Mortgage Reform: Potential Impacts of Provisions in the Dodd-Frank Act on Homebuyers and the Mortgage Market
Published: 2011-07-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) is intended, among other things, to reform residential mortgage lending and securitization practices that contributed to the recent 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"). The act also requires securitizers of mortgages not meeting separate criteria associated with lower default risk to retain at least 5 percent of the credit risk, though federal rulemaking agencies may vary this amount. The act directed GAO to assess the effect of mortgage-related provisions on the availability and affordability of mortgage credit and to issue a report by July 2011, but federal agencies are still developing implementing regulations. This report discusses the potential impact of the act's (1) qualified mortgage criteria, (2) credit risk retention requirement, and (3) provisions concerning homeownership counseling and regulation of high-cost loans.
section_title: What GAO Found
paragraphs: GAO examined five of the nine qualified mortgage criteria specified in the Dodd- Frank Act for which sufficient data were available and generally found that, for each year from 2001 through 2010, most mortgages would likely have met the individual criteria. The five criteria address payment of loan principal, length of the mortgage term, scheduled lump-sum payments, documentation of borrower resources, and borrower debt burden. The extent to which mortgages met the individual criteria varied by year of origination, reflecting changes in the mortgage market over the 10-year period. However, the impact of the full set of qualified mortgage criteria is uncertain, partly because data limitations make analysis of the other four criteria difficult and partly because federal agencies could establish different criteria as they develop final regulations. Consumer and industry groups indicated that the criteria specified in the act would likely encourage sound underwriting but could also restrict the availability of and raise the cost of mortgage credit for some homebuyers. Provisions in the act and proposed regulations attempt to address some of these issues, in part by providing exemptions for certain loan products in certain locales, such as rural areas. The public comment period for these proposed regulations ends on July 22, 2011. Mortgage industry stakeholders GAO spoke with indicated that the implications of a risk retention requirement would depend on a variety of regulatory decisions and potential changes in the mortgage market. Rulemaking agencies are accepting public comments on proposed risk retention regulations through August 1, 2011. Key decisions that have yet to be made concern the characteristics of mortgages that would be exempt from risk retention, the forms of risk retention that would be allowed, the percentage that securitizers would be required to hold, and risk-sharing arrangements between lenders and securitizers. These factors could affect the availability and cost of mortgage credit and the viability of a private mortgage securitization market. Additionally, risk retention could complement other securitization and mortgage reforms, such as those that promote greater transparency and enforcement of loan underwriting standards. Other provisions in the Dodd-Frank Act concerning homeownership counseling and regulation of high-cost loans could enhance consumer protections and improve mortgage outcomes for some borrowers, but their specific impacts are difficult to assess at this time. The act authorized a new Office of Housing Counseling within the Department of Housing and Urban Development, but the office is still in the planning stage. Findings from the limited research on housing counseling for mortgage borrowers are mixed, with some studies suggesting that some types of counseling can improve mortgage outcomes and others finding no effect. The act also expands the definition of "high-cost loans," which have disclosures and restrictions designed to protect consumers. Although lenders have generally avoided making these loans, additional information on mortgage costs would be needed to assess the extent to which the new definition would affect mortgages that may be made in the future. To do this work, GAO analyzed a proprietary database of residential mortgages, reviewed relevant housing and mortgage market research, and interviewed key mortgage industry stakeholders. GAO provided a draft of this report to eight agencies. In a letter, the National Credit Union Administration said, as noted in the report, that the act's impact would depend on regulatory decisions that had yet to be made. Six other agencies provided technical comments that have been incorporated as appropriate.

section_title: Letter
paragraphs: The number of homes in foreclosure and of homeowners in financial  distress remains at historically high levels. In the first quarter of 2011,  more than 3.5 million home mortgages were 90 or more days delinquent  or in the foreclosure process, and estimates indicate that more than one  in five mortgage borrowers owe more on their mortgages than their  homes are worth. The continuing foreclosure crisis was fueled in part by  the proliferation of mortgage products in the early to mid-2000s that have  come to be associated with poorer loan performance. These products  include mortgages with interest rates that increased sharply after a few  years, did not require a down payment or full documentation of income, or  allowed borrowers to defer principal and interest payments, increasing  their indebtedness over time. Some mortgage brokers and originators had  financial incentives to steer borrowers who qualified for potentially more  sustainable options into such mortgages. After home prices began to  stagnate or fall in 2005, defaults and foreclosures increased rapidly.  Complicating matters during this period were securitization practices,  which included bundling higher-risk mortgages into residential mortgage- backed securities (RMBS) that, in turn, were sometimes repackaged into  more complex investment products. As demand for RMBS grew, lenders  and securitizers were increasingly compensated based on loan volume  rather than loan quality, contributing to a decline in underwriting  standards.
To help prevent a recurrence of such problems in the mortgage market,  Congress passed the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act) on July 21, 2010. A key challenge in  implementing the Dodd-Frank Act’s provisions is balancing the goal of  protecting borrowers from unsustainable mortgage products with the goal  of maintaining broad access to mortgage credit. Among other things, the  Dodd-Frank Act establishes minimum standards for mortgages, requiring  that consumers have a “reasonable ability to repay” at the time a  mortgage is made when the loan terms, applicable taxes, homeowner’s  insurance, and assessments are taken into account. This consumer  protection provision creates due diligence standards for mortgage  lenders. According to the Dodd-Frank Act, a lender is presumed to have  satisfied the ability-to-repay requirement and receives some protection  from liability when it originates a “qualified mortgage” (QM). The Dodd- Frank Act specifies nine criteria that a loan must meet to be a QM:  (1) regular periodic payments do not result in an increase in the principal  balance or result in a deferral of the repayment of principal;  (2) the loan term does not exceed 30 years;  (3)  except for balloon loans under specified circumstances, the  mortgage does not include balloon payments;  (4)  borrower income and financial resources are verified and  (5) the loan complies with guidelines or regulations established by the  Board of Governors of the Federal Reserve System (Federal  Reserve Board) relating to ratios of total monthly debt to monthly  income or alternative measures of ability to pay regular expenses  after paying total monthly debt;  (6)  a fixed-rate loan is underwritten based on a fully amortizing payment  schedule that takes into account applicable taxes, insurance, and  assessments;  (7)  an adjustable-rate mortgage (ARM) is underwritten based on the  maximum rate permitted during the first 5 years and on a fully  amortizing payment schedule that takes into account applicable  taxes, insurance, and assessments;  (8) total points and fees payable in connection with loan do not exceed 3  percent of the total loan amount; and  (9)  a reverse mortgage that meets QM standards as set by the Federal  Reserve Board.
The Dodd-Frank Act gave federal rulemaking agencies the flexibility to  change these criteria.
The Dodd-Frank Act also requires mortgage 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 a separate set of  criteria (to be defined by regulators) that are associated with a lower risk  of default. Securitized mortgages that meet these criteria are exempt  from this risk retention requirement and are referred to as “qualified  residential mortgages” (QRM). The risk retention provision is designed to  provide an economic incentive for securitizers of non-QRMs to ensure  that lenders originate well-underwritten mortgages that protect investors  from losses. Although the Dodd-Frank Act contains a uniform 5 percent  requirement, it gives federal regulators the flexibility to specify a risk  retention requirement for nonexempt mortgages that varies depending on  the underwriting standards used.
Given the serious problems that continue in the mortgage market and  congressional interest in protecting consumers and ensuring credit  availability, we were required to assess the potential impact of the  mortgage-related provisions of the Dodd-Frank Act and issue a report by  July 21, 2011. Because regulations governing implementation of these  provisions are still being developed, the criteria we assessed could  change based on rulemakers’ review of comments from the public on the  proposed rules. The public comment periods for proposed QM and QRM  rules will end on July 22 and August 1, 2011, respectively. Partly for this  reason, assessing the potential impact of the Dodd-Frank Act provisions  is challenging at this time. This report (1) assesses the proportions of  mortgages originated from 2001 through 2010 that would have met  selected QM criteria specified in the Dodd-Frank Act and describes the  views of mortgage industry stakeholders on the potential effects of the  QM criteria on the mortgage market, (2) discusses relevant information  and the views of mortgage industry stakeholders on the potential impact  of a risk retention requirement on the mortgage market and the  advantages and disadvantages of a uniform risk retention requirement,  and (3) describes what research and the views of mortgage industry  stakeholders suggest about the potential impact of provisions in the  Dodd-Frank Act regarding homeownership counseling and changes to the  Home Ownership Equity Protection Act (HOEPA). For practical reasons,  we examined these different parts of the Dodd-Frank Act separately.  Although the purpose and scope of the QM and QRM provisions are  somewhat different, they could be expected to work together by  increasing lenders’ and securitizers’ exposure to the risks that are  associated with mortgages whose features and terms put borrowers at  higher risk of default and foreclosure.
Because recovery from today’s restricted credit conditions could expand  the volume and types of mortgage products in the marketplace, we used  historical data to illustrate the potential effects of selected QM criteria  under different market conditions and lending environments. Specifically,  we analyzed a proprietary database of loans from CoreLogic, Inc., to  examine the proportions of loans originated from 2001 through 2010 that  likely would have met selected QM criteria specified in the Dodd-Frank  Act. This database contains information from major mortgage servicers  and covers a broad cross-section of the mortgage market. For example,  CoreLogic estimates that the database captures 60 to 65 percent of the  mortgages purchased by Freddie Mac and Fannie Mae (the enterprises),  respectively, approximately 50 percent of subprime mortgages, and about  90 percent of mortgages with government-insurance or guarantees (such  as mortgages insured by the Federal Housing Administration (FHA)).  Nevertheless, because of limitations in the coverage and completeness of  the data, our analysis may not be fully representative of the mortgage  market as whole. We examined five of the nine QM criteria specified in  the Dodd-Frank Act for which sufficient data, including data from the  CoreLogic database, were available (see the first five criteria previously  listed). In general, for each year from 2001 through 2010, we identified  the proportion of mortgage originations that would have met the individual  criteria. We were not able to calculate relevant proportions for certain  years and mortgage market segments due to data limitations. Primarily  due to data limitations, we were also not able to assess the remaining  four QM criteria (see the last four criteria listed previously).
We assessed the reliability of the CoreLogic data by interviewing  CoreLogic representatives about the methods the firm used to collect and  ensure the integrity of the information. We also reviewed supporting  documentation about the database. In addition, we conducted  reasonableness checks on the data to identify any missing, erroneous, or  outlying figures. We concluded that the data elements we used were  sufficiently reliable for our purposes. To obtain additional information and  views on the potential effects of the QM criteria specified in the Dodd- Frank Act, we reviewed proposed rules for implementing the Dodd-Frank  Act’s QM provisions. We also reviewed relevant research literature and  interviewed officials from organizations representing mortgage lenders,  mortgage brokers, investors, securitizers, and consumer interests.  Additionally, we interviewed officials from the Federal Reserve Board,  Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance  Agency (FHFA), Department of Housing and Urban Development (HUD),  National Credit Union Administration (NCUA), Office of the Comptroller of  the Currency (OCC), and Office of Thrift Supervision (OTS).
To assess the potential impact of the Dodd-Frank Act’s risk retention  requirement on the mortgage market, we reviewed relevant statutory  provisions and the rules that have been proposed to implement those  provisions. We also reviewed available information on mortgage  securitization practices prior to the financial crisis and factors that could  affect the impact of the risk retention requirement, including potential  changes to the roles of the enterprises and FHA. We interviewed key  mortgage industry stakeholders—including those representing mortgage  lenders, securitizers, investors, and consumers—to obtain their views on  the potential impact of a risk retention requirement including how  regulatory decisions regarding the form and coverage of the requirement  could affect the availability and affordability of mortgage credit. We used  the CoreLogic data to examine selected criteria—loan-to-value (LTV) ratio  and debt service-to-income (DTI) ratio—that regulators are considering as  part of the QRM rulemaking to describe the proportion of mortgages that  may have met different LTV and DTI thresholds in 2006 (a period of  relatively lax underwriting standards) and 2010 (a period of relatively  stringent underwriting standards). To assess the impact of the risk  retention requirement on lenders, we reviewed relevant accounting  standards and risk-based capital requirements that could interact with risk  retention. We also interviewed industry stakeholders about the impact of  a risk retention requirement on different types and sizes of mortgage  lenders. To assess the advantages and disadvantages of a uniform 5  percent risk retention requirement, we interviewed industry stakeholders  about the development, implementation, and enforcement of both a  uniform and a nonuniform requirement. Finally, we interviewed officials  from the previously cited federal agencies and the Securities and  Exchange Commission (SEC).
