1944, known informally as the G.I. Bill, and the 
Housing Act of 1949. The Revenue Act of 1951 introduced the concept of 
deferring the tax on the capital gain from the sale of a principal 
residence if the proceeds of the sale were used to buy another 
residence of equal or greater value.[Footnote 183] This provision was 
modified in 1964 and again to its current form in 1997. 

The Servicemen's Readjustment Act of 1944, known informally as the 
G.I. Bill, created VA's mortgage guarantee program, as part of larger 
package of benefits for returning veterans.[Footnote 184] Under the 
act, the maximum amount of guaranty was limited to 50 percent of the 
loan, not to exceed $2,000, and loans were limited to a maximum 20 
years. To be eligible, veterans must have served in active duty for at 
least 90 days during World War II. The program was amended in 1945 to 
increase the maximum guarantee to $4,000, extend the maximum length of 
loans to 25 years, and make any veteran that could meet credit 
requirements eligible. In 1948, Congress authorized Fannie Mae to 
purchase VA-guaranteed mortgages to facilitate the efforts of veterans 
to purchase homes. The program is still in operation in 2014, and has 
undergone many revisions since 1944, including changes in loan terms, 
eligible uses, and fee structures. 

The Housing Act of 1949 authorized new rural lending programs through 
USDA under Title V.[Footnote 185] These programs authorized USDA to 
provide direct loans to farm owners for home construction and 
improvement on land capable of producing at least $400 worth of 
agricultural products annually. In 1965, the act was amended to 
authorize housing loans and grants to rural residents in general and 
to authorize USDA to insure loans made by private lenders to rural 
borrowers. Today, RHS administers direct loan and loan guarantee 
programs under sections 502 and 504 of the Housing Act of 1949, as 
amended. The section 502 program offers persons who do not currently 
own adequate housing, and who cannot obtain credit through 
conventional financing, the opportunity to acquire, build, 
rehabilitate, improve, or relocate dwellings in rural areas by 
guaranteeing loans made by commercial lenders or by directly lending 
to eligible home purchasers.[Footnote 186] Loans guaranteed under the 
502 program are limited to borrowers with low or moderate income, and 
loans made directly under the program are further limited to borrowers 
with low incomes (below 80 percent of the area median). The section 
504 program offers direct loans of up to $20,000 to very low-income 
homeowners who cannot obtain other credit to repair or rehabilitate 
their properties. The section 504 program also offers grants of up to 
$7,500 to senior citizens without the ability to repay their 
loans.[Footnote 187] Amendments to the Housing Act added in 1961 made 
nonfarm rural properties eligible for these single-family loan 
programs, and both continue to operate in 2014. In 2012, we found that 
the RHS loan guarantee programs overlapped significantly with FHA's 
loan guarantee program and that FHA guarantees more mortgages in rural 
areas than RHS.[Footnote 188] 

Until 1968, federal policies did not explicitly ban redlining, which 
is the refusal of lenders to make mortgage loans in certain geographic 
areas, typically minority or low-income neighborhoods, regardless of 
the creditworthiness of the loan applicant. Prior to that time, in its 
1938 underwriting manual, FHA established criteria for rating the 
economic viability of property locations and neighborhoods, and 
required an assessment of the quality of development near the property 
location "to determine whether incompatible racial and social groups 
are present, for the purpose of making a prediction regarding the 
probability of the location being invaded by such groups". However, 
redlining was explicitly banned in the Fair Housing Act.[Footnote 189] 

Privatization of Fannie Mae and Creation of Freddie Mac: 

In the post-war period, as the mortgage market became more 
standardized, Congress transitioned Fannie Mae into a private 
corporation with a congressional charter.[Footnote 190] Congress began 
the process of changing Fannie Mae's ownership structure with the 
Housing Act of 1954.[Footnote 191] Banks that sold mortgages to Fannie 
Mae were required to purchase nonvoting common stock in Fannie Mae, 
but the federal government remained the enterprise's majority owner. 
The Housing and Urban Development Act of 1968 chartered Fannie Mae as 
a government-sponsored enterprise and provided for its sale to private 
shareholders, completing the transition to private ownership.[Footnote 
192] The act also gave Fannie Mae the power to securitize loans, but 
initially Fannie Mae continued to primarily hold mortgages that it 
purchased in its portfolio. The act also split Fannie Mae into two 
corporations: Fannie Mae and the Government National Mortgage 
Association (Ginnie Mae). Ginnie Mae was and continues to be an on-
budget, federally owned corporation within HUD that guarantees timely 
payment of principal and interest on privately issued mortgage-backed 
securities (MBS) collateralized by FHA, VA, or other government 
insured or guaranteed mortgages. 

The Emergency Home Finance Act of 1970 created the Federal Home Loan 
Mortgage Corporation (Freddie Mac).[Footnote 193] Freddie Mac was 
intended to add liquidity to the secondary mortgage market and to 
complement the FHLBank System. Freddie Mac was initially owned by the 
member institutions of the FHLBanks, which were primarily thrifts, and 
was authorized to carry out transactions with any institution with 
federally insured deposits. Freddie Mac began to purchase long-term 
mortgages from thrifts, increasing their capacity to fund additional 
mortgages and reducing their interest rate and credit risk. Freddie 
Mac focused its business activities on purchasing loans and issuing 
MBS rather than holding mortgages in its portfolio. Freddie Mac issued 
its first MBS in 1971. The Emergency Home Finance Act of 1970 also 
authorized both Fannie Mae and Freddie Mac to purchase loans that 
satisfied certain requirements in terms of size and leverage that were 
not insured by the federal government, and the enterprises focused 
their business activities on these "conventional" mortgages.[Footnote 
194] The secondary market for conventional loans created by the 
enterprises increased the liquidity of the primary mortgage market, 
allowing lenders to fund additional mortgages. In addition to 
providing liquidity, by purchasing mortgages that were not federally-
insured, the enterprises took on the credit risk associated with the 
mortgages. Further, because of the ability to sell the loans, banks 
and thrifts had an incentive to originate mortgages that conformed to 
Fannie and Freddie's standards, and this made underwriting standards 
more uniform across the country. 

Response to Savings and Loan Crisis: 

The savings and loan crisis required a large financial intervention by 
the federal government and led to changes in the FHLBank System. Prior 
to changes made in the early 1980s, thrifts were limited by regulation 
in both the amount of interest they could pay on deposits and the 
types of loans they could offer. In 1979, the Federal Reserve System 
(Federal Reserve) substantially increased interest rates in an effort 
to reduce inflation. Thrifts were not able to offer depositors market 
rates on deposits due to the regulatory limitations, and lost 
substantial funding as depositors withdrew funds. As numerous thrifts 
became insolvent and were at risk of failure, the federal government's 
initial response was to remove some of the regulations that restricted 
thrifts, increase deposit insurance limits, and decrease capital 
requirements for thrifts. The two primary pieces of legislation in 
this response were the Depository Institutions Deregulation and 
Monetary Control Act of 1980 and the Garn-St Germain Depository 
Institutions Act of 1982.[Footnote 195] Together these acts removed 
limits on the amount of interest that could be charged on deposits and 
allowed certain banks and thrifts to provide many new types of 
products, including adjustable-rate mortgages. However, the crisis 
deepened and the federal government ultimately provided more than $100 
billion in direct outlays to resolve more than 700 failed thrifts. 
Congress passed the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), which placed thrifts under Federal 
Deposit Insurance Corporation (FDIC) insurance, created the Office of 
Thrift Supervision (OTS) as a new regulator for thrifts, and made 
changes to the FHLBank System.[Footnote 196] For example, the act 
allowed commercial banks and credit unions, to become members of the 
FHLBank System. 

Regulation of the Enterprises: 

During the 1990s the federal government continued to restructure the 
enterprises and put in place a new regulatory structure for them. 
FIRREA restructured Freddie Mac as a publicly traded corporation, with 
a similar corporate structure as Fannie Mae. With this change Fannie 
Mae and Freddie Mac's structures and strategies were very similar. 
Both of the enterprises issued MBS that included their own guarantees 
to investors against credit risk on the securitized mortgage pools, 
and both held mortgages and MBS on their respective balance sheets. By 
1992, Congress concluded that the enterprises posed potential safety 
and soundness risks, and regulations that had been in place since 1968 
were inadequate to manage such risks. Through the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (Title XIII of 
the Housing and Community Development Act of 1992), Congress 
fundamentally revised regulation of the enterprises and took steps to 
clarify Fannie Mae's and Freddie Mac's roles within the housing 
finance system and better define their public housing mission 
responsibilities.[Footnote 197] The act expanded the enterprises' 
previous housing mission responsibilities, requiring a percentage of 
the loans they purchased to be mortgages serving low or moderate-
income families; special affordable housing for families (that is, low-
income families in low-income areas, and very low-income families); 
and housing located in central city, rural, and other underserved 
areas.[Footnote 198] HUD was given responsibility for regulating the 
enterprises compliance with these goals. Recognizing the potentially 
large financial costs that the enterprises posed to the federal 
government, the act also established the Office of Federal Housing 
Enterprise Oversight (OFHEO) as an independent office within HUD whose 
mission was to help ensure the enterprises' safety and soundness. 
[Footnote 199] One of OFHEO's most important means of helping to 
ensure the enterprises' financial soundness was to establish capital 
requirements that are related to potential risks that the enterprises 
face. In 1992, Fannie Mae and Freddie Mac became subject to a 
statutory 2.5 percent equity capital charge against mortgages or MBS 
that were funded on their balance sheets and a 0.45 percent equity 
capital charge against the MBS that they had issued to investors. Both 
of these capital requirements were lower than the requirements for 
depository institutions, which were bound by the 4.0 percent minimum 
Basel I requirement. 

However, in 2008, we found that the regulatory structure for the 
enterprises was fragmented and not well equipped to oversee their 
financial soundness or housing mission achievement.[Footnote 200] We 
reported that OFHEO lacked key statutory authorities needed to fulfill 
its safety and soundness responsibilities as compared to the 
authorities available to federal bank regulators. For example, OFHEO 
was not authorized to limit the asset growth of housing enterprises if 
capital falls below predetermined levels. Moreover, HUD, which had 
housing mission oversight responsibility for the enterprises, faced a 
number of challenges in carrying out its responsibilities. In 
particular, HUD may not have had sufficient resources and technical 
expertise to review sophisticated financial products and issues. The 
Housing and Economic Recovery Act of 2008 (HERA) created FHFA to 
oversee the enterprises and the FHLBanks.[Footnote 201] The law gave 
FHFA such new regulatory authorities as the power to regulate the 
retained mortgage portfolios, to set more stringent capital standards, 
and to place a failing entity in receivership. In addition, the law 
also combined the regulatory authorities that were previously 
distributed among OFHEO; the Federal Housing Finance Board, which had 
replaced the FHLBank Board in 1989; and HUD. 

Response to Financial Crisis: 

The 2007-2009 financial crisis, which according to many researchers, 
was triggered by losses in the mortgage market, led the federal 
government to significantly increase the federal role in the housing 
finance markets. On October 3, 2008, the Emergency Economic 
Stabilization Act of 2008 was signed into law. The act authorized the 
Troubled Asset Relief Program, a $700 billion program designed to 
restore liquidity and stability to the financial system and to 
preserve homeownership by assisting borrowers struggling to make their 
mortgage payments.[Footnote 202] Troubled Asset Relief Program funds 
supported a variety of mortgage-and nonmortgage-related programs, 
including programs to make capital investments in shares of financial 
institutions.[Footnote 203] Treasury estimates several of the programs 
over their lifetimes will provide income to the government while 
others will incur a cost. 

