Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations
Highlights
What GAO Found
Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.
The QM regulations, which address lenders' responsibilities to determine a borrower's ability to repay a loan, set forth standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.
Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements. The QRM regulations align the QRM definition with QM; thus, securities collateralized solely by QM loans are not subject to risk-retention requirements.
The analyses GAO reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases (for borrowers, lenders, and investors) would mostly stem from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market, largely because the majority of loans originated were expected to be QM loans. However, questions remain about the size and viability of the secondary market for non-QRM-backed securities.
Agencies have begun planning their reviews of the QM and QRM regulations (due January and commencing December 2019, respectively); however, these efforts have not included elements important for conducting effective retrospective reviews. Federal guidance encourages agencies to preplan their retrospective reviews and carefully consider how best to promote empirical testing of the effects of rules. To varying degrees, the relevant agencies have identified outcomes to examine, potential data sources, and analytical methods. But existing data lack important information relevant to the regulations (such as loan performance or borrower debt to income) and planned data enhancements may not be available before agencies start the reviews. The Bureau of Consumer Financial Protection (CFPB) has proposed expanding Home Mortgage Disclosure Act data reporting requirements, but the earliest that the enhanced data will be available is 2017. Similarly, the Department of Housing and Urban Development (HUD) identified how it intends to examine its QM regulations and some potential data sources but has yet to determine how it would measure the effects of these regulations, including metrics, baselines, and analytical methods. Agencies also have not specified how they will conduct their reviews, including determining which data and analytical methods to use. Finalizing plans to retrospectively review the mortgage regulations will position the agencies to better measure the effects of the QM and QRM regulations and identify any unintended consequences. Additionally, the agencies could better understand data limitations and methodological challenges and have sufficient time to develop methods to deal with these limitations and challenges.
Why GAO Did This Study
Amid concerns that risky mortgage products and poor underwriting standards contributed to the recent housing crisis, Congress included mortgage reform provisions (QM and QRM) in the Dodd-Frank Wall Street Reform and Consumer Protection Act. CFPB's regulations establishing standards for QM loans became effective in January 2014. More recently, six agencies jointly issued the final QRM rule that will become effective in December 2015. GAO was asked to review possible effects of these regulations. This report (1) discusses views on the expected effects of the QM and QRM regulations, and (2) examines the extent of agency planning for reviewing the regulations' effects, among its objectives. GAO's methodologies included identifying and reviewing academic, industry, and federal agency analyses on the expected effects of the regulations. GAO also reviewed federal guidance on retrospective reviews and interviewed agency officials to assess agency efforts to examine the effects of the QM and QRM regulations.
Recommendations
CFPB, HUD, and the six agencies responsible for the QRM regulations should complete plans to review the QM and QRM regulations, including identifying specific metrics, baselines, and analytical methods. CFPB, HUD, and one QRM agency—the Federal Deposit Insurance Corporation—concurred or agreed with the recommendations. The other QRM agencies did not explicitly agree with the recommendations, but outlined ongoing efforts to plan their reviews.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Consumer Financial Protection Bureau | To enhance the effectiveness of its preparations for conducting a retrospective review of its QM regulations, CFPB should complete its plan. The plan should identify what outcomes CFPB will examine to measure the effects of the regulations and the specific metrics, baselines, and analytical methods to be used. Furthermore, to account for and help mitigate the limitations of existing data and the uncertain availability of enhanced datasets, CFPB should include in its plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | In August 2017, CFPB informed GAO that it had developed a plan for assessing its qualified mortgage (QM) regulations. CFPB anticipates using the following specific research activities: (1) quantitative research on loan originations, rejection rates, and loan performance, using available mortgage data and data that CFPB may reasonably collect; (2) analysis of cost of credit before and after the rule, as well as recent trends; (3) interviews with creditors regarding their activities undertaken to comply with the requirements of the ATR/QM Rule; and (4) consultations with government regulatory agencies and government sponsored enterprises. To assess the effectiveness of the ATR/QM Rule in... preserving consumer access to responsible and affordable credit, CFPB plans to examine the impact of major provisions of the rule on a set of consumer outcomes, including mortgage cost, origination volumes, approval rates, and subsequent loan performance. In addition to these measureable outcomes, CFPB also plans to consider changes in creditors' underwriting policies and procedures that were made in connection with the rule and which might affect consumer outcomes. CFPB noted that as a general matter, the assessment will associate rule requirements with observed outcomes of interest and consider counterfactual outcomes, to the extent possible. CFPB stated that it plans to draw conclusions as supported by the data, taking into account that factors other than the rule itself may affect observable outcomes.