To describe the potential effects of the housing counseling and HOEPA  provisions in the Dodd-Frank Act, we reviewed relevant statutory  provisions and industry research. We identified and reviewed empirical  research and published literature on the impact of prepurchase and  foreclosure mitigation counseling on mortgage outcomes. We also  interviewed HUD officials about their plans for creating the new housing  counseling office required by the Dodd-Frank Act. We compared the new  HOEPA requirements in the Dodd-Frank Act to previous statutory  requirements and examined available research on the number of loans  originated from 2004 through 2009 that were covered by HOEPA  requirements. We also interviewed a wide range of mortgage and  counseling industry stakeholders, including federal agencies, consumer  groups, lenders, and academic researchers about the Dodd-Frank Act’s  counseling and HOEPA provisions.
We conducted this performance audit from August 2010 to July 2011 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 I explains our  objectives, scope, and methodology in greater detail.
subsections: section_title: Background
subsections: section_title: Mortgage Markets and Securitization
paragraphs: Residential mortgages fall into several loosely defined categories and  encompass a range of loan products:    Prime mortgages are made to borrowers with strong credit histories  and provide the most attractive interest rates and loan terms.    Near-prime mortgages (also called Alt-A mortgages) generally serve  borrowers whose credit histories are close to prime but who have one  or more higher-risk characteristics, such as limited documentation of  income or assets.    Subprime mortgages are generally made to borrowers with blemished  credit and feature higher interest rates and fees than prime loans.    Government-insured or -guaranteed mortgages primarily serve  borrowers who may have difficulty qualifying for prime loans and  feature interest rates similar to those for prime loans. These  mortgages require insurance or charge guarantee fees. FHA and the  Department of Veterans Affairs (VA) operate the two main federal  programs that insure or guarantee mortgages.
Across all of these market segments, two types of loans are common:  fixed-rate mortgages, which have interest rates that do not change over  the life of the loans and ARMs, which have interest rates that change  periodically based on changes in a specified index.
A number of loan features became more common in the 2000s. While  these features potentially expanded access to mortgage credit, they were  often associated with higher default rates. These features included the  following:    Low- and no-documentation loans. Originally intended for borrowers  who had difficulty documenting income, such as the self-employed,  these loans were made with little or no verification of a borrower’s  income or assets.    High LTV ratios. As homebuyers made smaller down payments, this  ratio increased.    Prepayment penalties. Some loans contained built-in penalties for  repaying part or all of a loan in advance of the regular schedule.
Other mortgage types that became more prevalent during this period  included different types of ARMs. Short-term hybrid ARMs had a fixed  interest rate for an initial period (usually 2 or 3 years) but then “reset” to  an adjustable rate for the remaining term of the loan. Interest-only or  payment-option ARMs allowed borrowers to defer repayment of principal  and possibly part of the interest for the first few years of the loan.  Payment-option ARMs enabled mortgages to negatively amortize,  meaning that the loan balance could increase over time.
The secondary mortgage market, where loans are securitized, plays an  important role in providing liquidity for mortgage lending. Securitization  has a number of benefits for lenders. Among other things, it is typically  less expensive than raising funds directly and it transfers some or all of  the credit and interest rate risk from the lender to the investor. To  securitize mortgage loans, mortgage lenders or originators sell their loans  to third parties—either directly to securitizing institutions or loan  aggregators that serve as intermediaries between originators and  securitizers—generating funds that could be used to originate more loans  (see fig. 1). Securitization involves a number of players. Securitizing  institutions include investment banks, retail banks, mortgage companies,  and real estate investment trusts (REIT). As a part of the securitization  process, securitizers create a separate legal entity (“special purpose  entity” or SPE) to bundle mortgages and sell them as investment products  called RMBS. The purpose of creating the SPE is to help ensure that  securitized assets are protected in the event of a bankruptcy of the  securitizing or originating institutions. Other parties to a securitization  transaction include, but are not limited to, credit rating agencies that  assess the creditworthiness of the securities based on the likelihood of  default and the expected value of dollar losses in the event of a default,  and deal underwriters hired by the securitizers to market and sell the  securities to investors. Finally, servicers are hired to collect mortgage  payments from the borrowers and disburse interest and principal  payments to the investors.
RMBS can be structured in different ways, but one common structure  involves a prespecified distribution of cash payments to investors in  different slices, or tranches of the security. Tranching allows investors  with different appetites for risk to invest in a security with the same  underlying pool of loans. In such credit-tranched structures, also known  as “senior subordinate” structures, cash from the underlying loans is  generally paid to the topmost, least risky tranche first until the  prespecified thresholds are met. Cash then flows to the lower tranches in  what is known as a “waterfall.” Conversely, the bottom-most tranche  typically absorbs the losses from defaults until it is depleted, with any  additional losses flowing up toward senior securities.
The secondary mortgage market consists of (1) Ginnie Mae-guaranteed  RMBS, which are backed by cash flows from federally insured or  guaranteed mortgages; (2) enterprise RMBS, which are backed by  mortgages that meet the criteria for purchase by Fannie Mae and Freddie  Mac; and (3) private-label RMBS, which are backed by mortgages that do  not conform to enterprise purchase requirements because they are too  large (i.e., jumbo mortgages) or otherwise do not meet enterprise  underwriting criteria. Most subprime and near-prime mortgages, and  many prime jumbo mortgages, were securitized into private-label RMBS.  However, the private-label market, which accounted for most of the  RMBS issuances in 2005 and 2006, collapsed in 2008 and has not  recovered. As a result, almost all RMBS issuances in recent years are  backed by the full guarantees of the enterprises and Ginnie Mae. RMBS  represent the biggest single piece of the larger securitization market,  accounting for over one-third of all new asset-backed issuances from  2005 through the third quarter of 2010.
The composition of the mortgage market has changed dramatically in  recent years. In the early to mid-2000s, the volume of subprime and near- prime mortgage originations grew rapidly and peaked in 2006, accounting  for nearly 40 percent of mortgage originations that year. These market  segments contracted sharply in mid-2007, partly in response to increasing  defaults and foreclosures, including mortgages defaulting within a few  months of origination, and a lack of investor demand. The market  segments comprising mortgages backed by the enterprises and FHA had  the opposite experience: a decline in market share in the early to mid- 2000s, followed by rapid growth beginning in 2007 and 2008,  respectively. For example, the enterprises’ share of the mortgage  market decreased from about one-half in 2003 to about one-third in 2006.  By 2009 and 2010, enterprise-backed mortgages had increased to more  than 65 percent of the market. Similarly, FHA-insured mortgages grew  from about 2 percent of the market in 2006 to about 20 percent in 2009  and 2010. Congress and the administration are currently considering  options to scale back the role of the enterprises and FHA in the mortgage  market and increase the role of private capital. In addition to these  potential changes, a recovery from constrained credit conditions in the  mortgage market could expand the volume of mortgages extended to  borrowers and therefore subject to the Dodd-Frank Act’s provisions.
section_title: Federal Mortgage Lending Laws
paragraphs: The Dodd-Frank Act enacts numerous provisions intended to reform the  mortgage lending industry with an eye toward consumer protection. Many  of these provisions are contained in Title XIV of the act, which amends  provisions of the Truth in Lending Act (TILA) to reform and provide  accountability for consumer mortgage practices. TILA, enacted in 1968,  and HOEPA, which amended TILA in 1994, are among the primary  federal laws governing mortgage lending. TILA was designed to provide  consumers with accurate information about the cost of credit. 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 (APR)—that can help borrowers understand  the overall costs of their loans.
Congress enacted HOEPA in response to concerns about predatory  lending. HOEPA regulates and restricts the terms and characteristics of  certain kinds of “high-cost” mortgages—that is, those that exceed certain  thresholds in their APRs or fees (often referred to as “rate and fee  triggers”). The Dodd-Frank Act expands the definition of high-cost loans  to include mortgages for purchasing a home; reduces the APR and points  and fees triggers; and requires mandatory preloan counseling for  borrowers of high-cost mortgages, among other things. The Federal  Reserve Board implements TILA and HOEPA, but this responsibility will  transfer to the Bureau of Consumer Financial Protection (also known as  the Consumer Financial Protection Bureau or CFPB) on July 21, 2011.
section_title: Minimum Lending Standards and Qualified Mortgage Provisions
paragraphs: The Dodd-Frank Act reforms mortgage lending by amending TILA to  prohibit lenders from making mortgage loans without regard to  consumers’ ability to repay them. As previously noted, lenders can  comply with the ability-to-repay standard by originating a QM. Lenders  are not prohibited from originating non-QMs, however. The Dodd-Frank  Act specifies nine QM criteria, but gives the Federal Reserve Board the  authority to add to, subtract from, or modify the criteria as it develops  implementing regulations (see table 1).
The Dodd-Frank Act requires securitizers of RMBS to retain no less than 5  percent of the credit risk of any residential mortgage they securitize that  does not meet specified criteria. The purpose of the requirement is to help  align the interests of participants in the securitization process and  encourage sound loan underwriting. The Dodd-Frank Act exempts  government-insured or -guaranteed mortgages from the risk retention  requirement (excluding mortgages backed by the enterprises, which are in  government conservatorship), and as noted previously, loans that meet the  QRM criteria. However, the Dodd-Frank Act requires that the risk  retention requirement be applied to any RMBS that contains one or more  non-QRMs, even if the vast majority of the security’s mortgages are QRMs.
Federal banking and other agencies are required by the Dodd-Frank Act  to jointly prescribe regulations for the risk retention requirement. In  crafting the risk retention regulations, the Dodd-Frank Act requires  rulemakers to specify, among other things,  criteria for QRMs, taking into consideration underwriting and product  features that historical loan performance data indicate result in a lower  risk of default thereby ensuring high-quality loan underwriting. The  Dodd-Frank Act specifies that the QRM definition cannot be broader  than the QM definition described previously (i.e., the QRM criteria can  be more restrictive than the QM criteria but not less restrictive);    permissible forms of risk retention and the minimum duration for    ways of allocating risk between securitizers and originators; and  the possibility of permitting a lower risk retention requirement (less  than 5 percent) for any non-QRM that meets underwriting standards  that the agencies develop in regulations.
Rulemakers issued proposed rules for the risk retention provisions in  March 2011. The proposed criteria for the QRM include, but are not  limited to, the following:  the LTV ratio must be at least 80 percent for mortgages obtained for a  home purchase;  the DTI ratio must be 36 percent or less;  the loan term must not exceed 30 years;  the loan cannot include negative amortization or payment deferral  features;    points and fees cannot exceed 3 percent of the total loan amount;  the borrower can neither be 30 or more days past due on any debt  obligation nor have been 60 or more days past due on any debt  obligation within the preceding 24 months; and  the originator must incorporate into the mortgage documents certain  requirements regarding policies and procedures for servicing the  mortgage, including procedures to promptly initiate activities to  mitigate the risk of default for delinquent loans.
Although this report focuses on risk retention for RMBS, the Dodd-Frank  Act’s risk retention requirement also applies to securities backed by other  asset classes, such as credit cards and automobile loans. In response to  a mandate in the Dodd-Frank Act, the Federal Reserve Board issued a  report in October 2010 that, among other things, describes historical  issuance activity, securitization structures, and incentive alignment  mechanisms for nine categories of asset-backed securities. The report  noted that the effects of a final set of risk retention requirements could not  be analyzed because implementing regulations were still being  developed. However, the report made a number of recommendations for  rulemakers to consider when crafting the risk retention requirement,  including a recommendation that the requirement be tailored to each  major class of securitized assets. Also in response to a mandate in the  Dodd-Frank Act, the Chairman of the Financial Stability Oversight Council  issued a report in January 2011 that examined the macroeconomic  effects of a risk retention requirement. While noting limitations in the  information available to assess the impacts of risk retention rules not yet  in place, the report offered several principles and recommendations to  inform the design of a risk retention framework that facilitates economic  growth by allowing market participants to price credit risk more accurately  and allocate capital more efficiently.
section_title: Housing Counseling
paragraphs: The Housing and Urban Development Act of 1968 authorized HUD to  provide housing counseling services. Specifically, it authorized HUD to  make grants to or contract with public or private organizations to provide  a broad range of housing counseling services to homeowners and  tenants to assist them in improving their housing conditions and in  meeting the responsibilities of homeownership or tenancy.