Another significant response to the crisis was enactment of the Dodd-
Frank Wall Street Reform and Consumer Protection Act.[Footnote 204] 
The act is intended, among other things, to reform residential 
mortgage lending and securitization practices that contributed to the 
financial crisis. The act provides some liability protection for 
lenders originating mortgages that meet nine specified criteria, as 
applicable, associated with a borrower's ability to repay ("qualified 
mortgages").[Footnote 205] The act also requires securitizers of 
mortgages that do not meet the definition of a qualified residential 
mortgage to retain at least 5 percent of the credit risk, though 
federal rulemaking agencies may adopt exemptions from this 5 percent 
requirement for certain classes of institutions or assets.[Footnote 
206] A number of the act's other provisions seek to reform the 
mortgage market--for example, by authorizing CFPB to supervise nonbank 
mortgage lenders and by prohibiting certain mortgage lending 
practices, such as issuing mortgage loans without making a reasonable 
and good faith effort to determine that the borrower has a reasonable 
ability to repay. The act also eliminated the OTS and transferred its 
regulatory authorities to OCC, the FDIC, and the Federal 
Reserve.[Footnote 207] 

Financial Crisis Impact on FHA's Financial Position: 

As housing prices began to decline in April 2006 and conventional 
mortgage lenders tightened their underwriting standards, more 
homebuyers began taking advantage of FHA-insured loans, which tend to 
have less strict underwriting standards and require lower down 
payments, as compared with conventional loans. Additionally, the 
Economic Stimulus Act of 2008 increased the limits of loans eligible 
for FHA insurance to 125 percent of the median house price in each 
area.[Footnote 208] As a result, FHA's share of the market increased. 
In 2006, FHA insured approximately 4.5 percent of purchase mortgages. 
At its peak in 2009, it insured 32.6 percent of purchase mortgages. As 
FHA's market share grew, the economic value of FHA's insurance fund 
declined dramatically. Specifically, it declined from about $21 
billion at the end of 2007 to less than $4 billion by the end of 2009. 
At the end of 2012, the fund's economic value was negative. As a 
consequence, the insurance fund's capital ratio fell to negative 1.44 
percent in 2012, below its statutory minimum of 2.0 percent. As the 
capital ratio declined, the insurance fund's condition also worsened 
from the federal budgetary perspective. In recent years, FHA has taken 
several actions intended to strengthen its financial position and 
minimize defaults, such as increasing down-payment requirements for 
certain loans in 2010 and raising premiums on insured mortgages 
multiple times. (FHA proposed its most recent premium increase in 
January 2013.) However, on September 27, 2013, FHA notified Congress 
for the first time that the agency would require $1.68 billion in 
Treasury funds to ensure that at the end of FY 2013, the mutual 
mortgage insurance fund would have sufficient funds in its capital 
reserve account to pay for all expected future losses. 

Public Conservatorship of the Enterprises: 

Prior to the financial crisis, the enterprises made changes to their 
practices that increased their risk. For example, in 2009 we noted 
that during the late 1990s and early 2000s, we had raised concerns 
about the rapid growth of the enterprises' retained mortgage 
portfolios, which reached about $1.6 trillion by 2005.[Footnote 209] 
We found that although increasing the size of their mortgage 
portfolios may have been more profitable than issuing MBS, it also 
exposed the enterprises to significant interest-rate risk. 
Additionally, in 2004 and 2005, the enterprises embarked on aggressive 
strategies to purchase mortgages and mortgage assets with questionable 
underwriting standards. For example, they purchased a large volume of 
Alt-A mortgages, which typically did not have documentation of 
borrowers' incomes and had higher loan-to-value ratio or debt-to-
income ratios. The enterprises also increased their purchases of 
private-label MBS from 2003 through 2006. By the end of 2007, the 
enterprises collectively held more than $313 billion in private-label 
MBS. According to FHFA, while these questionable mortgage assets 
accounted for less than 20 percent of the enterprises' total assets, 
they represented a disproportionate share of credit-related losses in 
2007 and 2008. 

During 2007 and the first half of 2008, Fannie Mae's and Freddie Mac's 
financial condition deteriorated, which prompted congressional and 
Executive Branch efforts to stabilize the enterprises and minimize 
associated risks to the financial system. The enterprises incurred 
substantial credit losses on their retained portfolios and their 
guarantees on MBS. These credit losses resulted from pervasive 
declines in housing prices, as well as specific enterprise actions 
such as their guarantees on MBS collateralized by questionable 
mortgages (mortgages with limited or no documentation of borrowers' 
incomes), and investments in private-label MBS collateralized by 
subprime mortgages. According to FHFA and Treasury officials, their 
ongoing financial analysis of the enterprises in August and early 
September 2008, as well as continued investor concerns about the 
financial condition of each enterprise, resulted in FHFA's imposition 
of the conservatorships on September 6, 2008, to help ensure the 
enterprises' viability, that the enterprises fulfill their housing 
missions, and stabilize financial markets. Concurrently, Treasury made 
investments in the enterprises' senior preferred stock and MBS through 
authorities provided in HERA in an effort to ensure that the 
enterprises could maintain a positive net worth. The Senior Preferred 
Stock Purchase Agreements that Treasury entered into with the 
enterprises initially entitled Treasury to 10 percent dividend 
payments on its senior preferred stock investments. The agreements 
were subsequently amended, and since January 2013, the enterprises' 
required dividend payments are equal to their positive net worth, if 
any, above required capital levels. 

[End of section] 

Appendix III: Legislative Proposals to Change the Housing Finance 
System-March 2013 to July 2014: 

This appendix discusses the legislative proposals that were introduced 
in the U.S. Senate and the House of Representatives between March 2013 
and July 2014. These proposals are discussed accordingly from the most 
recent to those introduced earlier in the period. 

Senate Bills: 

Housing Finance Reform and Taxpayer Protection Act of 2014, S.1217 
(Johnson-Crapo Bill), a draft of the bill was released by Senate 
Banking Committee Chairman and Ranking Member on March 16, 2014.The 
Senate Banking Committee approved the bill with amendments on May 15, 
2014. The proposed legislation addresses secondary market reform by 
winding down the enterprises and creating a federal mortgage insurer 
to protect mortgage backed securities (MBS) investors against 
catastrophic loss, establishing a regulatory structure to oversee the 
secondary market, and imposing secondary market fees that would 
provide a funding stream to address low-to-moderate homeownership and 
rental housing needs. 

* Structure - The Federal Housing Finance Agency (FHFA) would become 
an independent office in the Federal Mortgage Insurance Corporation 
(FMIC), and FHFA would continue to be responsible for supervision and 
regulation of the Federal Home Loan Banks and the enterprises as they 
wind down. The enterprises would be dissolved over a five-year 
transition period with flexibility allowing for extensions if 
necessary to prevent market disruptions and increases in borrowing 
costs. FMIC is to maintain a re-insurance fund, the Mortgage Insurance 
Fund (MIF), to fund insurance claims on the principal and interest of 
FMIC-backed securities in certain circumstances. FMIC would have a 5-
member bipartisan board of directors. The proposal would create an 
advisory committee with diverse housing finance expertise to 
facilitate housing finance system stakeholder interaction with the 
board of directors. 

* Activities - FMIC is to establish a securitization platform to 
develop standardized securitization documents for all FMIC-guaranteed 
securities. MIF would fund claims on the principal and interest of 
FMIC-backed securities if losses exceed a required private market 
first loss position. The MIF would be funded initially by assessments 
on the enterprises and sustained in the future by fees on FMIC-backed 
securities. FMIC is to impose user fees to fund affordable 
homeownership and rental housing through the Housing Trust Fund, 
Capital Magnet Fund, and the proposed Market Access Fund. The MIF is 
to have a capital reserve ratio of 1.25 percent of the outstanding 
principal balance of FMIC-backed securities within 5 years, and 2.5 
percent within 10 years and thereafter. FMIC must establish 
underwriting standards to mirror the definition of "qualified 
mortgage," and the bill sets the down payment requirement at 3.5 
percent for first-time homebuyers and at 5.0 percent for other 
homebuyers (this rate is established after a phase-in period). FMIC is 
authorized to establish and capitalize a mutually owned company to 
facilitate access to the secondary market by smaller lenders. 

Once the new mortgage finance system is fully operational, FMIC is 
required to submit annual reports to Congress with detailed 
information including, among other things, a report on MIF's financial 
condition, the exposure of the MIF to economic conditions, and an 
estimate of the resources needed for the MIF to operate. The bill also 
establishes an Office of the Inspector General of FMIC and requires 
GAO to submit a report on the transition within 18 months of the 
system becoming fully operational and, within 8 years after the date 
of enactment, and a report on the feasibility of transitioning to and 
creating a fully privatized secondary mortgage market. 

FHA Solvency Act of 2013, S.1376, introduced by the Senate Banking 
Committee, which addresses primary market reform--in particular, the 
Federal Housing Administration (FHA). The bill was reported out by the 
Senate Banking Committee on July 31, 2013. The bill makes several 
changes to current law aimed at improving the financial safety and 
soundness of FHA's Mutual Mortgage Insurance Fund. 

* Structure - The bill would maintain FHA's current structure as part 
of HUD. The bill includes a statutory requirement for a Deputy 
Assistant Secretary and Chief Risk Officer with specific duties, 
including an annual report to Congress on the lowest performing loans. 

* Activities - FHA would be required to issue a single resource guide 
to inform lenders and servicers of all policies, processes, and 
procedures applicable to FHA mortgages and make it publicly available 
on the Internet. The bill would require an increase in the capital 
reserve ratio from 2 percent to 3 percent within 10 years. FHA must 
conduct an annual review of mortgagees underwriting or originating 
single family mortgages and FHA would have authority to terminate 
approval of a mortgagee if it determines that the mortgage loans 
originated by the mortgagee present an unacceptable risk to the 
insurance fund. FHA is given authority to issue rules requiring an 
underperforming servicer to contract with a specialty subservicer for 
a single mortgage or any pool of mortgages. FHA is required to 
evaluate and revise as necessary FHA's underwriting standards using 
criteria similar to the criteria used by CFPB for Qualified Mortgages. 
FHA is required to develop an alternative stress test scenario to help 
assess the financial status of the MMF. FHA would be required to 
submit a capital restoration plan to Congress when the MMI Fund is 
undercapitalized and to assess annual premium surcharges on new 
business. 

Housing Finance Reform and Taxpayer Protection Act of 2013, S.1217 
(Corker-Warner Bill), introduced by a bipartisan group of Senators, 
including Senators Bob Corker (R-TN), Mark Warner (D-VA), and some 
members of the Senate Banking Committee, on June 24, 2013. The 
proposal addresses secondary mortgage market reform by winding down 
the enterprises and creating a federal mortgage insurer to protect MBS 
investors against catastrophic loss, establishing a regulatory 
structure to oversee the secondary market, and imposing secondary 
market fees that would provide a funding stream for to address low-to-
moderate homeownership and rental housing needs. 

* Structure - The bill would create a new agency, the Federal Mortgage 
Insurance Corporation (FMIC), transfer the functions of FHFA to the 
new agency, and wind down the enterprises in no more than 5 years. 
FMIC would have a five-member bipartisan board of directors composed 
of individuals, each with expertise in a different area, including 
asset management, insurance, community banking, and multifamily 
housing. The bill would establish a Mortgage Insurance Fund (MIF) to 
cover insured losses when losses exceed the first loss position 
absorbed by private market holders. FMIC must create the FMIC Mutual 
Securitization Company, to be owned by credit unions, community and 
mid-size banks, and non-depository mortgage originators, to securitize 
member mortgages. The bill would also establish an Office of Federal 
Home Loan Bank Supervision within FMIC to oversee the Federal Home 
Loan Banks and the Federal Home Loan Bank System and would create an 
Office of Underwriting within FMIC to ensure that mortgages that 
underlie FMIC-guaranteed securities meet certain standards. 

* Activities - FMIC would be required to develop standard risk-sharing 
mechanisms, products, and contracts within 5 years of enactment. MIF 
insurance would have full-faith-and-credit government guarantee. To be 
eligible for a guarantee by FMIC, the mortgage loan amount would have 
to be below conforming loan limits set by the bill and the mortgage 
would need to meet the requirements of the qualified mortgage rule. 
The Housing Trust Fund in HUD and Capital Magnet Fund in Treasury are 
to be funded with a 5-10 basis-point fee on MBS insured by FMIC (80 
percent to HUD/20 percent to Treasury). MIF would be required to 
maintain at least a 2.5 percent capital ratio after 10 years. 

The FMIC is to present reports to Congress on various topics, 
including the MIF and the secondary mortgage market. The bill would 
require GAO to conduct an annual financial audit of FMIC and to issue 
a study on the feasibility of a fully privatized secondary market no 
later than 8 years after the date of enactment. Six months later, the 
FMIC director would be required to submit a report to Congress that 
describes all the legislative, administrative, and regulatory actions 
necessary to carry out a transition to a fully private secondary 
market. 

House Bills: 

Partnership to Strengthen Homeownership Act of 2014, (H.R. 5055). 
Introduced by Congressman Delaney and referred to the House Committee 
on Financial Services on July 10, 2014. The bill addresses secondary 
market reform by winding down the enterprises and creating a federal 
mortgage insurer to protect mortgage-backed securities investors 
against catastrophic loss, establishing a new regulatory structure to 
oversee the secondary market, and imposing secondary market fees to 
fund low-income housing initiatives. 

