HOUSING FINANCE 

SYSTEM

A Framework for 

Assessing Potential 

Changes

Report to Congressional Addressees

October 2014

GAO-15-131

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15-131, a report to 

congressional addressees

October 2014

HOUSING FINANCE SYSTEM

A Framework for Assessing Potential Changes

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 

View GAO-15-131. For more information, 

contact Matt Scirè at (202) 512-8678 or 

sciremj@gao.gov.
Highlights of GAO-15-131 (Continued) 

United States Government Accountability Office

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. 

Element Description

Clearly defined and prioritized housing 

finance system goals

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. 

Policies and mechanisms that are aligned 

with goals and other economic policies

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. 

Adherence to an appropriate financial 

regulatory framework

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. 

Government entities that have capacity to

manage risks 

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.

Mortgage borrowers are protected and 

barriers to mortgage market access are 

addressed

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. 

Protection for mortgage securities investors 

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. 

Consideration of cyclical nature of housing 

finance and impact of housing finance on 

financial stability 

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.

Recognition and control of fiscal exposure 

and mitigation of moral hazard 

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. 

Emphasis on implications of the transition. 

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
Page i GAO-15-131 Housing Finance System

Letter 1 

Background 3

Market Developments since 2000 Have Changed the 

Government’s Role in Housing Finance 22

Market Developments since 2000 Have Challenged the SingleFamily Housing Finance System 36

A Framework for Assessing Potential Changes to the Housing 

Finance System 53

Agency Comments and Our Evaluation 90

Appendix I Objectives, Scope, and Methodology 94

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

2014 99

Appendix III Legislative Proposals to Change the Housing Finance System-March 

2013 to July 2014 112

Appendix IV List of Participants in Discussion Groups 121

Appendix V GAO Contact and Staff Acknowledgments 123

Related GAO Products 124

Tables

Table 1: Some Weaknesses in the Housing Finance System 

Revealed Since 2000 37

Table 2: Elements of a Housing Finance Framework 54

Contents
Page ii GAO-15-131 Housing Finance System

Figures

Figure 1: Mortgage Lifecycle 4

Figure 2: Mortgage Origination 7

Figure 3: Mortgage Securitization 14

Figure 4: Mortgage Servicing 19

Figure 5: Circumstances under Which Mortgages Terminate 21

Figure 6: CoreLogic National Home Price Index, 1976-2013 24

Figure 7: Value of Mortgage Loan Originations by Product Type 

and Distribution of Market Share, 2000-2013 27

Figure 8: Refinance and Home Purchase Rates and Mortgage 

Rates, 2000- 2013 28

Figure 9: Value of Home Equity and Aggregate Mortgage Debt 

and Recession Periods, 1945-2013 30

Figure 10: Percentage of Mortgage Loans in Default 90 Days or 

More or in Foreclosure and Recession Periods, 1979-

2013 31

Figure 11: Value of New Insured Mortgage Originations and 

Distribution of Market Share, 2000-2013 32

Figure 12: Distribution of Mortgage Originations between 

Securities and Held-in Portfolio, 2000-2013 33

Figure 13: Value of Mortgage-Backed Securities Issued and 

Distribution of Market Share, 2000-2013 35

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
Page iii GAO-15-131 Housing Finance System

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

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Page 1 GAO-15-131 Housing Finance System

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.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.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 DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank 

Act), we have placed the housing finance system on our high-risk list.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.

 

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, 

GAO-13-283 (Washington, D.C.: Feb. 14, 2013). 
 

Page 2 GAO-15-131 Housing Finance System

To help policymakers assess various proposals for changing the singlefamily 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.
 

Page 3 GAO-15-131 Housing Finance System

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.4 The federal 

government also regulates certain aspects of mortgage servicing.

 

4

The federal government’s roles in housing finance markets have changed substantially 

over time. For more detail on these developments, see appendix II.

Background
Interactive graphic Figure 1: Mortgage Lifecycle

Page 4 GAO-15-131 Housing Finance System

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

Source. GAO. | GAO-15-131
 

Page 5 GAO-15-131 Housing Finance System

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.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).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, 

 

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.

The Primary Mortgage 

Market Connects 

Borrowers and Lenders
 

Page 6 GAO-15-131 Housing Finance System

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.
 

Page 7 GAO-15-131 Housing Finance System

Figure 2: Mortgage Origination

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.
 

Page 8 GAO-15-131 Housing Finance System

• 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 
 

Page 9 GAO-15-131 Housing Finance System

deposits, securitization, and other sources. Borrowers generally access 

mortgage lenders through three major channels—mortgage brokers, loan 

correspondents, and retail lenders.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.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.9 FHA operates the largest federal 

 

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.
 

Page 10 GAO-15-131 Housing Finance System

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.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 singlefamily 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.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.12 Most veterans 

 

10FHA pays claims to reimburse mortgage servicers for their interest expenses, the lost 

principal on outstanding mortgage balances, and maintenance costs. For more 

information see GAO-02-305. 

11Amortized 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. 

12Loan amounts lower than $144,000 carry a higher percentage of guaranty than do loans 

above this threshold. 
 