The Dodd-Frank Act requires HUD to establish an Office of Housing  Counseling and gives the office a broad range of responsibilities relating to  homeownership and rental housing counseling, including grant  administration, policy development, public outreach, and research. The  Dodd-Frank Act requires HUD to appoint a Director of Housing Counseling  to report directly to the Secretary of HUD and to establish an advisory  committee consisting of mortgage and real estate industry stakeholders  and consumer groups and HUD-certified housing counseling agencies.
Two key types of homeownership counseling are foreclosure mitigation  counseling and prepurchase counseling. Foreclosure mitigation counseling  focuses on helping financially distressed homeowners avoid foreclosure by  working with lenders to cure mortgage delinquency. Prepurchase counseling  topics can include the process of qualifying for a mortgage, selecting a  mortgage product, and successfully maintaining a home. While prepurchase  counseling was common prior to the financial crisis, foreclosure mitigation  counseling has gained increasing attention and popularity as a means to  assist homeowners who are struggling to stay in their homes.
section_title: Although Most Recent Mortgages Would Likely Have Met Certain Qualified Mortgage Criteria, the Criteria Could Limit Mortgage Options for Some Borrowers
paragraphs: Our analysis of the QM criteria specified in the Dodd-Frank Act generally  indicated that, for each year from 2001 through 2010, most mortgages  would likely have met the individual criteria for which relevant data were  available. The extent to which mortgages met individual criteria varied  by mortgage category and origination year, reflecting changes in the  mortgage market over the 10-year period. Consumer and industry groups  that we spoke with noted that the QM criteria would likely provide several  benefits to qualified borrowers, and housing research indicates that many  of the QM criteria are associated with a borrower’s ability to repay a  mortgage. However, some consumer and industry groups stated that  some of the QM criteria could increase the cost and restrict the availability  of mortgages for some borrower groups, including lower-income and  minority borrowers.
subsections: section_title: Data on a Cross Section of Mortgages Suggest That Most Mortgages Would Have Met Selected Qualified Mortgage Criteria Specified in the Dodd-Frank Act
paragraphs: To illustrate the potential significance of the QM criteria under different  lending environments and market conditions, we applied selected criteria  to CoreLogic data on mortgages originated from 2001 through 2010. We  applied each criterion separately, calculating the proportion of mortgages  in each annual loan origination cohort that likely would have met it. We  were unable to determine the proportion of mortgages that would have  met all of the criteria we examined due to the number of records in the  database that had missing or unreliable values for one or more of the  criteria. For example, the database contained no information on DTI ratio  for subprime mortgages and did not have reliable information on  documentation of borrower income and assets. As a result, we  determined that applying the criteria simultaneously would not have  produced reliable results. Because the CoreLogic data group mortgages  into two broad categories—the first containing prime, near-prime, and  government-insured or -guaranteed loans and the second containing  subprime loans—we examined these categories separately when  possible. The data did not contain information needed to examine all of  the QM criteria specified in the Dodd-Frank Act. As a result, our analysis  focused on the five criteria for which CoreLogic or other data were  available. Our analysis includes other limitations and assumptions, as  discussed in the rest of this section and in appendix I. Additionally,  appendix II contains additional breakdowns of our analysis by geographic  groupings based on racial, ethnic, income, and house price patterns.
The five QM criteria in the Dodd-Frank Act that we were able to assess  were  regular periodic payments do not result in an increase in the principal  balance or deferred repayment of principal (e.g., due to negative  amortization features);  the loan term does not exceed 30 years;    except for balloon loans under specified circumstances, the loan does  not include balloon payments;    borrower income and financial resources are verified and  the loan complies with guidelines or regulations established by the  Federal Reserve Board relating to ratios of total monthly debt service  to monthly income. The Federal Reserve Board’s proposed rules for  QMs do not provide a specific DTI ratio. Therefore, for illustrative  purposes, we used the 41-percent ratio that serves as a guideline in  underwriting FHA-insured mortgages.
The significance of selected QM requirements varied by origination year.  Regarding the criterion for repayment of principal, our analysis focused  on mortgages with negative amortization features, which would have  been prohibited under the Dodd-Frank Act because they allowed  payments that did not cover the loan principal, resulting in increasing loan  amounts. Due to limitations in the CoreLogic data, our analysis does not  account for interest-only mortgages, which would also have been  prohibited because they deferred repayment of principal. Negative  amortization features can be problematic because borrowers may  experience payment shock when their payments increase to include an  amount that will fully amortize the outstanding balance over the remaining  loan term. As shown in figure 2, most mortgages originated from 2001  through 2010 would have met the QM requirement related to repayment  of principal. Among prime, near-prime, and government-insured  mortgages, the proportion of new originations without a negative  amortization feature declined from 99 percent in 2001 to 91 percent in  2005, then increased to essentially 100 percent in 2009 and 2010. This  trend reflects the growth in near-prime mortgages (many of which were  payment-option ARMs that could negatively amortize) early in the decade  and their disappearance after 2007. In the subprime market, almost 100  percent of mortgage originations from 2001 through 2007 did not have  negative amortization features. Because so few subprime mortgages  were originated after 2007, we did not calculate corresponding  percentages for 2008 through 2010 for this criterion or other QM criteria.
As shown in figure 3, the large majority of mortgages originated from  2001 through 2010 would have met the QM criterion for a loan term of 30  years of less. A term of greater than 30 years increases the borrower’s  total mortgage costs because more interest accrues than it would in a  shorter period. Among prime, near-prime, and government-insured  mortgages, essentially 100 percent met the criterion from 2001 through  2004. For this category of mortgages, the proportion declined to 96  percent in 2007 and rose back to about 100 percent by 2009. For  subprime mortgages, the proportion that met the criterion was nearly 100  percent from 2001 through 2004, but declined to 85 percent in 2006. The  trend in the middle of the decade toward mortgages with longer loan  terms suggests efforts by lenders to qualify borrowers for mortgages that  offered lower monthly payments during a period of strong appreciation in  house prices.
A high proportion of the mortgages originated over the 10-year period we  examined would have met the QM criterion restricting balloon payments,  although the percentages were somewhat different for prime, near-prime,  and government-insured mortgages compared with subprime mortgages  (see fig. 4). A balloon mortgage does not fully amortize over the term of  the loan, leaving a balance due at maturity. The final payment is called a  balloon payment because it is generally much larger than the other  payments. Mortgages with balloon payments have been associated with  repayment problems, likely due to the payment shock that occurs when  the loan balance becomes due, or difficulty in refinancing at the end of the  loan term, especially if the home value depreciated. Among prime, near- prime, and government-insured mortgages, almost 100 percent of the  originations each year did not have balloon payments. For subprime  mortgages, the proportions increased from 96 percent in 2001 to 99  percent in 2003 and 2004, and decreased to about 90 percent in 2007.
A majority of the mortgages originated from 2001 through 2010 would  likely have met the QM criterion for full documentation of borrower income  and other financial resources, although low- or no-documentation loans  became common in certain market segments in the middle of the decade.  Low- or no-documentation of income or assets allows borrowers to  provide less detailed financial information than is traditionally required.  This feature was originally intended for borrowers who might have  difficulty documenting income, such as the self-employed, but eventually  became more widespread in the mid-2000s. As we previously reported,  mortgage originators or borrowers may have used the limited  documentation feature in some cases to overstate the financial resources  of borrowers and qualify them for larger, potentially unaffordable loans.
The CoreLogic data on documentation level were not sufficiently reliable  for our purposes, but information from other sources provides some  insights on documentation practices during the 10-year period we  examined. FHFA analysis of mortgages purchased by the enterprises  from 2001 through 2010 indicates that the proportion of mortgages  originated each year that were not “Alt-A,” and therefore most likely to  have met the full documentation criterion, ranged from a low of about 80  percent in 2006 (when enterprise-purchased mortgages accounted for  about one-third of the market) to a high of 100 percent in 2010 (when the  enterprises represented about two-thirds of the market). According to  FHA policy, all FHA-insured mortgages, except the generally modest  proportion that are streamlined refinances (expedited refinancing from  one FHA-insured loan into another), are fully documented. As previously  noted, FHA-insured mortgages accounted for about 20 percent of new  originations in 2009 and 2010 but for a substantially smaller share in prior  years. As we have previously reported, smaller proportions of subprime  and near-prime mortgages—which together grew to about 40 percent of  mortgage originations in 2006 but mostly disappeared after 2007—had  full documentation. Specifically, from 2001 to 2007, the proportion of  subprime mortgages with full documentation ranged from about 60  percent (in 2006) to 80 percent (in 2001), while the corresponding  proportion for near-prime mortgages ranged from about 20 percent (in  2006 and 2007) to just over 40 percent (in 2002).
Using an illustrative standard of 41 percent or less for the QM criterion for  DTI ratio, we found that more than half of the mortgages originated from  2003 through 2010 for which reported DTI ratios were available would  likely have met the criterion; however, a sizable proportion—from 25 to 42  percent—would not have. We did not calculate corresponding  percentages for 2001 and 2002 because our CoreLogic data sample  lacked DTI information for the large majority of the mortgages originated  in those years. The DTI ratio is a key measure of a borrower’s debt  burden and is therefore a factor used in assessing a borrower’s ability to  repay a loan. The proportion of prime, near-prime, and government- insured mortgages that would have met the illustrative 41-percent  criterion decreased from about 75 percent in 2003 to 58 percent in 2008  and then increased to about 65 percent in 2009 and 2010 (see fig. 5).  Although the CoreLogic database we used did not have DTI information  for subprime mortgages, we have previously reported that subprime  mortgages originated from 2001 through 2005 had average reported DTI  ratios of less than 41 percent and that those originated in 2006 and 2007  had average reported DTI ratios of 41.1 and 41.5 percent, respectively.  As a result, a substantial proportion of subprime mortgages would not  have met a 41-percent criterion.
Our analysis suggests that for each year from 2001 through 2010, most  borrowers obtained mortgages with characteristics consistent with the  individual QM criteria we were able to examine. However, we were not  able to evaluate other QM criteria because of data limitations, and  rulemaking agencies have not yet established the final QM criteria. The  four criteria we were unable to examine were as follows:    underwriting for fixed-rate mortgages is based on a fully amortizing  payment schedule that takes into account applicable taxes, insurance,  and assessments;    underwriting for ARMs must be based on the maximum interest rate  allowed during the first 5 years and must take into account applicable  taxes, insurance, and assessments;  total points and fees cannot exceed 3 percent of the total loan  amount; and  reverse mortgages must meet standards established by the Federal  Reserve Board.
The first two criteria address the practice of some lenders that qualified  borrowers for mortgages without assessing their ability to pay taxes and  insurance or make monthly payments that reflected scheduled increases  in interest rates. Requiring that underwriting account for applicable taxes  and insurance could help ensure that borrowers can meet their  responsibilities for paying these costs in addition to their mortgage  payment. Similarly, requiring underwriting to be based on the maximum  interest rate allowed during the first 5 years could help ensure that  borrowers have the ability to pay scheduled increases in mortgage  payments. Limiting points and fees may protect borrowers against  excessive up-front charges that have been associated with predatory  lending practices. We were not able to examine the criterion concerning  reverse mortgages because the Federal Reserve Board did not propose  standards for them. In proposed regulations, the Federal Reserve Board  indicated that QM requirements were generally not relevant to reverse  mortgages because the Dodd-Frank Act does not subject reverse  mortgages to the ability-to-repay requirement.
The Dodd-Frank Act gives the Federal Reserve Board the authority to  add to, subtract from, or modify the QM criteria as implementing  regulations are developed. Additionally, the Department of Agriculture’s  Rural Housing Service, FHA, and VA are required to develop separate  QM criteria for their loan programs through regulations. The Federal  Reserve Board issued proposed QM rules in April 2011, and is accepting  public comments through July 22, 2011. The Dodd-Frank Act requires  that the rules be finalized by no later than January 2013.
section_title: Consumer and Industry Groups Cited Consumer Protection Benefits of the Qualified Mortgage Criteria but also Raised Some Concerns
paragraphs: Representatives from some consumer groups and the mortgage industry  we spoke with stated that they were generally supportive of certain QM  criteria in the Dodd-Frank Act because the criteria were associated with a  borrower’s ability to repay a mortgage. Representatives from one of the  mortgage industry associations stated that the criteria were consistent with  their responsible lending policy, which was based upon a consumer’s ability  to repay. Several consumer group representatives stated that providing  mortgages based upon a borrower’s ability to repay would ultimately benefit  consumers by providing them with sustainable products, such as 30-year  fixed-rate mortgages, that were easy to understand. In addition, some  indicated that QMs would protect eligible consumers from risky loan  features, such as abrupt interest rate increases that could cause payment  shock. Also, one consumer group indicated that the QM criteria could  increase the availability of affordable and sustainable mortgage credit by  encouraging lender competition in offering less risky mortgage products  and helping to increase investor confidence in private-label RMBS.