* Structure - Ginnie Mae is removed from HUD, established as an 
independent entity, and replaces FHFA six months after enactment of 
the act. All FHFA's functions property and personnel are transferred 
to Ginnie Mae, which would have supervisory and regulatory authority 
over secondary market participants. Ginnie Mae is to establish a 
securitization platform and reinsurance fund. The bill winds down the 
enterprises over five years with 2-year extensions. 

* Activities - Ginnie Mae is to establish and oversee a securitization 
platform and provide backstop insurance through the newly established 
insurance fund with catastrophic government guarantees for losses 
above 5 percent on MBS after private capital takes first loss 
position. The new insurance fund is to have a capital reserve ratio of 
1.25 percent of the outstanding principal balance of backed securities 
within 5 years, and 2.5 percent within 10 years and thereafter. The 
bill requires that the Ginnie Mae, through the platform, establish 
uniform standards for MBS, including servicing and pooling 
requirements and underwriting guidelines. The bill also requires that 
Ginnie Mae set standards for secondary market participants, including 
credit rating requirements, and capital and related solvency standards 
intended to ensure safety and soundness of market participants and 
minimize risk to the insurance fund. The bill proposes that FHLBanks 
maintain a TBA market for small lenders. The bill requires the 
director of the new regulatory agency to share information with other 
federal regulatory agencies regarding the financial condition and risk 
management practices of market participants,. The bill also requires 
the new regulator to avoid duplication with the regulatory activities 
of other agencies, such as examination activities and reporting 
requirements. The bill preserves the Housing Trust Fund and the 
Capital Magnet Fund, and establishes a Market Access Fund to increase 
the supply of affordable housing for extremely low-, and very low-, 
and low-income families. 

Housing Opportunities Move the Economy (HOME) Forward Act of 2014. 
Released by House Financial Services Committee Ranking Member Maxine 
Waters on March 27, 2014. The proposal addresses secondary mortgage 
market reform by winding down the enterprises and creating a new 
lender-owned issuer of government-guaranteed securities, creating a 
federal mortgage insurer to protect MBS investors against catastrophic 
loss, establishing a regulatory structure to oversee the secondary 
market, and imposing secondary market fees that would provide a 
funding stream for affordable rental housing. 

* Structure - The bill would establish the National Mortgage Finance 
Administration (NMFA) to replace FHFA. The bill would also establish 
the new lender-owned Mortgage Securities Cooperative (MSC) to replace 
the enterprises, which would be wound-down over a five-year period. 
The Secretary of the Treasury may extend the transition period for no 
more than one year. The bill specifies that the director shall serve 
on the Financial Stability Oversight Council. The proposal establishes 
the Mortgage Insurance Fund (MIF), which would be funded by private 
companies and modeled after the Deposit Insurance Fund managed by FDIC. 

* Activities - NMFA would oversee the securitization platform 
established by the GSEs and provide backstop insurance through the MIF 
funded by private companies--catastrophic government guarantees for 
losses above 5 percent on MBS after private capital takes first loss 
position. The proposal gives the MIF up to 7 years to reach a reserve 
of 1.25 percent of the outstanding principal balance of guaranteed 
securities and 12 years to reach 2.25 percent capital reserve ratio. 
The NMFA may reduce these percentages if a determination is made that 
the level of reserves is adequate to cover losses at least equal to 
any experienced in the housing markets over the last 100 years. In 
addition to overseeing the MIF, NMFA would have oversight 
responsibilities over the Federal Home Loan Banks (FHLBank) and the 
FHLBank System and counterparties to the MSC. The bill also would 
establish underwriting standards for mortgages to be guaranteed by the 
MIF to mirror the definition of "qualified mortgage," and would set 
the down payment requirement at 3.5 percent for first-time homebuyers 
and at 5.0 percent for other homebuyers. The draft bill preserves the 
Housing Trust Fund to increase the supply of affordable housing for 
extremely low-, and very low-, and low-income families in rural and 
urban areas. The draft bill also preserves the Capital Magnet Fund at 
the Department of Treasury to develop, rehabilitate, or purchase 
affordable housing for these households and would establish a Market 
Access Fund to promote innovation in housing finance and affordability. 

The proposal also would establish an Inspector General with 
responsibilities to evaluate the programs of the agency and report on 
the adequacy of guarantee fees and the MIF, effectiveness of the 
placement of credit risk and capital requirements, and the extent to 
which the government is protected from loss. The NMFA Director would 
be required to provide a report and testimony to Congress annually. 
GAO would be required to conduct annual financial audits of the agency. 

Protecting American Taxpayers and Homeowners (PATH) Act, H.R. 2767, 
introduced by Rep. Scott Garrett. The bill was reported out of 
committee with amendments on July 24, 2013. H.R. 2767 consists of four 
separate titles, which, combined, address the primary and secondary 
mortgage markets. Together, the legislation would move FHA out of HUD, 
limit its activities, and increase its capital requirements; wind down 
the enterprises; authorize FHFA to establish a charter for a national 
mortgage market utility to be owned by the private sector; establish 
FHFA as the regulator of the national mortgage market utility, and FHA 
and Rural Housing Service (RHS) programs; establish regulation of 
covered bonds by financial regulators and standards setting by 
Treasury. 

* GSE Bailout Elimination and Taxpayer Protection Act. This title 
terminates enterprise conservatorship 5 years after enactment and 
requires FHFA director to act as receiver of the enterprises after 
their charters are revoked. 

* Structure - The bill would revoke the enterprises' charters 5 years 
after the date of enactment, unless the FHA director determines that 
market conditions warrant a temporary extension; no new business may 
be conducted thereafter. 

* Activities - The bill would impose limitations, requirements and 
prohibitions on the enterprises' activities until their charters are 
repealed. The bill would reduce conforming loan limits in high-cost 
areas, reduce the size of the enterprises' retained portfolios, and 
prohibit the purchase and guarantee of mortgages that do not meet the 
criteria for qualified mortgages in the Dodd-Frank Act. The bill 
repeals the enterprises' affordable housing goals and the Affordable 
Housing Trust Fund. 

* FHA Reform and Modernization Act of 2013. The bill would establish 
FHA as an independent agency to provide single-family homeownership to 
first-time homebuyers and rental housing opportunities. 

* Structure - FHA would become an independent government corporation 
with a nine-member board composed of the HUD secretary, the Secretary 
of Agriculture and 5 individuals with expertise in mortgage finance 
and 2 individuals with expertise in affordable housing. The bill 
provides for a transition to independence ending no sooner than 2 
years after the date of enactment or on the date FHA says it is ended, 
with OMB agreement or after the expiration of 5 years from the date of 
enactment. The bill would create positions for Chief Risk and 
Technology Officers with specified powers and duties. FHA would be 
required to use Generally Accepted Accounting Principles applicable to 
the private sector. 

* Activities - The bill would limit mortgage insurance to first-time 
and low-and moderate-income homebuyers and those experiencing 
countercyclical markets or disasters. With some delay, FHA would be 
required to establish credit risk-sharing on at least 10 percent of 
new business--FHA insures part of a mortgage and private insurers the 
rest. FHA insurance coverage would be reduced over 5 years from 100 
percent to 50 percent of the original value of the loan. The agency 
would be required to engage in research, development, and testing of 
new mortgage products designed to make housing credit available to 
hard-to-serve markets. The director of FHFA would be required to 
evaluate the safety and soundness of FHA and RHS. The minimum capital 
adequacy ratio of the Mutual Mortgage Insurance Fund would be raised 
from 2 percent to at least 4 percent of outstanding insurance 
obligations with restrictions on new insurance commitments when the 
ratio falls below certain thresholds The director would be required to 
develop a risk-based capital model and conduct stress tests to ensure 
capital adequacy during periods of stress. However, upon a joint 
determination with the Chief Risk Officer, the director may 
temporarily lower capital ratios under certain stressful conditions. 
Lenders would be required to repurchase mortgages that are more than 
60 days delinquent within the first two years of the loan, and 
borrowers may not obtain FHA mortgage insurance within seven years of 
a completed foreclosure. 

* National Mortgage Market Utility Act of 2013. The bill would require 
the FHFA Director to charter the National Mortgage Market Utility 
(Utility) to own and operate the securitization platform currently 
being developed by the enterprises, and the Utility is to organize and 
operate a national repository for mortgage data. 

- Structure - The Utility would be a not-for-profit entity and would 
be governed by a board of directors. The FHFA director would choose 
the Utility's organizational form. Initial funding through 
appropriations is to be repaid within 10 years out of user fees. The 
Utility would be regulated by FHFA. 

- Activities - The Utility would operate a securitization platform for 
private issuers of residential mortgage-backed securities (RMBS) and 
establish standards for RMBS. The Utility would not be permitted to 
originate, service, insure, or guarantee any mortgage or financial 
instrument associated with a mortgage and may not provide a government 
guarantee on MBS. All users of the platform would be required to 
resolve all representations and warranties disputes through mandatory 
arbitration. The FHLBanks would be authorized to serve as loan 
aggregators to compile pools of mortgages originated by any of their 
members for securitization through the platform. 

* United States Covered Bond Act of 2013. The bill would create a 
legislative framework for financial institutions to issue covered 
bonds, which would be an alternative to securitization as a way to 
finance mortgage lending. Eligible assets would include residential 
mortgages; federal, state, and local government securities; and auto, 
student, credit card, and Small Business Administration loans. The 
amount of covered bonds issued would be limited to a percentage of the 
issuer's total assets. Treasury would be required to establish 
standards for and registry of covered bond programs that would be 
overseen by federal financial regulators. 

FHA Emergency Fiscal Solvency Act of 2013, (H.R. 1145). Introduced by 
House Financial Services Committee Ranking Member Maxine Waters on 
March 13, 2013. The bill addresses primary market reform by directing 
HUD to establish and collect annual mortgage insurance premiums beyond 
current levels, expanding HUD's indemnification authority over 
mortgagees, and establishing a program to review the cause of early 
delinquencies--defined as a mortgage that becomes 90 or more days 
delinquent within 24 months of origination--on mortgages that are the 
obligation of the Mutual Mortgage Insurance Fund (MMIF) and to report 
on the financial impact on the MMIF of related indemnifications. 

* Structure -The bill maintains FHA's current structure at HUD, 
including the Mutual Mortgage Insurance Fund. The bill establishes a 
Deputy Assistant Secretary for Risk Management and Regulatory Affairs 
position at FHA and a Chief Risk Officer for Ginnie Mae. 

* Activities - The bill requires HUD to increase annual premium 
payments from not more than 1.5 percent to between 0.55% to 2% of the 
remaining insured principal balance for the first 11 years of HUD-
insured mortgages, and to increase from 1.55 percent to 2.05 percent 
the 30-year annual premium for an insured mortgage whose original 
principal obligation exceeds 95% of the remaining principal balance. 
The bill revises the conditions under which HUD would exercise its 
indemnification authority to include instances where the mortgagee 
knew, or should have known, of serious or material violations of HUD's 
mortgage requirements, irrespective of whether such violations caused 
a mortgage default. HUD's indemnification authority is also revised to 
include fraud or misrepresentation with origination or underwriting of 
which the mortgagee knew or should have known. The bill directs HUD to 
establish an appeals process for mortgagees in indemnification cases. 
The bill authorizes HUD to terminate the approval of the mortgagee to 
originate or underwrite mortgages if the mortgagee has an excessive 
rate of early defaults and claims. 

The bill requires HUD to establish programmatic reviews and reporting 
on early period delinquencies, defined as mortgages that become 90 or 
more days delinquent within 24 months of origination. The bill also 
requires HUD to estimate annual costs to the MMIF since 2008 resulting 
from mortgage servicers' noncompliance with National Housing Act 
guidelines governing loan servicing, loss mitigation, and insurance 
claim submission. The bill would also add to HUD's existing obligation 
to conduct and report on an annual independent actuarial study of the 
MMIF's financial position a requirement that HUD conduct and report on 
the study semiannually during periods of capital depletion of the 
MMIF. The bill directs GAO to provide, within 60 days of enactment, 
third-party review of the financial safety and soundness of HUD 
mortgage insurance programs and funds and the extent of their loan 
loss reserves and capital adequacy. 