Page 11 GAO-15-131 Housing Finance System

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.

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.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.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 $100,000.16

 

13Exemptions 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.

14USDA’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 USDAapproved 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. 

15Boats and recreational vehicles may qualify as homes if they have sleeping, cooking, 

and toilet facilities.

16Taxpayers may deduct all of the interest paid on acquisition debt incurred on or before 

October 13, 1987, known as grandfathered debt.
 

Page 12 GAO-15-131 Housing Finance System

The mortgage interest deduction has been estimated to result in $67.8

billion in forgone tax revenue in 2014.17

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.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.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.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.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 

 

17The 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.

18The federal banking regulators are the Federal Reserve, FDIC, National Credit Union 

Administration, and OCC. 

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

1667f).

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

(2010).

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

1831b).
 

Page 13 GAO-15-131 Housing Finance System

implementing RESPA were revised in 2008.

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.

23

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.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. (Fig. 3 provides an overview of mortgage securitization in the 

secondary mortgage market.)

 

22See 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).

23The 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). 

24Representations 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. 

The Secondary Market 

Provides Liquidity and 

Reduces Risk for 

Mortgage Lenders
 

Page 14 GAO-15-131 Housing Finance System

Figure 3: Mortgage Securitization

The enterprises are congressionally chartered, for-profit, shareholderowned companies that have been under federal conservatorship since 

2008.25 Generally the enterprises purchase mortgage loans that meet 

certain criteria for size, features, and underwriting standards known as 

 

25On September 6, 2008, FHFA placed the enterprises into conservatorship, due to a 

substantial deterioration in the enterprises’ financial condition.
 

Page 15 GAO-15-131 Housing Finance System

“conforming” loans.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.

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 governmentguaranteed mortgages, such as those insured by FHA, and Ginnie Mae 

guarantees the timely payment of principal and interest of these MBS. 

 

26The 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.
 

Page 16 GAO-15-131 Housing Finance System

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.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.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.30 FHFA has a statutory responsibility to 

 

28In 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. 

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

30Pub. 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).
 

Page 17 GAO-15-131 Housing Finance System

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.31

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 

 

31SEC 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 AssetBacked 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.

Mortgage Servicers 

Manage Loans After 

Origination
 

Page 18 GAO-15-131 Housing Finance System

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.
 

Page 19 GAO-15-131 Housing Finance System

Figure 4: Mortgage Servicing

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
 

Page 20 GAO-15-131 Housing Finance System

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.

Generally, mortgages terminate when borrowers pay off their mortgage

debt or after borrowers default on their loans (see fig. 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.

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.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 

 

32CFPB 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). 

33CFPB’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). 

Mortgages Terminate 

When They Are Paid in 

Full or After They Go into 

Default
 

Page 21 GAO-15-131 Housing Finance System

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
 

Page 22 GAO-15-131 Housing Finance System

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.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.

 

34This 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 governmentinsured or -guaranteed mortgages. 

Market Developments 

since 2000 Have 

Changed the 

Government’s Role in 

Housing Finance
 

Page 23 GAO-15-131 Housing Finance System

Nationally, U.S. home prices nearly doubled between January 2000 and 

their peak in April 2006 (see fig. 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.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.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.

 

35The 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). 

36An asset bubble is characterized by a rise in asset prices unsupported by market 

fundamentals. 

Home Prices and 

Homeownership Rates 

Fluctuated since 2000
 

Page 24 GAO-15-131 Housing Finance System

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

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 AfricanAmerican and Hispanic communities.37

 

37Joint Center for Housing Studies of Harvard University, The State of the Nation’s 

Housing 2013 (Cambridge, Mass: June 26, 2013).
 

Page 25 GAO-15-131 Housing Finance System

Home prices and homeownership rates are influenced, in part, by 

demographic and economic trends.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.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.40

 

38Housing finance market developments can also influence home prices and home 

ownership rates. For more information, see the next section of this report. 

39See 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). 

40According 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. 
 

Page 26 GAO-15-131 Housing Finance System

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 fig. 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.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.42

 

41For 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, GAO-07-645 (Washington D.C.: June 29, 2007).

42According to data from Inside Mortgage Finance, jumbo loans represented 14 percent of 

the approximately $1.9 trillion in prime originations during 2013.

Developments in the 

Primary Market since 2000 

Have Affected the 

Government’s Role in 

Housing Finance
 

Page 27 GAO-15-131 Housing Finance System

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

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

insured.” 

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 fig. 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, 
 

Page 28 GAO-15-131 Housing Finance System

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

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

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 fig. 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 
 

Page 29 GAO-15-131 Housing Finance System

Mac’s portfolio.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.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 fig. 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.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.

 

43According 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. 

44We 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, GAO-08-78R (Washington, D.C.: Oct. 16, 2007).

45Meta 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).
 

Page 30 GAO-15-131 Housing Finance System

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

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 fig. 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.
 

Page 31 GAO-15-131 Housing Finance System

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

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 fig. 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 
 

Page 32 GAO-15-131 Housing Finance System

Program.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

 

46For 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, 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, GAO-12-296 (Washington D.C.: June 28, 2012).
 