Consistent with these views, research indicates that certain QM criteria  specified in the Dodd-Frank Act are associated with a borrower’s ability to  meet their mortgage obligations. For example, we and others have  previously reported that no- and low-documentation mortgages are  associated with higher probabilities of default and foreclosure, likely  because borrowers’ financial resources were sometimes overstated,  allowing for larger, potentially unaffordable loans. Additionally, some  research indicates that balloon payments are associated with poorer loan  performance, as some lenders may use them to induce borrowers into  mortgages with attractive monthly payments without disclosing their long- term consequences. A 2007 study estimated that, controlling for other  factors, subprime refinance mortgages with balloon payments were 50  percent more likely to experience a foreclosure than other loans. We  previously reported that mortgages with payment options that allowed for  negative amortization (by adding deferred interest payments to the loan  balance) could lead to payment shock when the interest-only or payment  option period expired. Homeowners who could not afford the higher  payments were more likely to enter foreclosure.
However, several of the mortgage industry representatives told us that the  QM criterion limiting total points and fees to 3 percent of the total loan  amount could increase the cost and decrease the availability of mortgages  for certain borrower groups, including otherwise qualified low-income and  minority borrowers. According to these representatives, because certain  costs for originating a mortgage are fixed (i.e., do not vary with the size of  the loan), points and fees on smaller loans can easily exceed 3 percent of  the total (e.g., loans of $150,000 or less, according to one lender). These  representatives stated that a possible consequence of the cap could be  that lenders would increase interest rates on smaller loans or be deterred  from making them altogether. They indicated that this outcome could  disproportionately affect populations that tend to take out smaller  mortgages such as lower-income, first-time, rural, and minority borrowers.
Several mortgage industry representatives also raised concerns about the  QM criteria that restrict mortgages with balloon payments and create  stricter underwriting standards for ARMs. According to these  representatives, both product types—which typically have lower initial  interest rates or monthly payments than comparable fixed-rate  mortgages—can be used responsibly under certain circumstances to  make mortgages more affordable in the short run. These representatives  said that these criteria could constrain mortgage options or delay  homeownership for borrowers that traditionally used such products,  including some rural and lower-income borrowers.
Concerns were also raised about DTI ratio requirements. While the Dodd- Frank Act does not provide a maximum DTI ratio, it states that the QM  criteria must comply with any guidelines or regulations established by the  Federal Reserve Board relating to ratios of total monthly debt service to  monthly income (or alternative measures). Several mortgage industry  representatives stated that QM criteria that include specific DTI ratios  could restrict the availability of QMs for retirees or those with irregular  income streams. Industry representatives that we met with also indicated  that some retirees might have small incomes but substantial assets to  draw upon to meet their mortgage obligations and that individuals with  irregular incomes, such as seasonal workers, could have trouble meeting  income documentation requirements. As a result, some creditworthy  borrowers might be prevented from obtaining QMs.
Representatives from several construction and mortgage industry  associations stated that the QM criteria could restrict new home  construction and mortgage refinancing. They said that the QM criteria  could make qualifying for a mortgage more difficult for some borrowers,  reducing demand for newly constructed homes. In addition, officials from  two mortgage industry associations stated that the QM criteria could  make it more difficult or expensive for some existing homeowners to  refinance their mortgages. In particular, the QM criteria could affect  homeowners who did not qualify for a QM or who could not take  advantage of “streamlined refinance” programs—which allow qualified  borrowers to refinance with their existing lenders with less than full  documentation and with reduced fees—because of Dodd-Frank Act  requirements for full documentation of borrower income and assets.
Finally, a number of mortgage industry representatives expressed  concerns about the extent to which QMs would protect lenders from legal  claims by borrowers that the originating lenders had not complied with the  Dodd-Frank Act’s ability-to-repay standard. Although the Dodd-Frank Act  provides some measure of protection from liability for lenders of QMs,  industry representatives we spoke with told us that it was unclear whether  that protection was intended to be a legal “safe harbor” from liability— an  interpretation they favored—or a “rebuttable presumption of compliance”  with the ability-to-repay standard. A rebuttable presumption would allow  borrowers to overcome the presumption of compliance by providing  evidence that the lender did not, in fact, make a reasonable and good  faith determination of the borrower’s ability to repay the loan. Consumer  group representatives told us that they favored this interpretation.
In April 2011, the Federal Reserve Board issued proposed regulations  concerning criteria for complying with the ability-to-repay standard,  including by originating a QM, and that addressed some of the concerns  related to the DTI ratio, the cap on points and fees, and balloon loans.  The proposed rules include two alternative definitions of a QM. To help  decide on a final definition, the Federal Reserve Board is soliciting public  comments on these two alternatives and invites proposals for other  definitions. The first alternative in the proposed rule operates as a legal  safe harbor and includes all of the QM criteria described in the Dodd- Frank Act, with the exception of the DTI ratio. The rules note that due to  the discretion inherent in making DTI ratio calculations, a requirement to  consider the DTI ratio would not provide certainty that a loan is a QM. The  second alternative provides a rebuttable presumption of compliance and  includes the QM criteria identified under the first alternative, as well as  other underwriting criteria—including consideration of borrower DTI ratio  or residual income, employment status, simultaneous loans, current debt  obligations, and credit history—drawn from the Dodd-Frank Act’s ability- to-repay standard. The proposed rules also describe adjustments to and  exclusions from the 3 percent cap on points and fees (including for  smaller loans) and the restrictions on balloon payments for rural and  underserved areas.
section_title: Regulatory Decisions and Other Factors Will Influence the Effect of a Risk Retention Requirement on the Mortgage Market
paragraphs: The risk retention requirement is intended to help align the interests of  key participants in the securitization market—securitizers, lenders, and  investors—and encourage sound loan underwriting. The requirement  mandates that securitizers of RMBS have an economic stake in the  securities they issue and therefore an incentive to ensure that lenders  originate well-underwritten mortgages that protect investors from losses.  Many industry stakeholders and consumer groups noted that the  implications of such a requirement would depend on a variety of  regulatory decisions and potential changes in the mortgage market.  These include decisions on the characteristics of QRMs that would be  exempt from the risk retention requirement, the forms of risk retention that  would be allowed, the percentage that securitizers would be required to  hold, and risk-sharing arrangements between securitizers and lenders.  These factors could affect the availability and cost of mortgage credit and  the future viability of the private-label RMBS market. Some market  participants and the rulemaking agencies noted that risk retention may  complement other securitization and mortgage reforms, such as those  that promote greater transparency and enforcement of loan underwriting  standards. Interactions between a risk retention requirement and future  changes to the federal government’s role in housing finance could also  affect the cost of mortgage credit and the private-label RMBS market.
subsections: section_title: Regulatory Decisions on Mortgage Characteristics Will Affect the Scope and Implications of the Risk Retention Requirement
paragraphs: Mortgage market participants and consumer groups that we interviewed  indicated that the effect of the risk retention requirement would depend in  large part on certain regulatory decisions. Rulemaking agencies are  accepting public comments on proposed risk retention regulations  through August 1, 2011. Restrictive criteria would limit QRMs to  mortgages with high credit quality, while less restrictive criteria would  expand QRMs to include mortgages with a wider range of credit quality.  Regulators’ decisions about the criteria will determine the proportion of  securitized mortgages that are exempt from a risk retention requirement  and could affect the availability and cost of mortgage credit for non-QRM  borrowers. The Dodd-Frank Act requires the rulemaking agencies to  establish the definition by considering mortgage underwriting and product  features that historical loan performance data indicate result in a lower  risk of default. The rulemaking agencies are considering a range of  features, including LTV and DTI ratios. Lower LTV ratios (indicative of  larger borrower down payments) and lower DTI ratios (indicative of  smaller borrower debt burdens) would represent more restrictive criteria.
To illustrate the potential impact of more and less restrictive QRM criteria  on the mortgage market, we used the CoreLogic data to calculate the  proportion of mortgages meeting certain LTV thresholds and DTI ratio  thresholds. We compared the percentage of mortgages (prime, near- prime, and subprime combined) originated in 2006 and 2010 with LTV  ratios of 80 percent or less (more restrictive threshold) to the percentage  of mortgages with LTV ratios of 90 percent or less (less restrictive  threshold) (see fig. 6). We made similar comparisons for mortgages  (prime and near-prime only) with reported DTI ratios of 36 percent or less  (more restrictive) or 41 percent or less (less restrictive). Our analysis  showed that about 82 percent of the mortgages originated in 2010 had  LTV ratios of 80 percent or less and that about 91 percent had LTV ratios  of 90 percent or less. The corresponding percentages of mortgages made  in 2006, just prior to the housing crisis, with restrictive and less restrictive  LTV ratios were about 78 percent and about 89 percent respectively.
Further, about 56 percent of the prime and near-prime mortgages  originated in 2010 with reported DTI ratios met the more restrictive DTI  threshold of 36 percent or less (see fig. 7). About 70 percent of the  prime and near-prime mortgages met the less restrictive DTI threshold of  41 percent or less. The corresponding percentages for mortgages  originated in 2006 were about 44 percent and about 62 percent  respectively. An FHFA analysis of mortgages originated in 2009 that were  purchased by the enterprises illustrates the impact of simultaneously  applying multiple criteria in the proposed QRM rules (including DTI and  LTV thresholds, a requirement that mortgage payments pay down  principal, and a requirement for full documentation). FHFA estimated  that only about 31 percent of these mortgages would have met the  proposed QRM criteria they examined. FHFA estimated that this  percentage was even lower for mortgages originated in previous years.
FHFA’s findings suggest that relatively restrictive QRM criteria could  ultimately subject a large proportion of mortgages that are not insured or  guaranteed by the government to a risk retention requirement if the  mortgages are securitized. Some mortgage industry and consumer  representatives we spoke with expressed concern that this approach  would subject some mortgages with relatively low default risks to risk  retention and make mortgage credit less affordable for many borrowers,  because the increased securitization costs would be passed on to  borrowers in the form of higher mortgage interest rates and fees. Several  also indicated that a risk retention requirement that applied to a broad  segment of the market could make securitization a less attractive method  for financing mortgages. Because lenders may rely on securitization (as  opposed to bank deposits, for example) to provide funds for mortgage  lending, actions that make securitization more costly could hamper  recovery of the private-label RMBS market, according to some market  participants. Additionally, a range of industry stakeholders, including  lenders and consumer groups, told us that many creditworthy  borrowers—particularly low- and moderate-income households—are not  able to make a down payment of 20 percent and would therefore not  qualify for QRMs under the proposed rules.
However, federal regulators and other industry stakeholders favored  relatively restrictive QRM criteria and indicated that interest rates for non- QRMs would likely be only modestly higher than those for QRMs. For  example, the Chairman of the FDIC has stated that it is appropriate for  the QRM definition to be narrowly drawn because QRMs are intended to  be the exception and not the rule. She said she anticipates that QRMs will  account for a small part of the mortgage market and that mortgages  securitized with risk retention or held in lender’s portfolios will provide  more flexible options for borrowers who cannot meet the QRM criteria.  Further, rulemaking agencies indicated that more restrictive QRM criteria  could help ensure that a sufficient volume of non-QRMs subject to risk  retention would be available for an active, liquid securitization market for  such mortgages. Federal regulators have also stressed that historical  loan performance data show that the mortgage characteristics in the  proposed QRM definition significantly influence the risk of mortgage  default. For example, FHFA analyzed mortgages originated from 1997  through 2009 and purchased by the enterprises. They estimated that of  the mortgages that would have met all of the other proposed QRM  criteria, those with LTV ratios of 80 percent or less had 90-day  delinquency rates that were 2.0 to 3.9 times lower than those with LTV  ratios greater than 80 percent and less than 90 percent. Finally, FDIC  officials have stated that risk retention should not result in substantially  higher interest rates for non-QRM borrowers—less than half a percentage  point, according to their estimates—and comes with the benefit of safer  and sounder lending practices. They stressed that a 5 percent risk  retention requirement would increase costs to borrowers only to the  extent that it exceeded what investors would demand in the absence of  the requirement.