[End of section] 

Appendix IV: List of Participants in Discussion Groups: 

This appendix includes a list of the government officials, 
researchers, consumer advocates, and industry representatives who 
participated in our discussion groups on a draft housing finance 
framework. We also spoke with officials at the Credit Union National 
Association, the Council of Federal Home Loan Banks, and Treasury who 
were unable to attend our discussion groups about the draft framework. 
Researchers listed here spoke for themselves rather than for the 
institutions with which they are affiliated. 

Sonny Abbasi, Structured Finance Industry Group. 

Robert Avery, Federal Housing Finance Agency. 

Richard Brown, Federal Deposit Insurance Corporation. 

Mark Calabria, Cato Institute. 

Richard S. Carnell, Fordham University. 

Jim Carr, Center for American Progress. 

Alys Cohen, National Consumer Law Center. 

Rob Couch, Bradley Arant Boult Cummings, Bipartisan Policy Center. 

Andrew Davidson, Andrew Davidson & Co., Inc. 

Michael Fratantoni, Mortgage Bankers Association. 

Laurie S. Goodman, Urban Institute. 

Daniel D. Gray, Nationstar Mortgage, LLC. 

Rohit Gupta, Genworth Mortgage Insurance, Inc., U.S. Mortgage Insurers. 

Ethan Handelman, National Housing Conference. 

Ron Haynie, Independent Community Bankers of America. 

Carrie Johnson, Center for Responsible Lending. 

Chris Katopis, Association of Mortgage Investors. 

Chris Killian, Securities Industry and Financial Markets Association. 

Jed Kolko, Trulia, Inc. 

David Ledford, National Association of Home Builders. 

Paul Leonard, Financial Services Roundtable Housing Policy Council. 

Adam Levitin, Georgetown University. 

Jeff London, Department of Veterans Affairs. 

Enrique Lopezlira, National Council of La Raza. 

David Min, University of California at Irvine. 

Richard Nisenson, Office of the Comptroller of the Currency. 

Alessandro Pagani, Loomis Sayles & Company, L. P., Association of; 
Institutional Investors. 

Joseph Pigg, American Bankers Association. 

Ed Pinto, American Enterprise Institute. 

Alex Pollock, American Enterprise Institute. 

Janneke Ratcliffe, University of North Carolina Center for Community; 
Capital. 

Nicolas Retsinas, Harvard Business School, Bipartisan Policy Center. 

Garth Rieman, National Council of State Housing Agencies. 

Kathleen Ryan, Consumer Financial Protection Bureau. 

Ellen Seidman, Urban Institute. 

Hilary Shelton, National Association for the Advancement of Colored; 
People. 

Shane Sherlund, Federal Reserve Board of Governors. 

Robert Shiller, Yale University. 

Michael Simkovic, Seton Hall University. 

Phillip Swagel, University of Maryland. 

Sandra Thompson, Federal Housing Finance Agency. 

Theodore W. Tozer, Ginnie Mae. 

Joseph Tracy, Federal Reserve Bank of New York. 

Joaquin Tremols, U.S. Department of Agriculture. 

Joe Ventrone, National Association of Realtors. 

Susan M. Wachter, University of Pennsylvania. 

Lawrence J. White, Stern School of Business, New York University; Kyle 
Williams, National Urban League. 

Mitria Wilson, National Community Reinvestment Coalition. 

Andrew Winkler, American Action Forum. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mathew J. Scirè, (202) 512-8678 or sciremj@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Andrew Pauline (Assistant 
Director), Nancy S. Barry (Analyst-in-Charge), Farah Angersola, 
Bethany Benitez, Emily Chalmers, Jeremy Conley, John Karikari, Colleen 
Moffatt Kimer, Jena Sinkfield, Andrew Stavisky, and Jim Vitarello made 
major contributions to this report. Janet Eackloff, Paige Smith, and 
Heneng Yu also contributed to this report. 

[End of section] 

Related GAO Products: 

Troubled Asset Relief Program: More Efforts Needed on Fair Lending 
Controls and Access for Non-English Speakers in Housing Programs. 
[hyperlink, http://www.gao.gov/products/GAO-14-117]. Washington, D.C.: 
February 6, 2014. 

FHA Mortgage Insurance: Applicability of Industry Requirements Is 
Limited, but Certain Features Could Enhance Oversight. [hyperlink, 
http://www.gao.gov/products/GAO-13-722]. Washington, D.C.: September 
9, 2013. 

Federal Housing Administration: Analysis of Options for Modifying Its 
Products, Market Presence, and Powers. [hyperlink, 
http://www.gao.gov/products/GAO-13-682]. Washington, D.C.: September 
9, 2013. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-13-283]. Washington, D.C.: February 
14, 2013. 

Housing Assistance: Opportunities Exist to Increase Collaboration and 
Consider Consolidation. [hyperlink, 
http://www.gao.gov/products/GAO-12-554]. Washington, D.C.: August 16, 
2012. 

Financial Markets and Institutions: The Cooperative Model as a 
Potential Component of Structural Reform Options for Fannie Mae and 
Freddie Mac. [hyperlink, http://www.gao.gov/products/GAO-11-33R]. 
Washington, D.C.: November 15, 2010. 

Federal Housing Administration: Improvements Needed in Risk Assessment 
and Human Capital Management. [hyperlink, 
http://www.gao.gov/products/GAO-12-15]. Washington, D.C.: November 7, 
2011. 

Homeownership Counseling: Although Research Suggests Some Benefits, 
Implementation and Evaluation Challenges Exist. [hyperlink, 
http://www.gao.gov/products/GAO-11-925T]. Washington, D.C.: September 
14, 2011. 

Mortgage Reform: Potential Impacts of Provisions of the Dodd-Frank 
Act. [hyperlink, http://www.gao.gov/products/GAO-11-656]. Washington, 
D.C.: July 19, 2011. 

Nonprime Mortgages: Analysis of Loan Performance, Factors Associated 
with Defaults, and Data Sources. [hyperlink, 
http://www.gao.gov/products/GAO-10-805]. Washington, D.C.: August 24, 
2010. 

Fannie Mae and Freddie Mac: Analysis of Options for Revising the 
Housing Enterprises' Long-term Structures. [hyperlink, 
http://www.gao.gov/products/GAO-09-782]. Washington, D.C.: September 
10, 2009. 

Fair Lending: Data Limitations and the Fragmented U.S. Financial 
Regulatory Structure Challenge Federal Oversight and Enforcement 
Efforts. [hyperlink, http://www.gao.gov/products/GAO-09-704]. 
Washington, D.C.: July 15, 2009. 

Financial Regulation: A Framework for Crafting and Assessing Proposals 
to Modernize the Outdated Financial Regulatory System. [hyperlink, 
http://www.gao.gov/products/GAO-09-216]. Washington, D.C.: January 8, 
2009. 

Federal Housing Administration: Decline in the Agency's Market Share 
Was Associated with Product and Process Developments of Other Mortgage 
Market Participants. [hyperlink, 
http://www.gao.gov/products/GAO-07-645]. Washington, D.C.: June 29, 
2007. 

Alternative Mortgage Products: Impact on Defaults Remains Unclear, but 
Disclosure of Risks to Borrowers Could Be Improved. [hyperlink, 
http://www.gao.gov/products/GAO-06-1021]. Washington, D.C.: September 
19, 2006. 

Consumer Protection: Federal and State Agencies Face Challenges 
Combating Predatory Lending. [hyperlink, 
http://www.gao.gov/products/GAO-04-280]. Washington, D.C.: January 30, 
2004. 

[End of section] 

Footnotes: 

[1] In 2010, after a severe decline in home prices, primary residences 
still accounted for 29.5 percent of total family assets in the United 
States according to a Federal Reserve analysis of the 2010 Survey of 
Consumer Finances. At that time, 14.4 percent of American households 
also owned other residential real estate, such as second homes. The 
value of these assets contributes not only to the well-being of the 
individual family but also has an impact on consumption activity, 
which makes up about two-thirds of the U.S. Gross Domestic Product. In 
addition, residential construction contributed about 18 percent to the 
investment component of the Gross Domestic Product in 2012--a smaller 
percentage than prior to the financial crisis. 

[2] Federal government-supported mortgages include the value of those 
insured or guaranteed by the full faith and credit of the United 
States and those mortgages that back mortgage-backed securities 
guaranteed by Fannie Mae and Freddie Mac while they are in 
conservatorship. 

[3] Pub. L. No. 111-203, 124 Stat. 1376 (2010); see GAO, High-Risk 
Series: An Update, [hyperlink, http://www.gao.gov/products/GAO-13-283] 
(Washington, D.C.: Feb. 14, 2013). 

[4] The federal government's roles in housing finance markets have 
changed substantially over time. For more detail on these 
developments, see appendix II. 

[5] Some mortgage contracts may also provide the owner of the mortgage 
with recourse to collect any remaining debt if the value of a 
foreclosed property is less than the amount owed by a delinquent 
borrower. The ability of a lender to pursue a deficiency judgment may 
depend on state law. 

[6] These are all types of forward mortgages, which are mortgages 
where loan payments made to the lender generally add to the borrower's 
home equity and decrease the loan balance. (Some types of forward 
mortgages, such as interest-only loans, allow borrowers to defer 
principal payments during some periods of the mortgage's term, and a 
borrower's equity would not increase during these periods). A reverse 
mortgage is a loan that converts the borrower's home equity into 
payments from a lender, and the loan balance increases as the home 
equity decreases over time. Reverse mortgages are available to 
homeowners aged 62 and older and typically do not require any 
repayments as long as the borrower continues to live in the home and 
continues to make all property tax and insurance payments associated 
with the home. 

[7] Mortgage brokers are independent contractors that originate loans 
for multiple lenders. Mortgage brokers are funded through fees paid by 
borrowers and originators. Loan correspondents are generally smaller 
lenders that underwrite and originate loans, but immediately sell them 
to other lenders. Retail lenders, such as credit unions, banks, and 
thrifts, underwrite and originate loans directly. 

[8] Programs offered by different federal agencies are described in 
some cases as mortgage insurance and in others as mortgage guarantees, 
but these programs operate in fundamentally similar ways. 

[9] Generally, loss severity is the loss amount, which is the loan 
balance less net liquidation proceeds, as a ratio of the original loan 
balance. 

[10] FHA pays claims to reimburse mortgage servicers for their 
interest expenses, the lost principal on outstanding mortgage 
balances, and maintenance costs. For more information see [hyperlink, 
http://www.gao.gov/products/GAO-02-305]. 

[11] Amortized insurance-in-force is the remaining principal balance 
on all insured loans outstanding. This represents FHA's potential risk 
because FHA's insurance covers 100 percent of the loan balance. 

[12] Loan amounts lower than $144,000 carry a higher percentage of 
guaranty than do loans above this threshold. 

[13] Exemptions to the funding fee are granted for certain veterans 
and service members receiving, or eligible to receive, VA disability 
compensation, and for certain surviving spouses. 

[14] USDA's guarantee provides coverage for eligible losses of up to 
90 percent of the original principal, including unpaid principal and 
interest; principal and interest on USDA-approved advances for 
protection and preservation of the property; and the costs associated 
with selling the foreclosed property. USDA and VA also make direct 
mortgage loans, though the total amount of loans made under these 
programs is far lower than the amount of loans that are guaranteed. 

[15] Boats and recreational vehicles may qualify as homes if they have 
sleeping, cooking, and toilet facilities. 

[16] Taxpayers may deduct all of the interest paid on acquisition debt 
incurred on or before October 13, 1987, known as grandfathered debt. 

[17] The Joint Committee on Taxation has estimated that in 2014, tax 
expenditures for the deduction of property taxes and the exclusion of 
capital gains on sales of primary residences will result in $31.9 
billion and $24.1billion, respectively, in forgone revenue. 

[18] The federal banking regulators are the Federal Reserve, FDIC, 
National Credit Union Administration, and OCC. 

[19] Pub. L. No. 90-321, 82 Stat. 146 (1968) (codified as amended at 
15 U.S.C. §§ 1601-1667f). 

[20] Pub. L. No. 111-203, §§ 1403-1433, 1461-1475, 124 Stat. 1376, 
2139-63, 2178-2200 (2010). 

[21] Pub. L. No. 93-533, 88 Stat. 1724 (codified at 12 U.S.C. §§ 2601-
2617; 12 U.S.C. § 1831b). 