Page 33 GAO-15-131 Housing Finance System

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 fig. 12).47

Figure 12: Distribution of Mortgage Originations between Securities and Held-in 

Portfolio, 2000-2013

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

and the value of mortgages securitized. 

Over that same period, FHLBank advances, which can be an alternative 

to securitizations as a source of liquidity for mortgage originations, also 

 

47We 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.

Developments in the 

Secondary Market Have 

Also Affected the 

Government’s Role in 

Housing Finance
 

Page 34 GAO-15-131 Housing Finance System

varied.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 

fig. 13). Specifically, the market share of private-label MBS, which 

typically pool jumbo and nonprime mortgages, grew rapidly from 2004 to 

2006.49 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.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.

 

48The 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. 

49Private-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 AltA 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. 

50According 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. 
 

Page 35 GAO-15-131 Housing Finance System

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

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 
 

Page 36 GAO-15-131 Housing Finance System

largest risk exposure remaining from its emergency actions to assist the 

financial sector after the financial crisis.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 2013.52 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.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.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 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.

 

51Through 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. 

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

53According 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.

54These data were from the Federal Reserve announcement for the week ending January 

1, 2014. 

Market Developments 

since 2000 Have 

Challenged the 

Single-Family 

Housing Finance 

System
 

Page 37 GAO-15-131 Housing Finance System

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 Definition Examples 

Misaligned incentives 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. 

• 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. 

Lack of information or 

transparency 

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.

• 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.

Excessive risk taking 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.

• 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 

Key Weaknesses in the 

Housing Finance System 

Have Been Revealed 

since 2000
 

Page 38 GAO-15-131 Housing Finance System

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.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.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 highinterest 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.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. 

 

55For more information on lowered underwriting standards, see GAO-08-78R. 

56For more information on risky loan features associated with defaults, see GAO, 

Nonprime Mortgages: Analysis of Loan Performance, Factors Associated with Defaults, 

and Data Sources, GAO-10-805 (Washington, D.C.: Aug. 24, 2010).

57For more information see GAO, Consumer Protection: Federal and State Agencies Face 

Challenges Combating Predatory Lending, GAO-04-280 (Washington, D.C.: Jan. 30, 

2004).

Developments in the 

Mortgage Origination 

Process Revealed Many 

Weaknesses
 

Page 39 GAO-15-131 Housing Finance System

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.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.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.

 

58GAO, Alternative Mortgage Products: Impact on Defaults Remains Unclear, but 

Disclosure of Risks to Borrowers Could Be Improved, GAO-06-1021 (Washington, D.C.: 

Sept. 19, 2006). 

59GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to 

Modernize the Outdated Financial Regulatory System, GAO-09-216 (Washington, D.C.: 

Jan. 8, 2009) and GAO-04-280. 
 

Page 40 GAO-15-131 Housing Finance System

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 higherthan-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.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.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 

 

60For 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, GAO-13-682 (Washington, D.C.: Sept. 9, 2013).

61GAO-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, GAO-01-460 (Washington, D.C.: Feb. 

28, 2001).
 

Page 41 GAO-15-131 Housing Finance System

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.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.63

 

62Since 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. 

63According 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 pre2005 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.
 

Page 42 GAO-15-131 Housing Finance System

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.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.

 

64For more information see GAO, Fannie Mae and Freddie Mac: Analysis of Options for 

Revising the Housing Enterprises’ Long-term Structures, GAO-09-782 (Washington, D.C.: 

Sept. 10, 2009).

The Secondary Market 

Helped Fuel Nonprime 

Mortgage Originations and 

Spread Risks through 

Complex Products
 

Page 43 GAO-15-131 Housing Finance System

• 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.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.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.67 Further, we found that although 

 

65Michael Simkovic, “Competition and Crisis in Mortgage Securitization,” Indiana Law 

Journal: vol. 88: Iss. 1, Article 4, 2013.

66Credit 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 GAO-09-397T. 

67GAO-09-216. 
 

Page 44 GAO-15-131 Housing Finance System

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.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.

 

68GAO-09-216. 
 

Page 45 GAO-15-131 Housing Finance System

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.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.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 

 

69See GAO, Mortgage Foreclosures: Documentation Problems Reveal Need for Ongoing 

Regulatory Oversight, 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, GAO-11-288 (Washington, D.C.: 

Mar. 17, 2011). 

70Adam J. Levitin, J. and Tara Twomey, Mortgage Servicing, Georgetown Public Law and 

Legal Theory Research Paper No. 11-09, 2011.

The High Number of 

Defaults and Foreclosures 

Revealed Weaknesses in 

Mortgage Servicing
 

Page 46 GAO-15-131 Housing Finance System

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.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 

 

71Mortgage 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).
 

Page 47 GAO-15-131 Housing Finance System

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.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 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.

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.74 To fulfill this requirement, 

 

72GAO-11-433. 

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

2654, 2661. 

74§ 1125, 122 Stat. at 2693-94.