Finally, the Dodd-Frank Act exempts government-insured or -guaranteed  mortgages from the risk retention requirement but does not apply this  exemption to mortgages backed by the enterprises. However,  rulemaking agencies have proposed that the full guaranty provided by the  enterprises would satisfy the requirement while these institutions are in  conservatorship. Some market participants told us that in the short term,  this provision would limit the impact of a risk retention requirement on the  availability and cost of mortgage credit because most mortgages,  including many that would be non-QRMs, are currently securitized by the  enterprises. However, others have argued that the proposed rules would  help preserve the enterprises’ dominant market position by not subjecting  them to the costs associated with retaining 5 percent of the securities  they issue. In contrast, FHFA has indicated that requiring the enterprises  to hold 5 percent of their securities would have little impact on the  enterprises’ costs (because they already bear 100 percent of the credit  risk) and would be inconsistent with federal efforts to reduce the  mortgage assets held for investments by each enterprise.
section_title: Different Forms of Risk Retention Could Have Different Financial Implications
paragraphs: Several industry stakeholders we spoke with stated that different forms of  risk retention could have different implications for securitizers’ incentives  and costs that in turn could affect mortgage borrowers differently. The  proposed risk retention rules provide securitizers with a number of options  for meeting the 5 percent risk retention requirement, in recognition of the  different securitization structures and practices that exist for different  classes of assets. Federal Reserve Board officials said that this flexibility  was designed to reduce the proposed rules’ potential to negatively affect  the availability and costs of credit. However, it is possible that investors in  RMBS will demand particular forms of risk retention or amounts greater  than 5 percent. Stakeholders we spoke with primarily discussed two  options that illustrate the differences in the potential financial impacts of a  risk retention requirement on securitizers: retention of a tranche or  multiple tranches of a securitization that are the first to absorb losses  (“horizontal” risk retention)—and retention of a pro rata portion of each  tranche of a security (“vertical” risk retention).
A number of securitization market participants and regulatory officials  indicated that retaining a horizontal slice of a securitization would  potentially provide greater incentives for quality loan underwriting and  would carry substantially higher capital costs than vertical risk retention.  Certain regulated securitizing institutions, including banks and bank  holding companies, are subject to risk-based regulatory capital  requirements, meaning they must hold a minimum level of capital (“capital  charges”) to cover their risk exposures, including assets held on their  balance sheets. Horizontal risk retention would require securitizers to  retain an economic interest in the part of the security that absorbs losses  first and carries a higher risk weight under regulatory capital  requirements. One credit rating agency with which we spoke saw this  approach as an advantage because the securitizers’ exposure to first  losses would create incentives to ensure that the mortgages backing the  security were well underwritten. However, because the high risk weighting  would require securitizers to hold a substantial amount of capital against  the horizontal slice, these capital costs would be expected to be passed  on to borrowers in the form of higher interest rates. Figure 8 illustrates the  amount of capital a securitizer may have to hold—applying risk-based  capital charges to each portion of a security—for a 5 percent horizontal  slice of a hypothetical $750 million RMBS, compared with the  corresponding amount of capital for a 5 percent vertical slice. In this  example, the securitizer would have to hold $37.5 million in regulatory  capital for horizontal risk retention (5 percent of $750 million—or $37.5  million—times the 100 percent capital charge for a first-loss equity  tranche). With vertical risk retention, the securitizer would hold $2.6  million (the sum of the capital charges for 5 percent of each tranche of the  security). Because of anticipated changes in capital requirements and  calculations for securitization exposures, capital charges for future RMBS  may differ from this illustrative example.
Additionally, market participants indicated that interactions between  horizontal risk retention and recent changes to accounting standards for  securitizations could increase the cost of securitizing mortgages.  Securitization typically involves the transfer of assets to an SPE that  removes assets from the securitizers’ balance sheets and ensures that  investors still receive payments in the event of the bankruptcy or failure of  the securitizers. In 2009, the Financial Accounting Standards Board  issued financial accounting statement (FAS) 166, which addresses  whether securitizations and other transfers of financial assets are treated as sales or financings, and FAS 167, which requires securitizers or  lenders with a controlling financial interest in an SPE to “consolidate” the  securitized assets on their balance sheets. Although the need for  accounting consolidation would depend on the specific characteristics of  each securitization transaction, added on-balance sheet exposure from  any consolidated assets would generally result in higher regulatory capital  requirements for securitizers than if the assets were off-balance sheet. A  number of securitization market stakeholders indicated that securitization  could be economically unattractive in cases in which accounting  consolidation was triggered.
Vertical risk retention potentially exposes the securitizer to less credit risk  than horizontal risk retention because it involves retaining a portion of  every tranche of a security—some of which have a relatively low risk of  loss—rather than just the tranche in which credit losses are concentrated.  Vertical risk retention is also considered less likely to result in accounting  consolidation because it potentially represents less of a financial interest  in an SPE. While the securitizer could therefore have less financial  incentive to securitize higher-quality mortgages, some market participants  indicated that vertical risk retention would help to align the securitizer’s  interest with those of investors in each tranche. Investor representatives,  in particular, noted that when the securitizer held only the bottom-most  (first-loss) tranche and was also the mortgage servicer, it could have an  incentive to service the mortgages in ways that favored just its tranche  rather than all tranche holders. For example, because lower tranches  absorb initial losses, they generally benefit from actions that delay the  realization of losses from mortgage defaults, which may include extending  repayment periods and postponing foreclosure. In contrast, senior  tranches generally benefit from actions that pay down mortgage principal  as quickly as possible, which may include expeditiously foreclosing on a  delinquent borrower and selling the foreclosed property. Investor  representatives indicated that having securitizers hold a vertical slice of a  security would help to ensure that mortgages were serviced equitably for  all tranche holders.
section_title: The Implications of a Risk Retention Requirement Will Depend on Other Key Regulatory Decisions
subsections: section_title: Implications of a Nonuniform Requirement
paragraphs: The Dodd-Frank Act specifies a risk retention requirement for non-QRMs  of at least 5 percent but authorizes the rulemaking agencies to create a  different requirement—for example, greater than 0 and less than 5  percent—for non-QRMs that meet underwriting standards the agencies  prescribe. In March 2011, the rulemaking agencies proposed a uniform 5  percent level of risk retention for securitized non-QRMs. In the proposed  rule, the agencies indicated that they considered 5 percent to be a  minimum level of risk retention and suggested that levels below 5 percent  might not provide sufficient incentive for sound mortgage underwriting in  all circumstances.
A range of mortgage and securitization industry groups told us that a  nonuniform requirement would have both advantages and disadvantages,  some of which have implications for the cost and availability of mortgage  credit and risks to the mortgage market. On the one hand, stakeholders  noted that a nonuniform requirement could, in principle, be more  economically efficient than a uniform requirement because it could allow  the risk retention amount to be scaled to the risk level of the mortgages  being securitized. Further, some noted that a 5 percent requirement could  be excessive for non-QRMs with relatively low default risk, unnecessarily  raising the cost of those mortgages and tying up capital that could be  used to securitize additional mortgages. As previously discussed, some  mortgage industry and consumer group representatives indicated that if  the final QRM criteria were highly restrictive, non-QRMs could include  some lower-risk mortgages. On the other hand, industry stakeholders  also stated that a nonuniform requirement could potentially be difficult to  develop and enforce. To develop such a requirement, rulemaking  agencies would have to divide non-QRMs into different categories based  on risk level and develop an appropriate risk retention percentage for  each category. Several industry analysts indicated that it would be  challenging to calibrate a risk retention requirement that finely.  Additionally, assessing compliance with a requirement that had multiple  risk categories and retention levels could be more difficult than assessing  compliance with a uniform requirement.
Drawing general conclusions about whether a uniform or a nonuniform  risk retention requirement would be preferable is difficult, for two reasons.  First, historical and marketwide information about the amount, form, and  impact of risk retention in the secondary mortgage market is limited.  Industry stakeholders told us that risk retention practices for private-label  RMBS varied in terms of the slice (if any) of the security that securitizers  retained and how long and for what purpose they retained it. More  specifically, they described a range of risk retention practices in the years  leading up to the financial crisis, including retaining 1 to 3 percent  horizontal slices of near-prime and subprime RMBS and nothing of prime  jumbo RMBS. They also indicated that when risk retention did occur,  some securitizers held the retained piece as part of an investment  strategy, while others sold it soon after issuance of the security. Analysis  by FDIC of a limited sample of prime and near-prime RMBS deals from  2001 through 2007 suggests that risk retention levels in the private-label  market varied considerably, ranging from less than 1 percent to over 8  percent for the deals they examined. Mortgage and securitization industry  participants also indicated that a lack of systematic marketwide data on  these practices had prevented analysis of how different practices affected  the incentives of market participants and the quality of mortgage  underwriting. Without this information, it is difficult to determine whether a  particular level of retained risk would be optimal for all non-QRM  mortgages or whether varying the level depending on the credit quality of  the mortgages would better achieve the goals of risk retention. Given this  uncertainty, the requirement may need to be adjusted once regulators  have assessed how the private-label RMBS market has reacted to it. For  example, if a uniform 5 percent requirement was perceived as too high for  some non-QRMs and limited the availability of mortgage credit for certain  borrowers, regulators might want to consider a lower risk retention  requirement for those mortgages. Alternatively, if the regulation  established a requirement that was lower than that dictated by investors  in the market, some increase might be warranted.
Second, rulemaking agencies have not made final decisions about the  QRM criteria or other aspects of the risk retention requirement, and these  decisions could influence whether a uniform standard would be more  appropriate. For example, a nonuniform requirement could be more  appropriate if the final QRM definition were restrictive (i.e., limited to  mortgages of very high credit quality), because non-QRMs would  potentially include mortgages with a wide range of credit risks.
Conversely, a uniform requirement could be more appropriate if the QRM  definition were less restrictive, because non-QRMs would potentially  encompass a narrower range of credit risks.
The Dodd-Frank Act places the responsibility for retaining risk on  securitizers but authorizes rulemaking agencies to require that lenders  share the risk retention obligations. The proposed rules do not require  lenders to retain risk but would permit a securitizer to allocate a portion of  its risk retention requirement to any lender that contributed at least 20  percent of the underlying assets in the pool. Additionally, the proportion of  risk retained by each lender could not exceed the percentage of the  securitized assets it originated, and the lender would have to hold its  allocated share in the same manner (e.g., vertical or horizontal) as the  securitizer.
The impact of the risk retention requirement on lenders will depend, in  part, on how the risk retention requirement is shared. If lenders are  required to share risk (either directly by regulation or indirectly though an  allocation from a securitizer), they would have to hold capital against this  risk exposure. Several mortgage industry representatives indicated that  smaller lenders, such as independent mortgage companies and small  community banks, could lack sufficient capital resources to share risk  retention obligations or hold non-QRMs that were not securitized on their  balance sheets. A few of the mortgage and securitization market  participants we spoke with said that, in contrast, large lenders had the  financial capacity to share risk retention obligations with securitizers or  hold non-QRMs on their balance sheets, giving these lenders an  advantage over smaller lenders that could ultimately reduce competition  in mortgage lending. While acknowledging some of these concerns, the  rulemaking agencies have estimated that the proposed requirement  would not have a significant impact on a substantial number of small  banking institutions, at least under current market conditions. They cited  data indicating that small lenders generally did not securitize mortgages  themselves, did not contribute 20 percent or more of the mortgages to  private-label securitizations, and primarily securitized mortgages through  the enterprises. A number of market participants noted that even if  lenders were not required to share risk in the manner prescribed by the  Dodd-Frank Act, securitizers could be expected to take steps to transfer  the cost of risk exposure by paying lenders less for the mortgages they  sold or requiring additional collateral to ensure the underwriting quality of  the mortgages. However, others noted that lenders would pass this cost  on to borrowers and that the cost would likely be marginal.
section_title: A Risk Retention Requirement Will Complement or Interact With Other Efforts to Reform Housing Finance
paragraphs: Risk retention is a part of legislative and regulatory efforts to reduce  undisclosed risks to the overall credit market by addressing the  weaknesses in the securitization process that contributed to the housing  crisis. The risk retention requirement complements other parts of the  Dodd-Frank Act that are intended to improve the securitization markets,  as well as existing mechanisms to encourage lenders to sell high-quality  loans. For example, the Dodd-Frank Act requires issuers of asset-backed  securities, including RMBS, to conduct reviews of the assets underlying  the securities and disclose the nature of the reviews.