[22] See Real Estate Settlement Procedures Act (RESPA): Rule To 
Simplify and Improve the Process of Obtaining Mortgages and Reduce 
Consumer Settlement Costs, 73 Fed. Reg. 68204 (Nov. 17, 2008). 

[23] The CFPB issued those rules in November 2013. See Integrated 
Mortgage Disclosures Under the Real Estate Settlement Procedures Act 
(Regulation X) and the Truth in Lending Act (Regulation Z); Final 
Rule, 78 Fed. Reg. 79730 (Dec. 31, 2013). 

[24] Representations and warranties typically include statements that 
each of the loans bundled into the security has met all applicable 
federal, state, and local laws, including laws regarding truth-in-
lending, consumer credit protection, required disclosures, and 
predatory and abusive practices. If a loan is found to violate the 
representations and warranties, it must be repurchased by the seller, 
according to the terms of the contract between the seller and the 
securitizing entity. 

[25] On September 6, 2008, FHFA placed the enterprises into 
conservatorship, due to a substantial deterioration in the 
enterprises' financial condition. 

[26] The enterprises' conforming loan limits for single-family homes 
in 2014 ranged between $417,000 in the contiguous United States, 
District of Columbia, and Puerto Rico to $625,000 in areas outside of 
the contiguous states, and up to $938,000 in high-cost areas outside 
of the contiguous United States. Mortgages that are larger than the 
conforming loan limit are known as "jumbo loans." 

[27] The Senior Preferred Stock Purchase Agreements that Treasury 
entered into with the enterprises initially entitled Treasury to 10 
percent dividend payments on its senior preferred stock investments. 
The agreements were subsequently amended, and since January 2013, the 
enterprises' required dividend payments are equal to their positive 
net worth, if any, above required capital levels. 

[28] In a forward contract, the security and cash payment for the 
security may not be exchanged until after the date on which the terms 
of the trade are contractually agreed upon. On the TBA trade date, six 
criteria of the securities are agreed upon: issuer, maturity, coupon, 
face value, price, and the settlement date. However, the particular 
securities to be delivered to the buyer are not specified on the trade 
date. 

[29] Pub. L. No. 110-289, § 1101, 122 Stat. 2654, 2661 (codified at 12 
U.S.C. § 4511). 

[30] Pub. L. No. 110-289, § 1301, 122 Stat. 2654, 2794 (codified at 12 
U.S.C. § 4511 note). The Office of Federal Housing Enterprise 
Oversight was created by the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, Pub. L. No. 102-550, tit. XIII, § 
1311, 106 Stat. 3941, 3944 (codified at 12 U.S.C. § 4511). 

[31] SEC finalized rules regarding representations and warranties in 
asset-backed securities offerings in January 2011. Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 Fed. Reg. 4489 (Jan. 26, 
2011). That same month, the agency finalized rules regarding 
underlying asset review. Issuer Review of Assets in Offerings of Asset-
Backed Securities, 76 Fed. Reg. 4231 (Jan. 25, 2011). In August 2014, 
SEC adopted amendments to existing rules and finalized new rules that 
apply to credit rating agencies. See Nationally Recognized Statistical 
Rating Organizations, 79 Fed. Reg. 55078 (Sept. 15, 2014) (to be 
codified at 17 C.F.R. pts. 232, 240, 249, and 249b). . In September 
2014, SEC finalized rules regarding the offering process, disclosure, 
and reporting for asset-backed securities. See Asset-Backed Securities 
Disclosure and Registration, 79 Fed. Reg. 57184 (Sept. 24, 2014) (to 
be codified at 17 C.F.R. pts. 229, 230, 232, 239, 240, 243, and 249). 
Rules regarding risk retention by securitizers of asset-backed 
securities (ABS) and conflicts of interest between those who package 
and sell ABS and those who invest in ABS have also been proposed. See 
Credit Risk Retention; Proposed Rule, 78 Fed. Reg. 57928 (Sept. 20, 
2013); Prohibition Against Conflicts of Interest in Certain 
Securitizations; Proposed Rule, 76 Fed. Reg. 60320 (Sept. 28, 2011). 
The credit risk retention rule was proposed jointly by SEC, Federal 
Reserve, FDIC, FHFA, HUD, and OCC. 

[32] CFPB mortgage servicing rules now require that a servicer may not 
make the first notice or filing required by applicable law until the 
borrower is more than 120 days delinquent if the loan is a closed-end 
mortgage secured by the borrower's principal residence. See 12 C.F.R. 
§ 1024.41(f)(1). 

[33] CFPB's mortgage servicing rules also prohibit servicers from 
filing for foreclosure while a borrower's complete loss mitigation 
application is being evaluated. 12 C.F.R. § 1024.41(f)(2). 

[34] This calculation includes the value of new mortgages insured or 
backed by FHA or VA. Ginnie Mae securities were not included in this 
calculation because they pool government-insured or -guaranteed 
mortgages. 

[35] The S&P/Case Shiller National Home Price Index is a composite of 
single-family home price indexes for the nine U.S. Census divisions 
and is calculated quarterly. S&P/Case Shiller also calculates indexes 
for various metropolitan areas including Los Angeles and Detroit. The 
methodology used to calculate these indexes is described in S&P/Case 
Shiller Home Price Indices Methodology (March 2014). 

[36] An asset bubble is characterized by a rise in asset prices 
unsupported by market fundamentals. 

[37] Joint Center for Housing Studies of Harvard University, The State 
of the Nation's Housing 2013 (Cambridge, Mass: June 26, 2013). 

[38] Housing finance market developments can also influence home 
prices and home ownership rates. For more information, see the next 
section of this report. 

[39] See for example The State of the Nation's Housing 2013 and Lesley 
Frieman, Selma Hepp Dowell Myers, and Rolf Pendall, Demographic 
Challenges and Opportunities for U.S. Housing Markets, Prepared for 
the Bipartisan Policy Center (Washington, D.C.: March 2012). 

[40] According to the Federal Reserve Bank of New York, the share of 
25-year-olds with student debt has increased from 25 percent in 2003 
to 43 percent in 2012 and the average student loan balance grew from 
$10,649 in 2003 to $20,326 in 2012. 

[41] For more information on the decline in market share of FHA 
mortgages during this period, see GAO, Federal Housing Administration: 
Decline in the Agency's Market Share Was Associated with Product and 
Process Developments of Other Mortgage Market Participants, 
[hyperlink, http://www.gao.gov/products/GAO-07-645] (Washington D.C.: 
June 29, 2007). 

[42] According to data from Inside Mortgage Finance, jumbo loans 
represented 14 percent of the approximately $1.9 trillion in prime 
originations during 2013. 

[43] According to data from Freddie Mac, cash out refinances increased 
from 2.8 percent in 2012 to 3.7 percent in 2013. The percentage of 
cash out refinances in 2012 was the lowest amount recorded for data 
available from 1993 to 2013. 

[44] We have found that many nonprime products that offered interest-
only or payment options that allowed for negative amortization 
(deferred interest payments are added to the loan balance) can result 
in borrowers building less home equity than they would with a 
traditional loan. For more information see GAO, Information on Recent 
Default and Foreclosure Trends for Home Mortgages and Associated 
Economic and Market Developments, [hyperlink, 
http://www.gao.gov/products/GAO-08-78R] (Washington, D.C.: Oct. 16, 
2007). 

[45] Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der 
Klaauw, The Financial Crisis at the Kitchen Table: Trends in Household 
Debt and Credit, Federal Reserve Bank of New York Staff Report, no. 
480 (New York, NY: 2010) and Neil Bhutta, Mortgage Debt and Household 
Deleveraging: Accounting for the Decline in Mortgage Debt Using 
Consumer Credit Record Data, Federal Reserve Board Finance and 
Economics Discussion Series, Divisions of Research & Statistics and 
Monetary Affairs, Federal Reserve Board (Washington, D.C.: March 2012). 

[46] For more information on the Home Affordable Modification Program 
and other foreclosure mitigation efforts, see GAO, Troubled Asset 
Relief Program: More Efforts Needed on Fair Lending Controls and 
Access for Non-English Speakers in Housing Programs, [hyperlink, 
http://www.gao.gov/products/GAO-14-117] (Washington, D.C.: Feb. 6, 
2014) and Foreclosure Mitigation: Agencies Could Improve Effectiveness 
of Federal Efforts with Additional Data Collection and Analysis, 
[hyperlink, http://www.gao.gov/products/GAO-12-296] (Washington D.C.: 
June 28, 2012). 

[47] We estimated the percentage of originations held in portfolio 
based on the value of mortgages originated and the value of mortgages 
securitized by year as reported by Inside Mortgage Finance. 

[48] The FHLBanks provide liquidity by providing advances to members 
to originate loans to hold, including those that members are not 
willing or able to sell in the securitization market. The FHLBanks 
also operate mortgage purchase programs in which the FHLBanks may 
purchase eligible mortgage loans and MBS from member institutions. 

[49] Private-label MBS had existed for sometime before 2000, but they 
were a small part of the market. Private-label MBS were used primarily 
to securitize jumbo and nonprime mortgages. Jumbo mortgages are 
generally considered prime mortgages and are not Alt-A or subprime 
(i.e., nonprime) mortgages. Between 2001 and 2003, jumbo mortgage 
originations represented more than 60 percent of the value of jumbo 
and nonprime originations, this decreased to between 32 and 43 percent 
from 2004 through 2007. Since 2009, jumbo mortgage originations have 
represented more than 90 percent of the value of jumbo and nonprime 
originations. 

[50] According to data from Inside Mortgage Finance, there continues 
to be a small market for jumbo private-label securities; in 2013 about 
$13.1 billion of these securities were issued or less than 1 percent 
of all MBS issuances. 

[51] Through the purchase of senior preferred stock, Treasury has 
provided $187.5 billion to the enterprises. However, since the second 
quarter of 2012, neither enterprise has needed additional funding from 
Treasury. Under the current terms of the Senior Preferred Stock 
Purchase Agreements, Fannie Mae and Freddie Mac must pay to Treasury 
all of their quarterly positive net worth (if any) over a specified 
capital reserve amount. 

[52] This includes securities issued by the enterprises and guaranteed 
by Ginnie Mae. 

[53] According to data from Inside Mortgage Finance, the Federal 
Reserve System was the largest investor in this market, followed by 
commercial banks, in 2013. The Federal Reserve System is self-funded 
and independent but its revenues are transferred to the General Fund 
of the U.S. Treasury and therefore profits or losses from its 
investments in the housing market indirectly impact the U.S. budget. 

[54] These data were from the Federal Reserve announcement for the 
week ending January 1, 2014. 

[55] For more information on lowered underwriting standards, see 
[hyperlink, http://www.gao.gov/products/GAO-08-78R]. 

[56] For more information on risky loan features associated with 
defaults, see GAO, Nonprime Mortgages: Analysis of Loan Performance, 
Factors Associated with Defaults, and Data Sources, [hyperlink, 
http://www.gao.gov/products/GAO-10-805] (Washington, D.C.: Aug. 24, 
2010). 

[57] For more information see GAO, Consumer Protection: Federal and 
State Agencies Face Challenges Combating Predatory Lending, 
[hyperlink, http://www.gao.gov/products/GAO-04-280] (Washington, D.C.: 
Jan. 30, 2004). 

[58] GAO, Alternative Mortgage Products: Impact on Defaults Remains 
Unclear, but Disclosure of Risks to Borrowers Could Be Improved, 
[hyperlink, http://www.gao.gov/products/GAO-06-1021] (Washington, 
D.C.: Sept. 19, 2006). 

[59] GAO, Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated Financial Regulatory System, 
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.: 
Jan. 8, 2009) and [hyperlink, http://www.gao.gov/products/GAO-04-280]. 

[60] For more information on options to improve FHA's financial 
condition, see GAO, Federal Housing Administration: Analysis of 
Options for Modifying Its Products, Market Presence, and Powers, 
[hyperlink, http://www.gao.gov/products/GAO-13-682] (Washington, D.C.: 
Sept. 9, 2013). 

[61] [hyperlink, http://www.gao.gov/products/GAO-13-283]. A matter was 
raised for Congress's consideration and a recommendation made to FHA 
in GAO, Mortgage Financing: FHA's Fund Has Grown, but Options for 
Drawing on the Fund Have Uncertain Outcomes, [hyperlink, 
http://www.gao.gov/products/GAO-01-460] (Washington, D.C.: Feb. 28, 
2001). 