The Government Has 

Taken Some Steps to 

Address Housing Finance 

Market Challenges 

through Regulation and 

Enforcement
 

Page 48 GAO-15-131 Housing Finance System

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.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.

76 

The Dodd-Frank Act includes many other provisions to address market 

challenges in the areas of consumer protection, mortgage underwriting, 

and investor protection.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.78 The act 

transferred to CFPB rulemaking and enforcement authority over many 

 

75Pub. 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.

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

29, 2014). 

77Pub. 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, GAO-11-656 (Washington, D.C.: 

July 19, 2011) and 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. 
 

Page 49 GAO-15-131 Housing Finance System

previously enacted consumer financial protection laws and requires 

that CFPB track consumer complaints.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 interestrate 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.80 According to 

the act, a lender is presumed to have satisfied the ability-to-repay 

requirement when it originates a “qualified mortgage” (QM).81 CFPB 

had the responsibility to define QM generally and has included a 

 

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).
 

Page 50 GAO-15-131 Housing Finance System

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.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.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.

84 It also requires SEC to adopt regulations 

for MBS issuers to make additional disclosures of loan-level or assetlevel data if such data are necessary for investors to independently 

 

82Small 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-torepay 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.
 

Page 51 GAO-15-131 Housing Finance System

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.85 In addition, the act prohibits conflicts of interest 

between individuals responsible for developing ABS and investors.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.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.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 

 

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). 
 

Page 52 GAO-15-131 Housing Finance System

jointly by several agencies. The risk retention provision is designed to 

protect investors by providing an incentive for securitizers of nonQRMs 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.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.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 

 

89United 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.

90The 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 foreclosureprevention assistance. 
 

Page 53 GAO-15-131 Housing Finance System

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.

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.91 Attention has now turned in Congress and 

elsewhere to considering other significant changes to the housing finance 

system (see app. 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, 

 

91See GAO-13-283 and GAO, Financial Regulatory Reform: Regulators Have Faced 

Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks, 

GAO-13-195 (Washington, D.C.: Jan. 23, 2013).

A Framework for 

Assessing Potential

Changes to the 

Housing Finance 

System
 

Page 54 GAO-15-131 Housing Finance System

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 Description

Clearly defined and prioritized housing 

finance system goals

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. 

Policies and mechanisms that are aligned 

with goals and other economic policies

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. 

Adherence to an appropriate financial 

regulatory framework

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. 

Government entities that have capacity to 

manage risks 

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.

Mortgage borrowers are protected and 

barriers to mortgage market access are 

addressed

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. 

Protection for mortgage securities investors 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. 
 

Page 55 GAO-15-131 Housing Finance System

Element Description

Consideration of cyclical nature of housing 

finance and impact of housing finance on 

financial stability 

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. 

Recognition and control of fiscal exposure 

and mitigation of moral hazard 

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. 

Emphasis on implications of the transition. 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 

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.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.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.

 

92GAO, Financial Assistance: Ongoing Challenges and Guiding Principles Related to 

Government Assistance for Private Sector Companies, GAO-10-719 (Washington, D.C.: 

Aug. 3, 2010).

93GAO-09-216. 

Element 1: Clearly Defined 

and Prioritized Housing 

Finance System Goals
 

Page 56 GAO-15-131 Housing Finance System

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.94 As part of 

their strategic planning, agencies are expected to link their staffing, 

activities, and budgets to their missions and goals.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.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.97

 

94GAO-09-216. 

95See for example, GAO, Results-Oriented Government: GPRA Has Established a Solid 

Foundation for Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004).

96GAO, Agencies’ Strategic Plans Under GPRA: Key Questions to Facilitate 

Congressional Review, GAO/GGD-10.1.16 (Washington, D.C.: May 1997).

97GAO-04-38 and GAO, Executive Guide: Effectively Implementing the Government 

Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996).
 

Page 57 GAO-15-131 Housing Finance System

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.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.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 

 

98GAO, Guidelines for Rescuing Large Failing Firms and Municipalities, GAO/GGD-84-3

(Washington, D.C.: Mar. 29, 1984). 

99See 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).
 

Page 58 GAO-15-131 Housing Finance System

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.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.

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.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 singlefamily mortgages and USDA’s loan guarantee program and the potential 

for consolidation of these programs.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 

 

100GAO-09-216. 

101GAO-13-283. 

102GAO, Housing Assistance: Opportunities Exist to Increase Collaboration and Consider 

Consolidation, GAO-12-554 (Washington, D.C.: Aug. 16, 2012). 

Element 2: Policies and 

Mechanisms That Are 

Aligned with Goals and 

Other Economic Policies
 

Page 59 GAO-15-131 Housing Finance System

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.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.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 

 

103A 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.

104The 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). 
 

Page 60 GAO-15-131 Housing Finance System

duplication.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.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 

 

105Fragmentation 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 

GAO-12-554. 

106A 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).
 

Page 61 GAO-15-131 Housing Finance System

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.

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.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 

 

107GAO-09-216. 