The Dodd-Frank Act also requires credit rating agencies and securitizers  of residential mortgages (and other assets) to publicly disclose  information about representations and warranties—the assertions lenders  make about a loan’s underwriting standards and contractual obligations to  refund the value of the loan if the assertions later prove to be untrue.  Representations and warranties existed prior to the mortgage crisis, and  in some cases lenders failed to repurchase loans that violated these  terms because they could not afford to and subsequently went out of  business. Several market participants and researchers told us that these  mechanisms would be more effective if they were better monitored and  enforced, possibly by using third parties to verify loan information or  requiring that originators demonstrate the financial ability to honor  warranties and repurchase requests. The Dodd-Frank Act requires credit  rating agencies to disclose the representations, warranties, and  enforcements available to investors when the agency issues a credit  rating. Securitizers are required to disclose fulfilled and unfulfilled  repurchase requests so that investors can identify lenders’ records  related to such requests. In addition, a trade association representing the  securitization industry has an ongoing effort to make representations and  warranties for RMBS more standardized and transparent.
The risk retention requirement will also interact with efforts to reduce the  federal government’s role in mortgage finance, which could have  implications for mortgage borrowers and the private-label RMBS market.  Mortgages backed by the enterprises and FHA currently dominate the  mortgage market, and the private-label RMBS market is largely dormant.  However, the administration and Congress are considering options that  would diminish the federal role and help transition to a more privatized  market by winding down the enterprises and reducing the size of FHA.  Several mortgage market participants indicated that in the long run, if the  enterprises were eliminated or their activities scaled back, more non- QRMs would be subject to risk retention, potentially raising the cost of  these mortgages for borrowers. Potential changes in FHA’s role also  could influence how a risk retention requirement would affect mortgage  borrowers. In addition to non-QRMs, FHA-insured mortgages, which are  exempt from risk retention, are a potential alternative for borrowers who  may not qualify for mortgages that do not meet the QRM criteria. FHA  borrowers often make down payments that are low (generally less than 5  percent) compared with the 20 percent that has been proposed as the  QRM down payment requirement for home purchase mortgages.  However, in recent years, FHA has tightened its underwriting standards  and raised insurance premiums as it tries to reduce its market share and  strengthen its financial condition. For example, beginning in 2010 FHA  began requiring borrowers with lower credit scores to make larger down  payments. Additionally, FHA is considering further steps, such as  increasing down payment requirements more broadly. As a result, FHA  may not provide mortgage alternatives for as many non-QRM borrowers  as it would have in the past.
section_title: While Housing Counseling and High- Cost Lending Provisions May Enhance Borrower Protections, Specific Impacts Are Unknown
paragraphs: HUD has initiated plans to establish an Office of Housing Counseling, as  required under the Dodd-Frank Act. HUD already performs a number of  activities that are consistent with the new office’s authorized functions and  plans to move these functions into the new office. Industry and consumer  groups we spoke with identified opportunities for the counseling office to  enhance HUD’s role in housing counseling, but the financial resources for  the office are uncertain. Findings from the limited research available on  housing counseling are mixed, with some studies suggesting that some  types of counseling can improve mortgage outcomes and others finding  no effect. The Dodd-Frank Act supports another consumer protection by  changing the definition of high-cost loans under HOEPA. This change  could prevent some high-cost lending, although whether the definition  would affect mortgages currently available to consumers is unclear.
subsections: section_title: HUD Is Creating a New Office for Its Housing Counseling Activities, but Funding Is Uncertain
paragraphs: To enhance consumer protections for homebuyers and tenants, the  Dodd-Frank Act requires HUD to establish an Office of Housing  Counseling. This office will perform a number of functions related to  homeownership and rental housing counseling, including establishing  housing counseling requirements, standards, and performance measures;  certifying individual housing counselors; conducting housing counseling  research; and performing public outreach. The office is also mandated to  continue HUD’s role in providing financial assistance to HUD-approved  counseling agencies in order to encourage successful counseling  programs and ensure that counseling is available in underserved areas.
Currently, HUD’s housing counseling program operates out of the  Program Support Division within the Office of Single-Family Housing.  HUD supports housing counseling through the division in two ways. First,  it approves and monitors housing counseling agencies that meet HUD  criteria and makes information about these agencies available to  consumers on HUD’s Web site. According to HUD officials, as of May  2011, about 2,700 counseling agencies were HUD-approved. Second,  HUD annually awards competitive grants to approved agencies to help  them carry out their counseling efforts. HUD’s housing counseling  program provides funding for the full spectrum of housing counseling,  including prepurchase counseling, foreclosure mitigation counseling,  rental housing counseling, reverse mortgage counseling for seniors, and  homeless assistance counseling. HUD-approved agencies report to HUD  on the type the number and type of service interactions (e.g., counseling  sessions) they have with clients. Self-reported data on homeownership  counseling conducted by these agencies indicate that service interactions  for foreclosure mitigation counseling rose from about 171,000 in 2006 to  more than 1.4 million in 2010, while service interactions for prepurchase  counseling declined from about 372,000 to about 245,000 over the same  period.
Besides these two main functions, the Program Support Division and  other HUD staff perform other counseling-related activities, some of which  are similar to the functions the Dodd-Frank Act requires of the new  counseling office. For example, HUD has developed standards and  protocols for reverse mortgage counseling, certifies individual reverse  mortgage counselors, is conducting research on the impact of  homeownership counseling, and recently launched a public awareness  campaign on loan modification scams.
A working group within HUD is in the process of developing a plan for the  new counseling office. According to HUD officials, the primary change  needed to create the new office is the reassignment of the approximately  190 staff who spend most of their time on housing counseling activities  but also have other responsibilities. HUD expects the new office to  consist of approximately 160 full-time staff members. In order to move  forward with the establishment of the office and the appointment of a  Director of Housing Counseling, HUD must submit a plan to Congress for  approval.
HUD officials told us that the new counseling office would have  advantages over their current organizational structure. They indicated that  having dedicated resources, staff, and leadership would raise the profile  of the housing counseling function and help the agency build a more  robust capacity in this area. One official noted that getting sufficient  information technology resources for housing counseling had been  difficult and said that a separate counseling office might be able to  compete more effectively with other parts of the agency for these  resources. HUD officials also indicated that the new office would be  organized to help the agency better anticipate and respond to changing  counseling needs and improve interaction with counseling industry  stakeholders. For example, the officials said that the new office would be  organized around functional areas such as policy, training, and oversight,  making it easier for industry stakeholders to direct their questions or  concerns to the appropriate HUD staff. Additionally, HUD officials told us  that the office would work with the CFPB’s Office of Financial Literacy in  the future to coordinate the housing counseling activities of both  organizations.
Mortgage industry participants, consumer groups, and housing  researchers we spoke with were supportive of the new housing  counseling office and believed that it offered opportunities to enhance  HUD’s role in the housing counseling industry. For example, some of the  consumer groups stated that the office could help standardize counseling  practices and publicize best practices, further elevating and  professionalizing the counseling industry. In addition, representatives  from several of the consumer groups and researchers we met with stated  that the office could help enhance coordination among counseling  agencies by providing opportunities for improved training, networking, and  communication. Furthermore, they said that the office could potentially  support improved data collection for research on the impact of housing  counseling.
Budget constraints could delay the establishment of the new counseling  office and reduce the scale of HUD’s housing counseling activities.  Although the Dodd-Frank Act authorized $45 million per year for fiscal  years 2009 through 2012 for the operations of the new office, HUD had  not received any appropriations for this purpose as of May 2011. In  addition, appropriations for fiscal year 2011 eliminated HUD’s housing  counseling assistance funds, which are primarily grant funds for approved  counseling agencies. According to a HUD official, as a result of this  funding reduction, HUD is revising its proposal for the new counseling  office and is unable to estimate when it will submit the proposal to  Congress. HUD officials said they would begin the awards process for  about $10 million in unspent fiscal year 2010 counseling assistance funds  in May 2011 but expressed concern that some counseling agencies  would run out of funds soon and might not receive additional HUD funding  until well into fiscal year 2012. Housing counseling groups we spoke with  said that the cuts in HUD funding, which they use to leverage private  funds, ultimately could result in fewer counseling services for prospective  and existing homeowners unless private funds make up the difference.
section_title: Findings from the Limited Research Available on Homeownership Counseling Are Mixed
paragraphs: Empirical research on outcomes for homeownership counseling is limited,  with some studies suggesting that foreclosure mitigation counseling can  be effective in improving mortgage outcomes (e.g., remaining current on  mortgage payments versus defaulting or losing the home to  foreclosure). However, findings on prepurchase counseling are less  clear. Considered to be one element of financial literacy, these types of  homeownership counseling are based on the idea that providing  information and advice can help consumers make better decisions about  home purchases and maintenance and work more successfully with  lenders and mortgage servicers to obtain loan modifications or  refinancing.
Conducting research on homeownership counseling outcomes is  challenging for a variety of reasons, and limitations in the methodologies  used in existing studies make it hard to generalize the results. According  to housing counseling researchers we spoke with, the primary barrier in  the study of housing counseling is a lack of data. Long-term data on  counseling outcomes are limited because of the difficulty of tracking  counseling recipients after the counseling ends. In addition, many  counseling agencies are hesitant to request sensitive personal  information from clients. One researcher we spoke with told us that the  ability to track loan performance over time is critical to an effective  assessment of housing counseling programs. For this reason, some  counseling researchers have begun working with lenders and mortgage  servicers to access information on the payment status (e.g., current or  delinquent) of counseling recipients and the long-term outcomes of their  mortgages.
Another limitation of the current research is the lack of experimental  research design, which is considered the best approach for evaluating  differences in an intervention such as counseling and comparing it to no  intervention. Studies that employ experimental designs are often difficult  and costly to conduct. We did not identify any published studies that  evaluated homeownership counseling using an experimental design.  Further, researchers have not been able to overcome another inherent  limitation: the fact that consumers choose counseling themselves,  generally voluntarily, and those who choose counseling may differ in  unknown ways from those who do not. Both of these issues make  researchers hesitant to draw firm conclusions from the published  literature. Finally, differences among counseling programs—in terms of  curriculum, intervention method (e.g., one-on-one, telephone, classroom),  level of intervention (e.g., intensity or amount of time spent counseling),  and outcome measures—also make it difficult to draw general  conclusions about the impact of housing counseling. A selected  bibliography of research we reviewed on outcomes for prepurchase and  foreclosure mitigation counseling appears at the end of this report.
The limited body of evidence available is not conclusive on the impact of  all types of housing counseling. However, recent research on foreclosure  mitigation counseling suggests that it can help struggling mortgage  borrowers avoid foreclosure and prevent them from lapsing back into  default, especially if counseling occurs early in the foreclosure process. A  2010 evaluation of the National Foreclosure Mitigation Counseling  (NFMC) Program found that homeowners who received counseling under  the program were more likely to receive loan modifications and remain  current after counseling, compared with a group of non-NFMC borrowers  with similar observable characteristics. Specifically, the authors  estimated that borrowers who received NFMC counseling were 1.7 times  more likely to “cure” their foreclosure (i.e., be removed from the  foreclosure process by their mortgage servicer) than borrowers who did  not receive NFMC counseling. The authors also estimated that loan  modifications received by NFMC clients in the first 2 years of the program  resulted in monthly mortgage payments of $267 less on average than  what they would have paid without the help of the program. Additionally,  the study found that for borrowers counseled in 2008, the relative odds of  bringing their mortgages current were an estimated 53 percent higher if  they received counseling prior to receiving a loan modification than if they  did not receive NFMC counseling. Other studies of foreclosure prevention  counseling have also found that the timing of the counseling was critical  and that the earlier in the foreclosure process borrowers received  counseling, the more likely they were to have a positive outcome.
The findings on prepurchase counseling are less clear. For example, a  2001 study analyzed data on the performance of about 40,000 mortgages  made under a Freddie Mac program for low- to moderate-income  homebuyers, a large majority of whom received prepurchase  counseling. The authors compared the loan performance of program  participants who received different types of prepurchase counseling to the  loan performance of participants who did not. The study found that  borrowers who underwent individual and classroom counseling were 34  and 26 percent less likely, respectively, to become 90 days delinquent on  their mortgages than similar borrowers who did not undergo counseling.  However, subsequent studies have found either no effect on loan  performance or effects that were potentially attributable to other factors.  For example, a 2008 study of about 2,700 mortgage borrowers found that  prepurchase counseling had no effect on a borrower’s propensity to  default. A 2009 study examined a legislated pilot program in 10 Illinois  ZIP codes that mandated prepurchase counseling for mortgage  applicants whose credit scores were relatively low or who chose higher- risk mortgage products such as interest-only loans. Although the authors  found that mortgage default rates for the counseled low-credit score  borrowers were lower than those for a comparison group, the authors  attributed this result primarily to lenders tightening their screening of  borrowers in response to stricter regulatory oversight.