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| Department of Housing and Urban Development | To enhance the effectiveness of its preparations for conducting a retrospective review of its QM regulations, HUD should develop a plan that identifies the metrics, baselines, and analytical methods to be used. Furthermore, to account for and help mitigate the limitations of existing data and the uncertain availability of enhanced datasets, HUD should include in its plan alternate metrics, baselines, and analytical methods that could be used data were to remain unavailable. | In February 2017, HUD noted that it does not currently collect data on the annual percentage rate (APR) for each loan that would allow for a perfect comparison to the average prime offer rate. According to HUD, its Office of Housing has on its long-term list of systems priorities to collect specific information from the Uniform Closing Data that could be used to conduct such a comparison. However, HUD stated that it has not received adequate funding to meet these systems enhancements. According to HUD, it is considering the feasibility and potential utility of alternative data sources or the use of a proxy in an appropriate methodology. For instance, whether it may be possible to...
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| Federal Housing Finance Agency | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | According to information provided by the Federal Housing Finance Agency, it has taken action consistent with GAO's recommendation. Specifically, FHFA stated it planned to use data stored in its Mortgage Loan Integrated System (MLIS, which contains historical information on all Fannie Mae and Freddie Mac loans, including borrower, property, and loan characteristics). FHFA stated that that it will be looking at factors associated with the risk of default, such as loan-to-value ratio (LTV), credit score, and debt-to-income ratio (DTI), which are highly correlated with loan performance. FHFA plans to examine how the default rate (using available proxies such as 90-day delinquency rates)...
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| Department of Housing and Urban Development | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | Based on GAO's recommendation, HUD has conducted initial reviews of existing and potential methodologies and data sources that may inform the review. HUD also noted that as a fundamental matter, FHA-insured mortgages are only securitized through the Government National Mortgage Association (GNMA). Both FHA and GNMA have extensive underlying requirements regarding both mortgage terms and conditions as well as requirements related to the securitization of those mortgages. According to HUD, its retrospective review of the qualified residential mortgage (QRM) rule, in terms of its impact on FHA single family insurance programs, will take into account the existing underlying FHA and GNMA...
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| Office of the Comptroller of the Currency | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | As of December 2018, OCC's Economics Department has prepared a plan for reviewing the Qualified Residential Mortgage definition that included some discussion of metrics, analysis, and coordination. OCC stated that the first QRM review is scheduled to begin in December 2019 and that because private mortgage securitization has remained moribund since the 2007-2009 financial crisis, OCC will continue to monitor market conditions as the review date draws closer. OCC and the other regulators have taken more recent actions. In April/May 2019, OCC participated in an interagency working group of economists organized by FDIC to help with the QRM review. In June 2019, the interagency working group...
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| Federal Deposit Insurance Corporation | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | In February 2019, FDIC completed a revised plan to supplement its 2017 initial plan for reviewing the qualified residential mortgage (QRM) definition. Consistent with GAO's recommendation, the plan outlined the baseline, data, metrics, and analytical methods that FDIC will use. As a baseline, FDIC plans to use the data, metrics, and analytical methods used in the final rulemaking process as outlined in the Supplementary Information to the credit risk retention (CRR) regulation. FDIC identified seven specific datasets and noted that it will incorporate into its ongoing monitoring new data such as the expanded Home Mortgage Disclosure Act data and loan level data from SEC's regulation AB...
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| Board of Governors | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | In June 2019, Federal Reserve Board staff met with their other agency counterparts to develop a workplan for the retrospective review of the QRM regulations and specify agency roles and responsibilities in this review process. The plan, which was circulated to the agencies by Board staff following the June meeting and is still under review, outlines the focus areas of the review discussed by the agencies (determinants of default; credit availability; benefits and costs of risk retention; structural changes in the mortgage market that might affect the need for risk retention) and notes the potentially relevant metrics, baselines, and analytical methods. Further, the Federal Reserve Board...
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| United States Securities and Exchange Commission | To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable. | SEC has taken action consistent with GAO's recommendation. Specifically, SEC staff have undertaken the development of a plan for the review of the definition of Qualified Residential Mortgage (QRM) set forth in the credit risk retention rule (17 CFR Part 246), which is required to commence no later than December 24, 2019. According to SEC, the plan identifies the metrics, baselines, and analytical methods to be used (including alternate metrics, baselines, and analytical methods that could help mitigate limitations of existing data) and specifies the SEC's role and responsibility in the review process. SEC noted that the key role of SEC staff in the QRM review process will be to provide...
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