Element 3: Adherence to 

an Appropriate Financial 

Regulatory Framework
 

Page 62 GAO-15-131 Housing Finance System

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 nondepository 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 
 

Page 63 GAO-15-131 Housing Finance System

performance goals, and measure and report on performance toward 

those goals.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.

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.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.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 

 

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

U.S.C. § 1115).

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

110See GAO-09-216. 

111See GAO-09-216. 
 

Page 64 GAO-15-131 Housing Finance System

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.

We have previously stated that government agencies should assess risks 

associated with both internal management factors and external 

sources.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 

 

112See GAO, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

Element 4: Government 

Entities That Have 

Capacity to Manage Risk
 

Page 65 GAO-15-131 Housing Finance System

strategic and efficient approach to acquiring, developing, and retaining 

individuals with needed skills.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.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.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.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 

 

113See GAO, Human Capital Management: Effectively Implementing Reforms and Closing 

Critical Skills Gaps Are Key to Addressing Federal Workforce Challenges, GAO-12-1023T

(Washington, D.C.: Sept. 19, 2012).

114See GAO, Mortgage Financing: FHA and Ginnie Mae Face Risk-Management 

Challenges, GAO-12-578T (Washington D.C.: Mar. 29, 2012).

115See GAO, Insurance Markets: Impacts of and Regulatory Response to the 2007-2009 

Financial Crisis, GAO-13-583 (Washington, D.C.: June 27, 2013).

116Mortgage insurers are regulated by state insurance departments which require insurers 

to maintain a minimum risk based capital ratio. 
 

Page 66 GAO-15-131 Housing Finance System

assessment and human capital management, as well as HUD’s 

information technology systems.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.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 2013.119 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.120 According to FHFA, these new standards are 

 

117See GAO, Federal Housing Administration: Improvements Needed in Risk Assessment 

and Human Capital Management, GAO-12-15 (Washington, D.C.: Nov. 7, 2011) and 

Information Technology: HUD Needs to Improve Key Project Management Practices for 

Its Modernization Efforts, 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. 

118See GAO-13-682. 

119See FHFA, The 2014 Strategic Plan for the Conservatorships of Fannie Mae and 

Freddie Mac (Washington, D.C.: May 2014).

120Fannie 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. 
 

Page 67 GAO-15-131 Housing Finance System

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. 

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.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 

 

121See GAO-09-216. 

Element 5: Mortgage 

Borrowers Are Protected 

and Barriers to Mortgage 

Market Access Addressed
 

Page 68 GAO-15-131 Housing Finance System

borrowers.122 In June 2012, we found that reaching delinquent borrowers 

early, when they had missed fewer payments, resulted in more successful 

loan modifications.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.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.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 

 

122See GAO, Homeownership Counseling: Although Research Suggests Some Benefits, 

Implementation and Evaluation Challenges Exist, GAO-11-925T (Washington, D.C.: Sept. 

14, 2011). 

123See GAO-12-296. 

124See GAO, Foreclosure Review: Regulators Could Strengthen Oversight and Improve 

Transparency of the Process, GAO-14-376 (Washington, D.C.: Apr. 29, 2014). 

12512 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).
 

Page 69 GAO-15-131 Housing Finance System

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.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.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.128 A 2012 HUD 

 

126Federal Housing Administration (FHA): Homeowners Armed With Knowledge (HAWK) 

for New Homebuyers, 79 Fed. Reg. 27896 (May 15, 2014).

12712 C.F.R. §§ 1024.39-1024.41.

128See GAO-12-296 for more information about FHA’s servicing requirements.
 

Page 70 GAO-15-131 Housing Finance System

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.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-toRepay 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.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-toincome ratio for private loans.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 

 

129See 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.

130Ability-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.

131Alys 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. 
 

Page 71 GAO-15-131 Housing Finance System

minorities and protected classes.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.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 downpayment thresholds reflect accumulated wealth that can differ across 

groups and may be a barrier to accessing housing finance.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 

 

132The 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).

133Interagency 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.

134Ethan 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. 
 

Page 72 GAO-15-131 Housing Finance System

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 
 

Page 73 GAO-15-131 Housing Finance System

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.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 tradeoff between consumer protection and innovation. For example, they 

include mechanisms whereby the impact on consumers of new mortgage 

 

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

Page 74 GAO-15-131 Housing Finance System

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.136

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.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.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 

 

136The 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.

137GAO-09-216. 

138GAO-09-216. 

Element 6: Protection for 

Mortgage Securities 

Investors
 

Page 75 GAO-15-131 Housing Finance System

incentives credit rating agencies have to produce reliable and high-quality 

ratings.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.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.

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.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.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 

 

139GAO, Credit Rating Agencies: Alternative Compensation Models for Nationally 

Recognized Statistical Rating Organizations, GAO-12-240 (Washington, D.C.: Jan. 18, 

2014). 

140Disclosure 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). 

14117 C.F.R. § 240.15Ga-1.

14217 C.F.R. § 240.17g-7.

143See 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).
 

Page 76 GAO-15-131 Housing Finance System

contractual rights for certain ABS transactions.

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.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.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.

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 

 

144The 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.” 