Additional empirical research on the impact of housing counseling is  under way at HUD and Fannie Mae. HUD’s Office of Policy Development  and Research issued a broad overview of the housing counseling industry  in 2008 and is currently conducting two studies on mortgage outcomes  related to foreclosure mitigation and prepurchase counseling programs.
The foreclosure mitigation study will follow 880 individuals and evaluate  mortgage outcomes 12 months after counseling ends. HUD officials said  that they expected the study to be published in 2012. The prepurchase  counseling study will use an experimental design and will track 1,500 to  2,000 individuals who receive different types of counseling (one-on-one,  group, Internet, or telephone) or no counseling. HUD officials said they  expected data collection for this study to begin in 2012. In addition,  Fannie Mae is conducting both prepurchase and postpurchase  counseling studies. According to Fannie Mae officials, the prepurchase  study will track over a 2-year period the loan performance of borrowers  who received counseling prior to purchasing a home. The postpurchase  study will evaluate the impact of telephone counseling on existing  homeowners who receive loan modifications through the Department of  the Treasury’s Home Affordable Modification Program.
As previously noted, HOEPA regulates and restricts the terms and  characteristics of mortgages that exceed specified APR and fee triggers.  For these “high-cost loans,” HOEPA requires enhanced preclosing  disclosures to borrowers, restricts certain loan contract terms, and  imposes penalties on lenders for noncompliance. In addition, HOEPA  imposes liabilities on purchasers or securitizers (“assignees”) of high-cost  loans for violations of law committed by the mortgage originators.  Because of the associated penalties and liabilities, lenders have generally  avoided making high-cost loans, and the secondary market for these  loans has been negligible. Data collected under the Home Mortgage  Disclosure Act (HMDA) indicate that in 2004 (the first year for which  marketwide data on high-cost loans are available), lenders reported  making 23,000 high-cost loans, which accounted for only 0.003 percent of  all the originations of home-secured refinance or home improvement  loans reported for that year. The number of reported high-cost loans  rose to about 36,000 in 2005 but fell every year thereafter. In 2009, the  most current year for which HMDA data are available, these loans  numbered only 6,500, which, in aggregate, made up less than 0.1 percent  of all the originations of home-secured refinancing and home  improvement loans reported for that year.
The Dodd-Frank Act expanded the definition of high-cost mortgages in  several ways. Prior to the Dodd-Frank Act, the definition of such loans  applied only to refinance loans and closed-end home equity loans (e.g.,  home improvement loans) secured by the borrower’s principal dwelling.
However, the Dodd-Frank Act expanded the definition of high-cost  mortgages by    Applying the high-cost triggers to a wider range of loan types,  including mortgages for purchasing a home, open-end loans, and any  other home-secured loan other than a reverse mortgage.    Lowering the APR trigger from 8 percentage points to 6.5 percentage  points over the average prime offer rate for first liens, and from 10  percentage points to 8.5 percentage points over the average prime  offer rate for subordinate liens.    Lowering the points and fees trigger from 8 percent to 5 percent of the  total loan amount and banning the financing of points and fees.    Adding a third trigger for prepayment penalties extending beyond 36  months from mortgage closing or exceeding 2 percent of the  outstanding balance of the mortgage.
In addition, the Dodd-Frank Act prohibits prepayment penalties for high- cost loans and requires that borrowers undergo counseling with a HUD- approved counselor before taking out a high-cost loan.
Data limitations make assessing the potential impact of the new definition  difficult, but the views of industry stakeholders and prior research provide  some useful perspectives. Additional information would be needed to  assess the extent to which the new definition would affect mortgages  currently available to consumers. As we have previously reported,  marketwide data on APRs, points, and fees are not readily available to  researchers. As a result, determining the proportion of mortgages made  in recent years that might have met the new high-cost triggers is difficult.  Industry stakeholders we spoke with indicated that the new definition of  high-cost loans would further expand disincentives for originating  mortgages with potentially predatory terms and conditions. Additionally,  they said that lenders would likely continue to avoid offering high-cost  loans because the strict penalties and liabilities attached to these loans  make them risky to originate and difficult to securitize. In prior work, we  examined research on the impact of state and local anti-predatory lending  laws—some of which are similar to HOEPA—on subprime mortgage  markets. This research provides some evidence that anti-predatory  lending laws can have the intended effect of reducing loans with  problematic features without substantially affecting credit availability.
Implementing mortgage-related provisions in the Dodd-Frank Act will  involve tradeoffs between providing consumer protection and maintaining  credit availability. Additionally, potential interactions with plans to scale  back government involvement in the mortgage market and expand the  role of private capital add complexity to implementation efforts. Limited  data and research show that certain provisions could provide benefits to  homebuyers and the larger mortgage market. However, the ultimate  impact of the Dodd-Frank Act’s mortgage-related requirements is not yet  known and will depend, in part, on regulatory actions, decisions to fund  housing counseling, and mortgage market adjustments that have not yet  occurred.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Federal Reserve Board, FDIC,  FHFA, OCC, OTS, NCUA, HUD, and SEC for their review and comment.  We received written comments from the Chairman of the NCUA that are  reprinted in appendix III. We also received technical comments from the  Federal Reserve Board, FDIC, FHFA, HUD, OCC, and SEC, which we  incorporated as appropriate. OTS did not provide comments on the draft  report.
In its written comments, NCUA indicated, as we do, that the impact of the  Dodd-Frank Act would depend on regulatory decisions that had yet to be  made. NCUA also said that while our report found that most mortgages  would have met individual QM criteria, applying the criteria  simultaneously would narrow the population of loans that would qualify as  QMs. While this is a reasonable conclusion, as stated in our report, we  were unable to determine the proportion of mortgages meeting all of the  QM criteria we examined because of limitations in the data (e.g., missing  or unreliable values) available for our analysis. We added language to the  report to clarify the impact of these limitations on our analysis.
With respect to rulemaking efforts, NCUA expressed concern about the  lack of a mechanism for non-QMs to receive QM status after some period  of performance given the potential difficulty some borrowers, including  those of modest means, may have in meeting the QM criteria. NCUA  suggested that creating such a mechanism could help achieve the goal of  protecting borrowers from unsustainable mortgage products while  maintaining broad access to mortgage credit.
We are sending copies of this report to the appropriate congressional  committees, the Chairman of FDIC, the Chairman of the Federal Reserve  Board, the Acting Director of FHFA, the Secretary of Housing and Urban  Development, the Chairman of NCUA, the Acting Comptroller of the  Currency, the Chairman of SEC, the Acting Director of OTS, the Bureau of  Consumer Financial Protection, and other interested parties. In addition,  the report is available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) assess the proportions of mortgages originated  from 2001 through 2010 that would have met selected qualified mortgage  (QM) criteria specified in the Dodd-Frank Wall Street Reform and  Consumer Protection (Dodd-Frank Act) and describes the views of  mortgage industry stakeholders on the potential effects of the QM criteria  on the mortgage market, (2) discuss relevant information and the views of  mortgage industry stakeholder on the potential impact of a risk retention  requirement on the mortgage market and discuss the advantages and  disadvantages of a uniform risk retention requirement, and (3) describe  what research and the views of mortgage industry stakeholders suggest  about the potential impact of provisions in the Dodd-Frank Act regarding  homeownership counseling and changes to the Home Ownership Equity  Protection Act (HOEPA).
subsections: section_title: Assessment of Qualified Mortgage Criteria
paragraphs: To assess the proportions of recent loans that would likely have met  selected QM criteria, we reviewed relevant statutory provisions and  proposed rules to implement those provisions. We applied the QM criteria  to mortgages in a proprietary loan-level servicing database from  CoreLogic, Inc. This database contains information from major mortgage  servicers and covers a broad cross-section of the mortgage market. For  example, CoreLogic estimates that for the period we examined, the  database captures 60 to 65 percent of the mortgages purchased by  Fannie Mae and Freddie Mac (the enterprises), approximately 50 percent  of subprime mortgages, and about 90 percent of mortgages with  government insurance or guarantees. Nevertheless, because of  limitations in the coverage and completeness of the data, our analysis  may not be fully representative of the mortgage market as whole. For our  analysis, we used a random 10 percent sample of the database that  amounted to about 6.6 million mortgages for the 2001 through 2010  period. Our sample included purchase and refinance mortgages and  mortgages to owner-occupants and investors, and excluded second-lien  mortgages. We assessed the reliability of the CoreLogic data by  interviewing CoreLogic representatives about the methods the firm used  to collect and ensure the integrity of the information. We also reviewed  supporting documentation about the database. In addition, we conducted  reasonableness checks on the data to identify any missing, erroneous, or  outlying figures. We concluded that the data elements we used in this  objective and the following objective were sufficiently reliable for our  purposes.
We focused on mortgages originated from 2001 through 2010 to provide  insight into the potential effects of the Dodd-Frank Act’s provisions under  different market conditions and lending environments. We applied each  QM criterion separately, calculating the proportion of mortgages in each  annual loan origination cohort that likely would have met the criterion. We  were unable to determine the proportion of mortgages that would have  met all of the criteria we examined due to the number of records in the  database that had missing or unreliable values for one or more of the  criteria. For example, the database contained no information on DTI ratio  for subprime mortgages and did not have reliable information on  documentation of borrower income and assets. As a result, we  determined that applying the criteria simultaneously would not have  produced reliable results. Because the CoreLogic data group mortgages  into two broad categories—one containing prime, near-prime, and  government-insured loans and another containing subprime loans—we  examined these categories separately when possible.
The data did not contain information needed to examine all of the QM  criteria specified in the Dodd-Frank Act. As a result, our analysis focused  on five of the nine QM criteria specified in the Dodd-Frank Act for which  sufficient data, including data from the CoreLogic database, were  available. These criteria were  regular periodic payments do not result in an increase in the principal  balance or result in a deferral of the repayment of principal;  the loan term does not exceed 30 years;    except for balloon loans under specified circumstances, the mortgage  does not include balloon payments;    borrower income and financial resources are verified and  the loan complies with guidelines or regulations established by the  Board of Governors of the Federal Reserve System (Federal Reserve  Board) relating to ratios of total monthly debt to monthly income (e.g.,  debt service-to income (DTI) ratio).
In general, for each year from 2001 through 2010, we identified the  proportion of mortgage originations that would have met the individual  criteria. We were not able to calculate relevant proportions for certain  years and mortgage market segments due to data limitations. For  example, because few subprime mortgages were originated after 2007,  we only present data for 2001 through 2007 for that market segment.
Regarding the criterion for repayment of principal, our analysis focused  on mortgages with negative amortization features. Our analysis does not  account for interest-only mortgages because most loan records in the  CoreLogic data had missing values for the interest-only indicator. The  Dodd-Frank Act does not contain a specific threshold for DTI ratio and  leaves that decision to rulemakers. For illustrative purposes, we used the  41 percent ratio that is used as a guideline for underwriting mortgages  insured by the Federal Housing Administration (FHA). The CoreLogic  database did not contain information on DTI for any subprime mortgages,  nor for many prime, near-prime, and government-insured mortgages.  Because DTI information was missing for the large majority of mortgages  originated in 2001 and 2002, we only present DTI data for 2003 through  2010. For the latter period, about 53 percent of the mortgages in the  CoreLogic data sample did not have DTI information. We concluded that  those mortgages were likely not systematically different from mortgages  with DTI information based on a comparison of the distribution of  borrower credit scores associated with both groups of mortgages, which  showed little difference. Additionally, our analysis was based on reported  DTI ratios, which may understate debt obligations or overstate income in  some cases. As a result, the proportions of mortgages we show as  meeting the criterion are likely somewhat higher than they would have  been if all of the DTI ratios had been calculated in a uniform and accurate  manner. To examine the subprime market segment, we drew upon  information from a prior analysis we conducted of mortgage  characteristics using a separate CoreLogic database that captures a large  majority of subprime mortgages. We also examined a fifth QM criterion in  the Dodd-Frank Act—documentation of borrower income and assets— using information from that prior analysis, data from the Federal Housing  Finance Agency (FHFA) on mortgages purchased by the enterprises, and  information on FHA policies concerning borrower documentation.  (Although the CoreLogic database contained information on  documentation level, we determined that it was not sufficiently reliable for  our purposes.) For certain QM criteria (repayment of principal, loan term,  balloon payment, and DTI ratio), we performed a similar analysis by  geographic groupings based on racial, ethnic, income, and house price  patterns. Appendix II contains the results and methodology for this  analysis. Data limitations prevented us from assessing three of the  remaining four QM criteria contained in the Dodd-Frank Act— specifically,  those relating to interest rates used for underwriting adjustable-rate  mortgages, consideration of applicable taxes and insurance in  underwriting, and limitations on points and fees. We were not able to  examine the fourth criterion concerning reverse mortgages because the  Federal Reserve Board did not establish QM standards for them. In  proposed regulations, the Federal Reserve Board indicated that QM  requirements were not relevant to reverse mortgages because the Dodd- Frank Act does not subject reverse mortgages to the ability-to-repay  requirement.