[62] Since September 2010, those with credit scores between 500 and 
579 are required to put down at least 10 percent of the value of the 
property, and those with credit scores below 500 do not qualify for 
FHA-insured mortgage financing. Prior to that time, FHA did not have a 
minimum required credit score. 

[63] According to Fannie Mae acquisition data, in 2013 the weighted 
average credit score was 753 and the average origination LTV was 75.7 
percent, whereas in 2005 the average credit score was 719 and the 
average origination LTV was 72 percent; average credit scores reached 
a high of 762 in 2010 and 2011 and LTV reached a low of 66.8 percent 
in 2009. According to separate acquisition data from Freddie Mac, in 
2013 the average credit score was 755 and the average original LTV 
ratio was 71 percent, whereas from their pre-2005 books of business 
the average credit score was 711 and the average origination LTV was 
72 percent; the average credit score reached a high of 761 in 2012 and 
the average LTV was 69 percent between 2009 and 2012. 

[64] For more information see GAO, Fannie Mae and Freddie Mac: 
Analysis of Options for Revising the Housing Enterprises' Long-term 
Structures, [hyperlink, http://www.gao.gov/products/GAO-09-782] 
(Washington, D.C.: Sept. 10, 2009). 

[65] Michael Simkovic, "Competition and Crisis in Mortgage 
Securitization," Indiana Law Journal: vol. 88: Iss. 1, Article 4, 2013. 

[66] Credit default swaps are bilateral contracts that transfer credit 
risks from one party to another. In return for a periodic fee, the 
seller agrees to compensate the buyer if a specified credit event, 
such as default, occurs. For more information on credit default swaps 
see [hyperlink, http://www.gao.gov/products/GAO-09-397T]. 

[67] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[68] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[69] See GAO, Mortgage Foreclosures: Documentation Problems Reveal 
Need for Ongoing Regulatory Oversight, [hyperlink, 
http://www.gao.gov/products/GAO-11-433] (Washington, D.C.: May 2, 
2011) and Troubled Asset Relief Program: Treasury Continues to Face 
Implementation Challenges and Data Weaknesses in Its Making Home 
Affordable Program, [hyperlink, http://www.gao.gov/products/GAO-11-
288] (Washington, D.C.: Mar. 17, 2011). 

[70] Adam J. Levitin, J. and Tara Twomey, Mortgage Servicing, 
Georgetown Public Law and Legal Theory Research Paper No. 11-09, 2011. 

[71] Mortgage Servicing Rules Under the Truth in Lending Act 
(Regulation Z), 78 Fed. Reg. 10902, 10905 (Feb. 14, 2013); Mortgage 
Servicing Rules Under the Real Estate Settlement Procedures Act 
(Regulation X), 78 Fed. Reg. 10696, 10700 (Feb. 14, 2013). 

[72] [hyperlink, http://www.gao.gov/products/GAO-11-433]. 

[73] Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, § 
1101, 122 Stat. 2654, 2661. 

[74] § 1125, 122 Stat. at 2693-94. 

[75] Pub. L. No. 111-203, § 1094, 124 Stat. 1376, 2097 (2010). 
Consistent with recommendations we have made, the Dodd-Frank Act calls 
for collecting additional information including mortgage applicants' 
credit scores as well as information on the mortgage product and terms 
and property purchased or refinanced. In addition to those items, the 
National Mortgage Database will include information about the ongoing 
payment history of the loan. In addition to CFPB's and FHFA's efforts, 
OCC has been publishing mortgage-related data in its quarterly 
Mortgage Metrics Report since 2008. However, this report is limited to 
mortgage data from national banks and federal savings associations--
the depository institutions over which OCC has regulatory authority. 

[76] Home Mortgage Disclosure (Regulation C); Proposed Rule, 79 Fed. 
Reg. 51732 (Aug. 29, 2014). 

[77] Pub. L. No. 111-203, 124 Stat. 1376 (2010). For additional 
information on the impact of the Dodd-Frank Act on the mortgage and 
financial markets see GAO, Mortgage Reform: Potential Impacts of 
Provisions of the Dodd-Frank Act, [hyperlink, 
http://www.gao.gov/products/GAO-11-656] (Washington, D.C.: July 19, 
2011) and [hyperlink, http://www.gao.gov/products/GAO-13-180]. 

[78] §§1024-1026, 124 Stat. at 1987-95. Before the Dodd-Frank Act, 
responsibility for administering and enforcing consumer financial laws 
for these entities was spread across several federal agencies. 

[79] §§ 1011, 1012, § 1013(b)(3), 124 Stat. at 1964-66, 1968-69. In 
July 2013, CFPB reported that 48 percent of its over 175,000 consumer 
complaints were related to mortgages. 

[80] § 1411, 124 Stat. at 2142-45 (codified at 15 U.S.C. § 1639c(a)). 

[81] § 1412, 124 Stat. at 2145 (codified at 15 U.S.C. § 1639c(b)). The 
act specifies nine criteria that a loan must meet to be a qualified 
mortgage (QM). These include, but are not limited to, criteria 
specifying that the loan be a loan with regular, amortizing payments 
for a term of no more than 30 years; the lender have verified and 
documented borrower income and financial resources; the loan complies 
with established guidelines or regulations relating to total monthly 
debt to monthly income ratios or alternative measures of ability to 
pay regular expenses; and that the loan's points and fees do not 
exceed 3 percent of the loan amount. 15 U.S.C. § 1693c(b)(2)(A). In 
addition, there are criteria specifying when ARMs, balloon payments, 
and reverse mortgages can qualify as a QM. CFPB's final QM rule went 
into effect January 10, 2014--Ability-to-Repay and Qualified Mortgage 
Standards Under the Truth in Lending Act (Regulation Z); Final Rule, 
78 Fed. Reg. 6408 (Jan. 30, 2013). The final rule specified a 43 
percent threshold for the maximum total monthly debt to monthly income 
ratio with respect to the definition of qualified mortgages, although 
the rule provided more flexibility for loans that were originated by 
small creditors or in compliance with enterprise and Ginnie Mae 
standards. 12 C.F.R. § 1026.43(e). 

[82] Small creditors are defined as those with no more than $2 billion 
in assets that (along with affiliates) originate no more than 500 
first-lien mortgages covered under the ability-to-repay rules per 
year. See Ability-to-Repay and Qualified Mortgage Standards Under the 
Truth in Lending Act (Regulation Z); Final Rule, 78 Fed. Reg. 35430, 
35431 (June 12, 2013). 

[83] §942(b), 124 Stat. at 1891-97 (codified at 15 U.S.C. § 77g(c)). 
Some of these provisions apply to ABS, in general, and MBS are a 
subset of ABS. 

[84] § 943, 124 Stat. at 1897 (codified at 15 U.S.C. § 78o-7); § 945, 
124 Stat. at 1898 (codified at 15 U.S.C. §77g(d)(1)). This rule became 
effective on March 28, 2011. 

[85] § 942(b), 124 Stat. at 1897 (codified at 15 U.S.C. § 
77g(c)(2)(B)(iii)). 

[86] § 621(a), 124 Stat. at 1631-32 (codified at 15 U.S.C. § 77z-
2a(a)). Regulations implementing section 621 have been proposed by SEC 
but not yet finalized. See Prohibition Against Conflicts of Interest 
in Certain Securitizations; Proposed Rule, 76 Fed. Reg. 60320 (Sept. 
28, 2011). 

[87] § 932(a), 124 Stat. at 1872-1880 (codified at 15 U.S.C. § 78o-7). 
Pursuant to section 932's amendments to the Securities Exchange Act of 
1934, SEC revised its nationally recognized statistical rating 
organizations conflict-of-interest rule, 17 C.F.R. § 240.17g-5. 
Nationally Recognized Statistical Rating Organizations, 79 Fed. Reg. 
55078 (Sept. 15, 2014). 

[88] § 941(b), 124 Stat. at 1892. Government-insured or -guaranteed 
residential mortgage loans and loans eligible for securitization by 
the enterprises would be excluded from this requirement for so long as 
the enterprises are in receivership or conservatorship with capital 
support from Treasury. Credit Risk Retention; Proposed Rule, 78 Fed. 
Reg. 57928, 58033 (Sept. 20, 2013). In addition, although the act 
contains a minimum 5 percent requirement, it gives the rule-writing 
federal regulators the flexibility to specify different risk retention 
requirements for securitizers of different classes of assets, 
including residential mortgages, commercial mortgages, commercial 
loans, auto loans, and other classes of assets that the agencies deem 
appropriate, subject to certain underwriting standards established by 
federal banking agencies. A joint agency final rule for the risk 
retention requirements and the definition of qualified residential 
mortgage (QRM) has yet to be issued. However, the relevant agencies 
have proposed two rules. In March 2011, the agencies issued their 
original proposed rules, including a QRM definition that included 
loans with back-end debt-to-income ratios of no more than 36 percent, 
minimum 20 percent down payments, and minimum credit history 
requirements. Credit Risk Retention; Proposed Rule, 76 Fed. Reg. 
24090, 24096 (Apr. 29, 2011). In August 2013, the agencies reproposed 
the credit risk retention rules, which, as revised, would equate the 
definition of QRM with the definition of QM adopted by CFPB. Credit 
Risk Retention; Proposed Rule, 78 Fed. Reg. 57928, 57934, 57992 (Sept. 
20, 2013). 

[89] United States v. Bank of America Corp., No. 1: 12-CV-00361 
(D.D.C. Apr. 4, 2012). The settling servicers were Ally (formerly 
GMAC), Citi, Bank of America, JPMorgan Chase, and Wells Fargo. The 
settlement, known as the National Mortgage Settlement, established 
nationwide servicing reforms for the participating servicers, 
including establishing a single point of contact for borrowers, 
standards for communication with borrowers, and expectations for fee 
amounts and the execution of foreclosure documentation. The settlement 
also established an independent monitor to oversee the servicers' 
execution of the agreement, including their adherence to the mortgage 
servicing standards. 

[90] The Federal Reserve and OCC also concluded their Independent 
Foreclosure Review by entering into payment agreements with 15 
servicers in 2013 to provide $3.9 billion in direct cash payments to 
borrowers and approximately $6.1 billion in foreclosure-prevention 
assistance. 

[91] See [hyperlink, http://www.gao.gov/products/GAO-13-283] and GAO, 
Financial Regulatory Reform: Regulators Have Faced Challenges 
Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks, 
[hyperlink, http://www.gao.gov/products/GAO-13-195] (Washington, D.C.: 
Jan. 23, 2013). 

[92] GAO, Financial Assistance: Ongoing Challenges and Guiding 
Principles Related to Government Assistance for Private Sector 
Companies, [hyperlink, http://www.gao.gov/products/GAO-10-719] 
(Washington, D.C.: Aug. 3, 2010). 

[93] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[94] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[95] See for example, GAO, Results-Oriented Government: GPRA Has 
Established a Solid Foundation for Achieving Greater Results, 
[hyperlink, http://www.gao.gov/products/GAO-04-38] (Washington, D.C.: 
Mar. 10, 2004). 

[96] GAO, Agencies' Strategic Plans Under GPRA: Key Questions to 
Facilitate Congressional Review, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-10.1.16] (Washington, D.C.: May 
1997). 

[97] [hyperlink, http://www.gao.gov/products/GAO-04-38] and GAO, 
Executive Guide: Effectively Implementing the Government Performance 
and Results Act, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-96-118] (Washington, D.C.: June 
1996). 

[98] GAO, Guidelines for Rescuing Large Failing Firms and 
Municipalities, [hyperlink, http://www.gao.gov/products/GAO/GGD-84-3] 
(Washington, D.C.: Mar. 29, 1984). 

[99] See for example, Bipartisan Policy Center's Housing Commission 
Economic Policy, Housing America's Future: New Directions for National 
Policy (Washington, D.C.: February 2013); Mortgage Finance Working 
Group of the Center for American Progress, A Responsible Market for 
Housing Finance: A Progressive Plan to Reform the U.S. Secondary 
Market for Residential Mortgages (Washington, D.C.: January 2011); and 
Peter J. Wallison, Alex J. Pollock, and Edward J. Pinto, Taking the 
Government Out of Housing Finance: Principles for Reforming the 
Housing Finance Market, An American Enterprise Institute Policy Paper 
(Washington, D.C.: Mar. 24, 2011). 

[100] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[101] [hyperlink, http://www.gao.gov/products/GAO-13-283]. 