145See 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). 

146Nationally Recognized Statistical Rating Organizations; Proposed Rule, 76 Fed. Reg. 

33420 (June 8, 2011). 

147See 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). 
 

Page 77 GAO-15-131 Housing Finance System

rule to implement credit risk retention requirements.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.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, 2014.150 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.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 singlefamily 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 

 

148In 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 reproposal 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.

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

2013).

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

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

2013).
 

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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.152 The September 2014 

 

152Chris 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.
 

Page 79 GAO-15-131 Housing Finance System

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.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.

We have identified financial system stability and reforms related to 

promoting that stability as a key issue.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.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 

 

153The rule also requires that the transaction agreement provide the reviewer with access 

to copies of the underlying loan documents. 

154http://www.gao.gov/key_issues/financial_system_stability_reform/issue_summary#t=0

downloaded on June 30, 2014.

155See GAO, Dodd-Frank Regulations: Agencies Conducted Regulatory Analyses and 

Coordinated but Could Benefit from Additional Guidance on Major Rules, GAO-14-67

(Washington, D.C.: Dec. 11, 2013); GAO-13-195; and GAO-13-180.

Element 7: Consideration 

of Cyclical Nature of 

Housing Finance and 

Impact of Housing Finance 

on Financial Stability
 

Page 80 GAO-15-131 Housing Finance System

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.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 

 

156Timothy F. Geithner, Chairman, Financial Stability Oversight Council, Macroeconomic 

Effects of Risk Retention Requirements (Washington, D.C.: January 2011).
 

Page 81 GAO-15-131 Housing Finance System

public policy should avoid reinforcing any speculative activity during the 

emergence of housing bubbles.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.

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 loanto-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.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 

 

157Lynn E. Browne and Eric S. Rosengren, eds., Real Estate and the Credit Crunch 

(Boston, MA: September 1992).

158GAO-13-682. 

159Hong 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).
 

Page 82 GAO-15-131 Housing Finance System

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.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 

 

160Researchers 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). 
 

Page 83 GAO-15-131 Housing Finance System

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.

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.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.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.163

 

161GAO, Fiscal Exposures: Improving Cost Recognition in the Federal Budget, 

GAO-14-28 (Washington, D.C.: Oct. 29, 2013). 

162See GAO, Federal Deposit Insurance Act: Regulators’ Use of Systemic Risk Exception 

Raises Moral Hazard Concerns and Opportunities Exist to Clarify the Provision, 

GAO-10-100 (Washington, D.C.: Apr. 15, 2010); GAO-10-719; and GAO-09-216. 

163For the recommendation see GAO-10-100. 

Element 8: Recognition 

and Control of Fiscal 

Exposure and Mitigation of 

Moral Hazard
 

Page 84 GAO-15-131 Housing Finance System

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 

1990.164 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.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.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.167 For budgetary purposes, Treasury recorded its assistance as 

 

164Pub. 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).

165See GAO, Mortgage Financing: FHA’s $7 Billion Reestimate Reflects Higher Claims 

and Changing Loan Performance Estimates, 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. 

166See GAO-05-875 and GAO, Mortgage Financing: FHA’s Fund Has Grown, but Options 

for Drawing on the Fund Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 

28, 2001). 

167These activities were permitted under HERA. 
 

Page 85 GAO-15-131 Housing Finance System

budget outlays to the enterprises in the year Treasury made the actual 

disbursement.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.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.

 

168At 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.” 

169FHFA, Projections of the Enterprises Financial Performance (Stress Tests)

(Washington, D.C.: Apr. 30, 2014). 
 

Page 86 GAO-15-131 Housing Finance System

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.

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.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.171 However, any housing finance reform policies should 

consider that there may be trade-offs between making smaller changes to 

 

170GAO-09-216. 

171See GAO-09-216. 

Element 9: Emphasis on 

Implications of the 

Transition
 

Page 87 GAO-15-131 Housing Finance System

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.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 

 

172Mark Zandi and Cristian deRitis, Housing Finance Steps Forward, Moody’s Analytics, 

March 2014.
 

Page 88 GAO-15-131 Housing Finance System

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.

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 

Any Changes Will Involve 

Trade-offs and Should 

Consider Characteristics 

Associated with Controls 

and Performance
 

Page 89 GAO-15-131 Housing Finance System

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.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.

 

173For example, see GAO, Troubled Asset Relief Program: Further Actions Needed to 

Enhance Assessments and Transparency of Housing Programs, GAO-12-783

(Washington, D.C.: July 19, 2012); Federal Reserve Bank Governance: Opportunities 

Exist to Broaden Director Recruitment Efforts and Increase Transparency, GAO-12-18

(Washington, D.C.: Oct. 19, 2011); and GAO-12-886. 
 

Page 90 GAO-15-131 Housing Finance System

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.

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:

Agency Comments

and Our Evaluation
 

Page 91 GAO-15-131 Housing Finance System

• 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 http://www.gao.gov. 
 

Page 92 GAO-15-131 Housing Finance System

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. 

Mathew J. Scirè 

Director, Financial Markets and Community Investment
 

Page 93 GAO-15-131 Housing Finance System

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
Appendix I: Objectives, Scope, and 

Methodology

Page 94 GAO-15-131 Housing Finance System

To help policymakers assess various proposals for changing the singlefamily 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 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 95 GAO-15-131 Housing Finance System

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.1 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 

 

1

See GAO, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of 

the Dodd-Frank Act, 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, GAO-12-296 (Washington, D.C.: June 28, 2012). 
Appendix I: Objectives, Scope, and 

Methodology

Page 96 GAO-15-131 Housing Finance System

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 97 GAO-15-131 Housing Finance System

insurance programs.2 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.

 

2

GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to 

Modernize the Outdated Financial Regulatory System, GAO-09-216 (Washington, D.C.: 

Jan. 8, 2009); Financial Assistance: Ongoing Challenges and Guiding Principles Related 

to Government Assistance for Private Sector Companies, GAO-10-719 (Washington, 

D.C.: Aug. 3, 2010); and Public Policy Options for Changing the Federal Role in Natural 

Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007).
Appendix I: Objectives, Scope, and 

Methodology

Page 98 GAO-15-131 Housing Finance System

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. 
Appendix II: History of Federal Involvement in 

Housing Finance from 1913 to 2014

Page 99 GAO-15-131 Housing Finance System

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.1 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. 

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 

 

1

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. 

Appendix II: History of Federal Involvement 

in Housing Finance from 1913 to 2014

First Steps
Appendix II: History of Federal Involvement in 

Housing Finance from 1913 to 2014

Page 100 GAO-15-131 Housing Finance System

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.

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.2 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 

 

2

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

1449).

The Great Depression
Appendix II: History of Federal Involvement in 

Housing Finance from 1913 to 2014

Page 101 GAO-15-131 Housing Finance System

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.3 The HOLC raised funds with governmentbacked 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.

4

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.5

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 

 

3

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

1468c).

4

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. 

5

Pub. L. No. 73-479, § 1, 48 Stat. 1246 (codified as amended at 12 U.S.C. §§ 1701-

1749aaa-5)).
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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.6 In 1938, FHA 

established a national mortgage association, which became the Federal 

National Mortgage Association (Fannie Mae).7 Originally, Fannie Mae 

was a federal agency with a mandate to purchase, hold, and sell FHAinsured 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.

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 

 

6

§ 301(a), 48 Stat. at 1252.

7

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

World War II and Post-War 

Era
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greater value.8 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.9 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.10 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.11 Loans guaranteed under the 502 program are limited to 

 

8

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

9

Pub. L. No. 78-346, 58 Stat. 284.

10Pub. 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.

11See 7 C.F.R. § 3550.2. 
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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.12 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.13

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.14

In the post-war period, as the mortgage market became more 

standardized, Congress transitioned Fannie Mae into a private 

corporation with a congressional charter.15 Congress began the process 

of changing Fannie Mae’s ownership structure with the Housing Act of 

 

12See 7 C.F.R. §§ 3550.103(b) and 3550.112(c).

13GAO, Housing Assistance: Opportunities Exist to Increase Collaboration and Consider 

Consolidation, GAO-12-554 (Washington D.C.: Aug. 16, 2012).

14Pub. L. No. 90-284, tit. VIII, 82 Stat. 73, 81-89 (1968) (codified as amended at 42 U.S.C. 

§§ 3601-3619).

15Federal 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).

Privatization of Fannie 

Mae and Creation of 

Freddie Mac
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Housing Finance from 1913 to 2014

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1954.16 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 governmentsponsored enterprise and provided for its sale to private shareholders, 

completing the transition to private ownership.17 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).18 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.19 The secondary market for 

conventional loans created by the enterprises increased the liquidity of 

 

16Pub. L. No. 83-560, 68 Stat. 590 (1954) (codified in scattered sections of 12 and 42 

U.S.C.). 

17Pub. L. No. 90-448, § 801, 82 Stat. 476, 536 (codified as amended in scattered sections 

of 12, 15, and 42 U.S.C.).

18Pub. L. No. 91-351, §303(a), 84 Stat. 450, 452 (codified at 12 U.S.C. §§ 1451-1459).

19§ 305, 84 Stat. at 454.
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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.

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 1982.20 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.21 For 

example, the act allowed commercial banks and credit unions, to become 

members of the FHLBank System.

 

20Pub. 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.).

21Pub. L. No. 101-73, 103 Stat. 183 (codified in scattered sections of 12 U.S.C.)

Response to Savings and 

Loan Crisis
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Housing Finance from 1913 to 2014

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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.22 

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.

23 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.24 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 

 

22Pub. L. No. 102-550, tit. XIII, 106 Stat. 3672, 3941-4012 (codified in scattered sections 

of U.S.C.).

23§§ 1331-1334, 106 Stat. at 3956-61 (codified at 12 U.S.C. §§ 4561-4564).

24§§ 1311-1317, 106 Stat. at 3944-49 (codified at 12 U.S.C. §§ 4511-4517).