[102] GAO, Housing Assistance: Opportunities Exist to Increase 
Collaboration and Consider Consolidation, [hyperlink, 
http://www.gao.gov/products/GAO-12-554] (Washington, D.C.: Aug. 16, 
2012). 

[103] A Joint Federal Housing Agencies Working Group, which includes 
CFPB, FHA, FHFA, Ginnie Mae, USDA, and VA, has been formed. According 
to its March 2014 minutes, the working group plans to meet monthly to 
discuss issues including coordination, information sharing, and 
development of best practices. 

[104] The Home Mortgage Disclosure Act, Pub. L. No. 94-200, 89 Stat. 
1125 (codified at 12 U.S.C. §§ 2801-2810), is intended to provide the 
public with loan data that can be used to (1) determine whether 
financial institutions are serving the housing needs of their 
communities; (2) assist public officials in the distribution of public-
sector investments so as to attract private investment to areas where 
it is needed; and (3) identify possible discriminatory lending 
patterns. 12 U.S.C. § 2801(b); 12 C.F.R. § 1003.1(b)(1). 

[105] Fragmentation refers to those circumstances in which more than 
one federal agency is involved in the same broad area of national 
interest. Overlap occurs when programs have similar goals, devise 
similar strategies and activities to achieve those goals, or target 
similar users. Duplication occurs when two or more agencies or 
programs engage in the same activities or provide the same services to 
the same beneficiaries. In some instances, it may be appropriate for 
multiple agencies or entities to be involved in the same programmatic 
or policy area due to the nature or magnitude of the federal effort. 
See [hyperlink, http://www.gao.gov/products/GAO-12-554]. 

[106] A covered bond is a debt obligation secured by a pool of assets, 
often mortgages. It differs from a securitization in that in the case 
of default, holders of the bonds not only have access to the 
collateral supporting the security, but also can draw on the issuer's 
other assets for repayment in case of bankruptcy or insolvency. 
According to the Congressional Research Service covered bonds are a 
relatively common method of funding mortgages in Europe, but uncommon 
in the United States. See Congressional Research Service, Covered 
Bonds: Background and Policy Issues, R41322 (Washington, D.C.: Apr. 
26, 2013). 

[107] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[108] Pub. L. No. 103-62, §§ 3-4, 107 Stat. 285, 286-89 (codified at 5 
U.S.C. § 306, 31 U.S.C. § 1115). 

[109] Pub. L. No. 111-352, § 4, 124 Stat. 3866, 3871-72 (codified at 
31 U.S.C. § 1116). 

[110] See [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[111] See [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[112] See GAO, Standards for Internal Control in the Federal 
Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
November 1999). 

[113] See GAO, Human Capital Management: Effectively Implementing 
Reforms and Closing Critical Skills Gaps Are Key to Addressing Federal 
Workforce Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-12-1023T] (Washington, D.C.: Sept. 19, 
2012). 

[114] See GAO, Mortgage Financing: FHA and Ginnie Mae Face Risk-
Management Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-12-578T] (Washington D.C.: Mar. 29, 
2012). 

[115] See GAO, Insurance Markets: Impacts of and Regulatory Response 
to the 2007-2009 Financial Crisis, [hyperlink, 
http://www.gao.gov/products/GAO-13-583] (Washington, D.C.: June 27, 
2013). 

[116] Mortgage insurers are regulated by state insurance departments 
which require insurers to maintain a minimum risk based capital ratio. 

[117] See GAO, Federal Housing Administration: Improvements Needed in 
Risk Assessment and Human Capital Management, [hyperlink, 
http://www.gao.gov/products/GAO-12-15] (Washington, D.C.: Nov. 7, 
2011) and Information Technology: HUD Needs to Improve Key Project 
Management Practices for Its Modernization Efforts, [hyperlink, 
http://www.gao.gov/products/GAO-13-455] (Washington, D.C.: June 12, 
2013). In response to these recommendations, FHA has taken steps, such 
as developing a plan for conducting an inaugural risk assessment and a 
workforce analysis and succession plan, and describing actions HUD 
would take to improve its project management practices in order to 
address the deficiencies identified. 

[118] See [hyperlink, http://www.gao.gov/products/GAO-13-682]. 

[119] See FHFA, The 2014 Strategic Plan for the Conservatorships of 
Fannie Mae and Freddie Mac (Washington, D.C.: May 2014). 

[120] Fannie Mae and Freddie Mac Draft Private Mortgage Insurer 
Eligibility Requirements; Request for Public Input, 79 Fed. Reg. 42513 
(July 22, 2014). The period for public input ended on September 8, 
2014. 

[121] See [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[122] See GAO, Homeownership Counseling: Although Research Suggests 
Some Benefits, Implementation and Evaluation Challenges Exist, 
[hyperlink, http://www.gao.gov/products/GAO-11-925T] (Washington, 
D.C.: Sept. 14, 2011). 

[123] See [hyperlink, http://www.gao.gov/products/GAO-12-296]. 

[124] See GAO, Foreclosure Review: Regulators Could Strengthen 
Oversight and Improve Transparency of the Process, [hyperlink, 
http://www.gao.gov/products/GAO-14-376] (Washington, D.C.: Apr. 29, 
2014). 

[125] 12 C.F.R. § 1026.36; see also Loan Originator Compensation 
Requirements Under the Truth in Lending Act (Regulation Z), 78 Fed. 
Reg. 11280 (Feb. 15, 2013). 

[126] Federal Housing Administration (FHA): Homeowners Armed With 
Knowledge (HAWK) for New Homebuyers, 79 Fed. Reg. 27896 (May 15, 2014). 

[127] 12 C.F.R. §§ 1024.39-1024.41. 

[128] See [hyperlink, http://www.gao.gov/products/GAO-12-296] for more 
information about FHA's servicing requirements. 

[129] See Foreclosure Counseling Outcome Study: Final Report --Housing 
Counseling Outcome Evaluation. The evaluation was designed to document 
the circumstances of housing counseling clients enrolled in 
foreclosure and prepurchase counseling in the fall of 2009 at a broad 
sample of HUD-funded housing counseling agencies in the United States. 

[130] Ability-to-Repay and Qualified Mortgage Standards Under the 
Truth in Lending Act (Regulation Z); Final Rule, 78 Fed. Reg. 6408 
(Jan. 30, 2013); 12 C.F.R. § 1026.43. 

[131] Alys Cohen, National Consumer Law Center, Housing Finance 
Reform: Essentials of a Functioning Housing Finance System for 
Consumers, testimony before the Senate Committee on Banking, Housing 
and Urban Affairs, 113th Cong., 1st sess., October 29, 2013. 

[132] The fair lending laws--the Equal Credit Opportunity Act (ECOA) 
and the Fair Housing Act (FH Act)--prohibit discrimination in making 
credit decisions, among other things. Respectively, Pub. L. No. 90-
321, tit. VII, as added Pub. L. No. 93-495, tit. V, 88 Stat. 1521 
(1974) (codified at 15 U.S.C. §§ 1691-1691f) and Pub. L. No. 90-284, 
tit. VIII, 82 Stat. 81 (1968) (codified at 42 U.S.C. §§ 3601-3619). 
Under ECOA, it is unlawful for a lender to discriminate on a 
prohibited basis in any aspect of a credit transaction, including 
mortgage lending, and under both ECOA and the FH Act, it is unlawful 
for a lender to discriminate on a prohibited basis in a residential 
real estate-related transaction. Under one or both of those laws, a 
lender may not, because of a prohibited factor, vary the terms of 
credit offered, including the amount or interest rate, or use 
different standards to evaluate collateral, among other things. A 
lender also may not maintain a facially neutral policy or practice 
that has a disproportionately adverse impact on members of a protected 
group for which there is no business necessity that could not be met 
by a less discriminatory alternative. Policy Statement on 
Discrimination in Lending; Notice, 59 Fed. Reg. 18266, 18268-18269 
(Apr. 15, 1994). 

[133] Interagency Statement on Fair Lending Compliance and the Ability-
to-Repay and Qualified Mortgage Standards Rule, October 22, 2013. The 
statement was issued by the Federal Reserve, CFPB, FDIC, National 
Credit Union Administration, and OCC. 

[134] Ethan Handelman, National Housing Conference, Housing Finance 
Reform: Essential Elements to Provide Affordable Housing Options, 
testimony before the Senate Committee on Banking, Housing and Urban 
Affairs, 113TH Cong., 1ST sess., Nov. 7, 2013; Alys Cohen, National 
Consumer Law Center, Housing Finance Reform: Essentials of a 
Functioning Housing Finance System for Consumers. 

[135] Pub. L. No. 111-203, § 1406, 124 Stat. 1376, 2142 (2010). 

[136] The Housing Trust Fund--established by the Housing and Economic 
Recovery Act of 2008,Pub. L. No. 110-289, § 1131, 122 Stat. 2654, 2711-
-is an affordable housing production program to increase and preserve 
the supply of affordable housing for extremely low-and very low-income 
households, including homeless families. The Capital Magnet Fund was 
established through the same act to provide grants for programs that 
support affordable housing and economic development activities. § 
1131, 122 Stat. at 2723. 

[137] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[138] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[139] GAO, Credit Rating Agencies: Alternative Compensation Models for 
Nationally Recognized Statistical Rating Organizations, [hyperlink, 
http://www.gao.gov/products/GAO-12-240] (Washington, D.C.: Jan. 18, 
2014). 

[140] Disclosure for Asset-Backed Securities Required by Section 943 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 
Fed. Reg. 4489 (Jan. 26, 2011). 

[141] 17 C.F.R. § 240.15Ga-1. 

[142] 17 C.F.R. § 240.17g-7. 

[143] See Asset-Backed Securities Disclosure and Registration, 79 Fed. 
Reg. 57184 (Sept. 24, 2014) (to be codified at 17 C.F.R. pts. 229, 
230, 232, 239, 240, 243, and 249). 

[144] The rule includes an asset-review provision requiring that 
parties to a pooling and servicing agreement must retain an asset 
reviewer and that underlying transaction agreements must require a 
review of pool assets upon the occurrence of a two-pronged trigger--
first upon the occurrence of a specified percentage of delinquencies 
in the pool, and, if the delinquency trigger is met, then upon the 
direction of investors by vote. The asset reviewer would then prepare 
a report about the assets reviewed and provide the report to the 
trustee, who would then determine whether a repurchase request would 
be appropriate under the terms of the transaction agreements. In 
addition, the rule revises the eligibility criteria for ABS using an 
expedited registration process known as shelf registration. The rule 
requires ABS issuers using a shelf-registration statement to file a 
preliminary prospectus containing transaction-specific information at 
least three business days in advance of the first sale of securities 
in the offering. Most public offerings of ABS are conducted through 
expedited SEC procedures known as "shelf offerings." 

[145] See Nationally Recognized Statistical Rating Organizations, 79 
Fed. Reg. 55078 (Sept. 15, 2014) (to be codified at 17 C.F.R. pts. 
232, 240, 249, and 249b). 

[146] Nationally Recognized Statistical Rating Organizations; Proposed 
Rule, 76 Fed. Reg. 33420 (June 8, 2011). 

[147] See SEC, Report to Congress on Assigned Credit Ratings As 
Required by Section 939F of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, (Washington, D.C.: December 2012). 

[148] In March 2011, the agencies issued their original proposed 
rules, including a QRM definition that included loans with back-end 
debt-to-income ratios of no more than 36 percent, minimum 20 percent 
down payments, and minimum credit history requirements. Credit Risk 
Retention; Proposed Rule, 76 Fed. Reg. 24090, 24096 (Apr. 29, 2011). 
In August 2013 proposal, the agencies re-proposed the credit risk 
retention rule. The re-proposal includes as the agencies' preferred 
approach a QRM definition that equated QRM with CFPB's definition of 
QM. Credit Risk Retention; Proposed Rule, 78 Fed. Reg. 57928, 57992 
(Sept. 20, 2013).The act requires the agencies to exempt QRM from the 
risk retention requirement. 

[149] See Credit Risk Retention; Proposed Rule, 78 Fed. Reg. 57928, 
57934 (Sep. 20, 2013). 

[150] See 12 CFR 1026.43(e)(4)(iii). 

[151] See Credit Risk Retention; Proposed Rule, 78 Fed. Reg. 57928, 
57992 (Sep. 20, 2013). 

[152] Chris Katopis, Association of Mortgage Investors, Building a 
Sustainable Housing Finance System: Examining Impediments to Private 
Investment Capital, testimony before the House Committee on Financial 
Services, 113TH Cong., 1ST sess., April 24, 2013. 