Regulation of the 

Enterprises
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Housing Finance from 1913 to 2014

Page 108 GAO-15-131 Housing Finance System

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.25 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.26 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.

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.27 Troubled Asset Relief Program funds supported a variety of 

 

25GAO, Housing Government-Sponsored Entities: A Single Regulator Will Better Ensure 

Safety and Soundness and Mission Achievement , GAO-08-563t (Washington, D.C.: Mar. 

6, 2008).

26Pub. 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.

27Pub. L. No. 110-343, § 101, 122 Stat. 3765, 3767 (codified at 12 U.S.C. § 5211). 

Response to Financial 

Crisis
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Housing Finance from 1913 to 2014

Page 109 GAO-15-131 Housing Finance System

mortgage- and nonmortgage-related programs, including programs to 

make capital investments in shares of financial institutions.28 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 DoddFrank Wall Street Reform and Consumer Protection Act.

29 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”).30 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.31 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.

32

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 

 

28For 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, GAO-13-192 (Washington, D. C.: Jan. 7, 2013).

29Pub. L. No. 111-203, 124 Stat. 1376 (2010).

30§ 1412, 124 Stat. at 2145-46. 

31§ 941(b), 124 Stat. at 1892.

32The 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).

Financial Crisis Impact on 

FHA’s Financial Position
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Housing Finance from 1913 to 2014

Page 110 GAO-15-131 Housing Finance System

Stimulus Act of 2008 increased the limits of loans eligible for FHA 

insurance to 125 percent of the median house price in each area.

33 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 downpayment 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.

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 2005.34 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 

 

33Subsequent 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. 

34 Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises 

Long-Term Structures, GAO-09-782 (Washington, D. C.: Sept. 10, 2009).

Public Conservatorship of 

the Enterprises
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Housing Finance from 1913 to 2014

Page 111 GAO-15-131 Housing Finance System

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 privatelabel 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.
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 112 GAO-15-131 Housing Finance System

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. 

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 FMICbacked 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 

Appendix III: Legislative Proposals to 

Change the Housing Finance System-March

2013 to July 2014

Senate Bills
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 113 GAO-15-131 Housing Finance System

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 
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 114 GAO-15-131 Housing Finance System

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-tomoderate 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.
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 115 GAO-15-131 Housing Finance System

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. 

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 

House Bills
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 116 GAO-15-131 Housing Finance System

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 lowincome 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 
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 117 GAO-15-131 Housing Finance System

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. 
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 118 GAO-15-131 Housing Finance System

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-toserve 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.
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 119 GAO-15-131 Housing Finance System

• 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.
Appendix III: Legislative Proposals to Change 

the Housing Finance System-March 2013 to 

July 2014

Page 120 GAO-15-131 Housing Finance System

• 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 HUDinsured 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.
Appendix IV: List of Participants in Discussion 

Groups

Page 121 GAO-15-131 Housing Finance System

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

Appendix IV: List of Participants in 

Discussion Groups
Appendix IV: List of Participants in Discussion 

Groups

Page 122 GAO-15-131 Housing Finance System

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
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 123 GAO-15-131 Housing Finance System

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

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.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Page 124 GAO-15-131 Housing Finance System

Troubled Asset Relief Program: More Efforts Needed on Fair Lending 

Controls and Access for Non-English Speakers in Housing Programs.

GAO-14-117. Washington, D.C.: February 6, 2014.

FHA Mortgage Insurance: Applicability of Industry Requirements Is 

Limited, but Certain Features Could Enhance Oversight. GAO-13-722. 

Washington, D.C.: September 9, 2013.

Federal Housing Administration: Analysis of Options for Modifying Its 

Products, Market Presence, and Powers. GAO-13-682. Washington, 

D.C.: September 9, 2013.

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 

14, 2013.

Housing Assistance: Opportunities Exist to Increase Collaboration and 

Consider Consolidation. 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. GAO-11-33R. Washington, D.C.: November 15, 2010.

Federal Housing Administration: Improvements Needed in Risk 

Assessment and Human Capital Management. GAO-12-15. Washington, 

D.C.: November 7, 2011.

Homeownership Counseling: Although Research Suggests Some 

Benefits, Implementation and Evaluation Challenges Exist.

GAO-11-925T. Washington, D.C.: September 14, 2011.

Mortgage Reform: Potential Impacts of Provisions of the Dodd-Frank Act. 

GAO-11-656. Washington, D.C.: July 19, 2011.

Nonprime Mortgages: Analysis of Loan Performance, Factors Associated 

with Defaults, and Data Sources. 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. GAO-09-782. Washington, 

D.C.: September 10, 2009.

Related GAO Products
Page 125 GAO-15-131 Housing Finance System

Fair Lending: Data Limitations and the Fragmented U.S. Financial 

Regulatory Structure Challenge Federal Oversight and Enforcement 

Efforts. 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. 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. 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. GAO-06-1021. 

Washington, D.C.: September 19, 2006.

Consumer Protection: Federal and State Agencies Face Challenges 

Combating Predatory Lending. GAO-04-280. Washington, D.C.: January 

30, 2004.

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