[153] The rule also requires that the transaction agreement provide 
the reviewer with access to copies of the underlying loan documents. 

[154] [hyperlink, 
http://www.gao.gov/key_issues/financial_system_stability_reform/issue_su
mmary#t=0] downloaded on June 30, 2014. 

[155] See GAO, Dodd-Frank Regulations: Agencies Conducted Regulatory 
Analyses and Coordinated but Could Benefit from Additional Guidance on 
Major Rules, [hyperlink, http://www.gao.gov/products/GAO-14-67] 
(Washington, D.C.: Dec. 11, 2013); [hyperlink, 
http://www.gao.gov/products/GAO-13-195]; and [hyperlink, 
http://www.gao.gov/products/GAO-13-180]. 

[156] Timothy F. Geithner, Chairman, Financial Stability Oversight 
Council, Macroeconomic Effects of Risk Retention Requirements 
(Washington, D.C.: January 2011). 

[157] Lynn E. Browne and Eric S. Rosengren, eds., Real Estate and the 
Credit Crunch (Boston, MA: September 1992). 

[158] [hyperlink, http://www.gao.gov/products/GAO-13-682]. 

[159] Hong Kong Monetary Authority, "Loan-to-Value Ratio as a 
Macroprudential Tool--Hong Kong SAR's Experience and Cross Country 
Evidence," The Influence of External Factors on Monetary Policy 
Frameworks and Operations, Bank for International Settlements Papers 
No. 57 (Basel, Switzerland; September 2011). 

[160] Researchers at the Federal Reserve Bank of Dallas have suggested 
that a regulation limiting home equity borrowing in Texas may have led 
that state to have fewer defaults during the financial crisis. The 
authors note that after purchase, mortgage debt along with any new 
borrowing--including home equity loans--cannot exceed 80 percent of a 
home's market value unless the new debt funds home improvements. 
However, the article notes that comparisons with the rest of the 
nation cannot fully disentangle the role of the home equity borrowing 
restrictions because states differ in many other ways. See Anil Kumar 
and Edward C. Skelton, "Did Home Equity Restrictions Help Keep Texas 
Mortgages from Going Underwater?" Southwest Economy, Federal Reserve 
Bank of Dallas, Third Quarter 2013 (Dallas, Tex: 2013). 

[161] GAO, Fiscal Exposures: Improving Cost Recognition in the Federal 
Budget, [hyperlink, http://www.gao.gov/products/GAO-14-28] 
(Washington, D.C.: Oct. 29, 2013). 

[162] See GAO, Federal Deposit Insurance Act: Regulators' Use of 
Systemic Risk Exception Raises Moral Hazard Concerns and Opportunities 
Exist to Clarify the Provision, [hyperlink, 
http://www.gao.gov/products/GAO-10-100] (Washington, D.C.: Apr. 15, 
2010); [hyperlink, http://www.gao.gov/products/GAO-10-719]; and 
[hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[163] For the recommendation see [hyperlink, 
http://www.gao.gov/products/GAO-10-100]. 

[164] Pub. L. No. 93-344, tit. V, as added Pub. L. No. 101-508, tit. 
XIII, 104 Stat. 1388 (codified at 2 U.S.C. §§ 661-661f). 

[165] See GAO, Mortgage Financing: FHA's $7 Billion Reestimate 
Reflects Higher Claims and Changing Loan Performance Estimates, 
[hyperlink, http://www.gao.gov/products/GAO-05-875] (Washington, D.C.: 
Sept. 2, 2005) for discussion of credit subsidy estimates and the use 
of models. FHA's actuarial models for predicting loan defaults and 
prepayments are used to estimate its credit subsidy costs, to 
calculate its liability for loan guarantees for its financial 
statements under generally accepted accounting principles applicable 
to federal agencies, and to estimate the economic net worth and 
capital ratio for the Mutual Mortgage Insurance Fund. 

[166] See [hyperlink, http://www.gao.gov/products/GAO-05-875] and GAO, 
Mortgage Financing: FHA's Fund Has Grown, but Options for Drawing on 
the Fund Have Uncertain Outcomes, [hyperlink, 
http://www.gao.gov/products/GAO-01-460] (Washington, D.C.: Feb. 28, 
2001). 

[167] These activities were permitted under HERA. 

[168] At the end of any quarter in which either Fannie Mae's or 
Freddie Mac's balance sheet reflects total liabilities that exceed 
total assets, the enterprises have 15 business days to request funds, 
which Treasury has 60 days to provide. Such payments are referred to 
as "draws." 

[169] FHFA, Projections of the Enterprises Financial Performance 
(Stress Tests) (Washington, D.C.: Apr. 30, 2014). 

[170] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[171] See [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[172] Mark Zandi and Cristian deRitis, Housing Finance Steps Forward, 
Moody's Analytics, March 2014. 

[173] For example, see GAO, Troubled Asset Relief Program: Further 
Actions Needed to Enhance Assessments and Transparency of Housing 
Programs, [hyperlink, http://www.gao.gov/products/GAO-12-783] 
(Washington, D.C.: July 19, 2012); Federal Reserve Bank Governance: 
Opportunities Exist to Broaden Director Recruitment Efforts and 
Increase Transparency, [hyperlink, 
http://www.gao.gov/products/GAO-12-18] (Washington, D.C.: Oct. 19, 
2011); and [hyperlink, http://www.gao.gov/products/GAO-12-886]. 

[174] See GAO, Financial Regulatory Reform: Financial Crisis Losses 
and Potential Impacts of the Dodd-Frank Act, [hyperlink, 
http://www.gao.gov/products/GAO-13-180] (Washington, D.C.: Jan. 16, 
2013) and Foreclosure Mitigation: Agencies Could Improve Effectiveness 
of Federal Efforts with Additional Data Collection and Analysis, 
[hyperlink, http://www.gao.gov/products/GAO-12-296] (Washington, D.C.: 
June 28, 2012). 

[175] GAO, Financial Regulation: A Framework for Crafting and 
Assessing Proposals to Modernize the Outdated Financial Regulatory 
System, [hyperlink, http://www.gao.gov/products/GAO-09-216] 
(Washington, D.C.: Jan. 8, 2009); Financial Assistance: Ongoing 
Challenges and Guiding Principles Related to Government Assistance for 
Private Sector Companies, [hyperlink, 
http://www.gao.gov/products/GAO-10-719] (Washington, D.C.: Aug. 3, 
2010); and Public Policy Options for Changing the Federal Role in 
Natural Catastrophe Insurance, [hyperlink, 
http://www.gao.gov/products/GAO-08-7] (Washington, D.C.: Nov. 26, 
2007). 

[176] The federal government plays a significant role in regulating 
the mortgage markets. This appendix does not include all changes to 
federal regulation of housing finance and financial institutions, but 
does provide examples of significant rule changes. 

[177] Pub. L. No. 72-304, 47 Stat. 725 (1932) (codified as amended at 
12 U.S.C. §§ 1421-1449). 

[178] Pub. L. No. 73-43, § 4, 48 Stat. 128, 129 (codified as amended 
at 12 U.S.C. §§ 1461-1468c). 

[179] A fully amortizing mortgage is one where the principal is repaid 
over the life of the loan in regularly scheduled payments, so that the 
borrower does not face a large payment at the end of the loan. 

[180] Pub. L. No. 73-479, § 1, 48 Stat. 1246 (codified as amended at 
12 U.S.C. §§ 1701-1749aaa-5)). 

[181] § 301(a), 48 Stat. at 1252. 

[182] National Housing Act Amendments of 1938, Pub. L. No. 75-424, § 
4, 52 Stat. 8, 23. 

[183] Pub. L. No. 82-183, § 318(a), 65 Stat. 452, 494. 

[184] Pub. L. No. 78-346, 58 Stat. 284. 

[185] Pub. L. No. 81-171, §§ 501-504, 63 Stat. 413, 432-35. The act 
updated a program created by the Bankhead-Jones Farm Tenant Act, Pub. 
L. No. 75-210, 50 Stat. 522 (1937), which authorized USDA to provide 
long-term, low-interest loans to farm tenants and sharecroppers so 
that they could purchase and improve farms, including homes on farms. 

[186] See 7 C.F.R. § 3550.2. 

[187] See 7 C.F.R. §§ 3550.103(b) and 3550.112(c). 

[188] GAO, Housing Assistance: Opportunities Exist to Increase 
Collaboration and Consider Consolidation, [hyperlink, 
http://www.gao.gov/products/GAO-12-554] (Washington D.C.: Aug. 16, 
2012). 

[189] Pub. L. No. 90-284, tit. VIII, 82 Stat. 73, 81-89 (1968) 
(codified as amended at 42 U.S.C. §§ 3601-3619). 

[190] Federal National Mortgage Association Charter Act, Pub. L. No. 
83-560, tit. II, 68 Stat. 590, 612-622 (1954) (codified as amended at 
12 U.S.C. §§ 1716-1723j). 

[191] Pub. L. No. 83-560, 68 Stat. 590 (1954) (codified in scattered 
sections of 12 and 42 U.S.C.). 

[192] Pub. L. No. 90-448, § 801, 82 Stat. 476, 536 (codified as 
amended in scattered sections of 12, 15, and 42 U.S.C.). 

[193] Pub. L. No. 91-351, §303(a), 84 Stat. 450, 452 (codified at 12 
U.S.C. §§ 1451-1459). 

[194] § 305, 84 Stat. at 454. 

[195] Pub. L. No. 96-221, 94 Stat. 132 (codified in scattered sections 
of 12 U.S.C.); Pub. L. No. 97-320, 96 Stat. 1469 (codified in 
scattered sections of 12 U.S.C.). 

[196] Pub. L. No. 101-73, 103 Stat. 183 (codified in scattered 
sections of 12 U.S.C.) 

[197] Pub. L. No. 102-550, tit. XIII, 106 Stat. 3672, 3941-4012 
(codified in scattered sections of U.S.C.). 

[198] §§ 1331-1334, 106 Stat. at 3956-61 (codified at 12 U.S.C. §§ 
4561-4564). 

[199] §§ 1311-1317, 106 Stat. at 3944-49 (codified at 12 U.S.C. §§ 
4511-4517). 

[200] GAO, Housing Government-Sponsored Entities: A Single Regulator 
Will Better Ensure Safety and Soundness and Mission Achievement, 
[hyperlink, http://www.gao.gov/products/GAO-08-563T] (Washington, 
D.C.: Mar. 6, 2008). 

[201] Pub. L. No. 110-289, § 1101, 122 Stat. 2654, 2661 (codified at 
12 U.S.C. § 4511). Previously the Federal Housing Finance Board was 
the safety and soundness and housing mission regulator of the Federal 
Home Loan Banks. 

[202] Pub. L. No. 110-343, § 101, 122 Stat. 3765, 3767 (codified at 12 
U.S.C. § 5211). 

[203] For more information on Troubled Asset Relief Program see 
Troubled Asset Relief Program: Treasury Sees Some Returns as it Exits 
Programs and Continues to Fund Mortgage Programs, [hyperlink, 
http://www.gao.gov/products/GAO-13-192] (Washington, D. C.: Jan. 7, 
2013). 

[204] Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

[205] § 1412, 124 Stat. at 2145-46. 

[206] § 941(b), 124 Stat. at 1892. 

[207] The transfer of powers from OTS to other federal regulators was 
completed on July 21, 2011, and OTS was officially dissolved 90 days 
later (Oct. 19, 2011). 

[208] Subsequent to the enactment of the Economic Stimulus Act of 
2008, HERA established new statutory limits of 115 percent of area 
median home prices for FHA loans. See Pub. L. No. 110-289, § 2112, 122 
Stat. 2654, 2830. A few months later, the American Recovery and 
Reinvestment Act of 2009 set the floor for FHA loan limits at the 2008 
levels; FHA loan limits for 2009 were set in each county at the higher 
dollar amount when comparing loan limits established under the 
Economic Stimulus Act of 2008 requirements and the 2009 limits under 
HERA Pub. L. No. 111-5, § 1202, 123 Stat. 115, 225. 

[209] Fannie Mae and Freddie Mac: Analysis of Options for Revising the 
Housing Enterprises Long-Term Structures, [hyperlink, 
http://www.gao.gov/products/GAO-09-782] (Washington, D. C.: Sept. 10, 
2009). 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO's commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e-mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select 
"E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO's actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO's 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov]. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548. 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548. 

[End of document]