To obtain additional information and views on the potential effects of the  QM criteria specified in the Dodd-Frank Act, we reviewed relevant  research literature and conducted interviews with nearly 40 individual  mortgage and securitization industry stakeholders. These stakeholders  included representatives from financial services companies (major  mortgage lenders and mortgage securitizers); groups representing  mortgage lenders, brokers, securitizers, and investors; groups  representing consumer interests; and academics. Additionally, we  interviewed officials from the Federal Reserve Board, Office of the  Comptroller of the Currency (OCC), Federal Deposit Insurance  Corporation (FDIC), Office of Thrift Supervision (OTS), National Credit  Union Administration (NCUA), Department of Housing and Urban  Development (HUD), and FHFA. We also reviewed testimonies and  published papers from these stakeholders that documented their views.
section_title: Assessment of Risk Retention Requirement
paragraphs: To assess the potential impact of the Dodd-Frank Act’s risk retention  requirement on the mortgage market, we reviewed relevant statutory  provisions and proposed rules to implement those provisions. We also  reviewed available information on mortgage securitization practices prior  to the financial crisis and factors that may affect the impact of the risk  retention requirement, including information from two other studies on risk  retention required by the Dodd-Frank Act from the Federal Reserve Board  and the Financial Stability Oversight Council. To assess the implications  of interactions between the risk retention requirement and other mortgage  market and securitization reforms, we reviewed other provisions in the  Dodd-Frank Act intended to improve the securitization process and  information on proposed changes to the federal government’s role in  housing finance.
Because the risk retention regulations were being developed during the  course of our audit work, we interviewed the key private sector mortgage  and securitization industry stakeholders mentioned previously as well as  representatives from two credit rating agencies to obtain views on the  potential impact of a risk retention requirement. We obtained their views  on how regulatory decisions regarding the form and coverage of the  requirement may affect the availability and cost of mortgage credit for  borrowers and the viability of a private-label residential mortgage-backed  securities (RMBS) market. Additionally, we interviewed officials from the  previously cited federal agencies and the Securities and Exchange  Commission (SEC) and reviewed their research, testimonies, and other  public statements on risk retention. We also reviewed comment letters,  testimonies, and published papers from these stakeholders that  documented their views.
To illustrate the potential impact of regulatory decisions regarding the  coverage of the risk retention requirement, we used the CoreLogic data to  examine selected criteria (loan-to-value (LTV) ratio and DTI ratio) being  considered by regulators as part of the qualified residential mortgage  (QRM) rulemaking. We included only conventional mortgages in the  analysis because mortgages that are insured or guaranteed by the  federal government are exempt from the risk retention requirement. We  analyzed the data to describe the proportions of mortgages that may have  met more restrictive and less restrictive versions of these criteria in 2006  (a period of relatively lax underwriting standards) and 2010 (a period of  relatively stringent underwriting standards). For the LTV analysis, we  used 80 percent as the more restrictive criterion (based on proposed  QRM rules for purchase mortgages) and 90 percent as the less restrictive  criterion. We used the CoreLogic variable for LTV ratio, which does not  take any subordinate liens into account. We did not use the variable for  combined LTV ratio, which does take subordinate liens into account,  because it was not reliable. As a result, the percentages we report are  likely somewhat higher than they would have been if we had been able to  use combined LTV ratios. For the DTI analysis, we used 36 percent as  the more restrictive criterion (based on proposed QRM rules) and 41  percent as the less restrictive criterion. We limited the analysis of DTI  ratios to prime and near-prime mortgages because the CoreLogic  database did not contain DTI ratios for subprime mortgages. As in the DTI  analysis in the previous section of the report, we used reported DTI ratios  in the CoreLogic database, which may understate debt obligations or  overstate income in some cases. As a result, the proportions of  mortgages we show as meeting the different DTI criteria are likely  somewhat higher than they would have been if all of the DTI ratios had  been calculated in a uniform and accurate manner. To provide additional  perspective on the potential coverage of the risk retention requirement,  we reviewed an analysis by FHFA, which examined the proportion of  mortgages purchased by the enterprises that would have met the  proposed QRM criteria, including those for LTV and DTI ratios.
To assess the financial impact of the risk retention requirement on  lenders and securitizers, we reviewed relevant accounting standards and  federal risk-based regulatory capital requirements that may interact with  risk retention. In particular, we reviewed financial accounting statement  (FAS) 166 (which addresses whether securitizations and other transfers  of financial assets are treated as sales or financings), FAS 167 (which  requires securitizers or lenders with a controlling financial interest in an  SPE to “consolidate” the securitized assets on their balance sheets), and  regulatory capital standards based on the Basel accords. We also  reviewed provisions in the Dodd-Frank Act and the proposed risk  retention rules that applied to lenders specifically and interviewed industry  stakeholders about the potential impact of a risk retention requirement on  different types and sizes of mortgage lenders. To illustrate the potential  capital impacts of different forms of risk retention, we developed a  hypothetical securitization based on research and industry information  about the size and structure of RMBS. We used regulatory capital risk  weights used by federal banking regulators to calculate the capital  charges for horizontal and vertical risk retention to estimate the total  amount of regulatory capital that a securitizer would have to hold for each  option. Because this example is meant to be illustrative, we did not apply  all regulatory capital or accounting standards that could influence the  capital impacts of the risk retention requirement, including the FAS 166  and 167 accounting statements.
To assess the advantages and disadvantages of a uniform 5 percent risk  retention requirement, we reviewed available information on past risk  retention practices. We also interviewed industry stakeholders about  these practices and information that should be considered in comparing  the merits of a uniform and a nonuniform requirement. Additionally, we  interviewed federal rulemakers and mortgage industry stakeholders  (including representatives from financial services companies and  mortgage and securities analysts) about the development,  implementation, and enforcement of both a uniform and a nonuniform  requirement.
section_title: Assessment of Housing Counseling and HOEPA Provisions
paragraphs: To describe the potential effects of consumer protection provisions in the  Dodd-Frank Act for housing counseling and high-cost HOEPA loans, we  reviewed relevant statutory provisions and regulations. We also reviewed  information from HUD regarding its current housing counseling assistance  program, including data on the counseling services provided by HUD- approved counseling agencies from 2006 through 2010. We identified  and reviewed empirical research on the impact of foreclosure mitigation  and prepurchase housing counseling, HUD reports, and relevant  academic and industry literature about housing counseling research and  policy. We also interviewed officials from HUD’s Office of Single-Family  Housing and Office of Policy Development and Research, and officials  from organizations currently conducting housing counseling research,  including Fannie Mae, the Federal Reserve Bank of Philadelphia, and the  Urban Institute. With respect to HOPEA, we compared the Dodd-Frank  Act’s new requirements for high-cost loans to previous statutory  requirements and examined available research on the number of loans  originated from 2004 through 2009 that were covered by HOEPA. We  interviewed a wide range of mortgage and counseling industry  stakeholders, including consumer groups, lenders, academic researchers,  and housing counseling intermediaries (organizations that channel HUD  counseling funds to local, affiliated counseling agencies) about the Dodd- Frank Act’s counseling and HOEPA provisions.
We conducted this performance audit from August 2010 to July 2011 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.
section_title: Appendix II: Proportions of Mortgages Meeting Selected Qualified Mortgage Criteria in Geographic Groupings Based on Demographic and Housing Market Characteristics
paragraphs: In contemplating the potential impact of QM criteria, one consideration is  the extent to which mortgages made to different borrower groups and  within different housing markets would have met selected QM criteria.  Using the CoreLogic database described in more detail in appendix I, we  examined the percentages of mortgages originated within various  geographic groupings that would have met selected QM criteria from  2001 through 2010 and compared them with the corresponding  percentages for all borrowers. We applied each criterion separately. We  looked at ZIP codes grouped by race, ethnicity, and income level to  examine the proportions of mortgages in each grouping that likely would  have met the four QM criteria for which the CoreLogic database had  relevant information (mortgage does not have a negative amortization  feature, mortgage term does not exceed 30 years, mortgage does not  include balloon payments, and mortgage complies with regulations  relating to DTI ratio). Using 2000 Census data, the most recent data  available as of June 2011, we grouped ZIP codes associated with the  mortgages in the CoreLogic database into three categories: black or  African-American households made up 75 percent or more of the  population, Hispanic or Latino households made up 75 percent or more of  the population, and median incomes were less than 80 percent of the  median income of the associated metropolitan statistical area (low  income). We also grouped states into two categories: one containing  states that experienced rapid house price appreciation followed by rapid  depreciation (severe housing bubble states) during the 2000s, and all  other states. The severe housing bubble states were Arizona, California,  Florida, and Nevada. Except where noted below, for this appendix we  used a dataset that combined the mortgages in the prime, near-prime,  and government-insured category of the CoreLogic database with the  mortgages in the subprime category.
Our analysis of the QM criterion prohibiting negative amortization features  found that in ZIP codes with high proportions of black or African-American  households, the percentages of mortgage originations that met the  criterion were generally similar to the percentages for all borrowers, with  the exception of 2004 through 2006 when the proportions were  approximately 2 to 4 percentage points higher (see table 2). In ZIP codes  with high proportions of Hispanic or Latino households, the percentages  of mortgage originations that met the criterion were similar to those for all  borrowers, although they were somewhat lower (about 3 percentage  points) from 2005 through 2007. In low-income ZIP codes, the proportions  of mortgage originations that met the criterion in all years were similar to  the proportions for all borrowers. In severe housing bubble states, the  proportions of mortgage originations from 2003 through 2007 that met the  criterion were about 2 to 7 percentage points lower than they were for all  borrowers. In all other states, the proportions of mortgage originations  that met the criterion were similar in all years to the proportions for all  borrowers, except from 2005 through 2007, when they were from 2 to 3  percentage points higher.
Our analysis of the QM criterion for amortization terms of 30 years or less  found that in ZIP codes with high proportions of black or African-American  households, the percentages of mortgage originations that met the  criterion were generally similar to those for all borrowers, exception of  2006 through 2008, when the proportions were approximately 2 to 4  percentage points lower (see table 3). In ZIP codes with high proportions  of Hispanic or Latino households, the percentages of mortgage  originations that met the criterion were similar to those for all borrowers,  although they were somewhat lower (about 2 to 3 percentage points) from  2006 through 2008. In low-income ZIP codes, the proportions of  mortgage originations that met the criterion were similar to those for all  borrowers, with the exception of 2006 and 2007, when the proportion was  nearly 2 percentage points lower. In severe housing bubble states, the  proportions of mortgage originations that met the criterion were similar to  the proportions for all borrowers, with the exception of 2006 and 2007,  when it was 3 to 4 percentage points lower. In all other states, the  proportions of mortgage originations that met the criterion in all years  were similar to the proportions for all borrowers.
Our analysis of the QM criterion restricting balloon payments found that in  ZIP codes with high proportions of black or African-American households  or Hispanic or Latino households, the percentages of mortgage  originations that met the criterion were generally similar to those for all  borrowers, with the exception of 2006, when the proportions were nearly  2 percentage points lower for both ZIP code groupings (see table 4). In  low-income ZIP codes, severe housing bubble states, and all other states,  the proportions of mortgage originations that met the criterion in all years  were similar to the proportions for all borrowers.
Due to limitations in the CoreLogic database, our examination of the  criterion for DTI ratio was restricted to mortgages in the prime, near- prime, and government-insured category for 2003 through 2010. Using a  hypothetical standard of 41 percent or less for DTI ratio, we found that in  ZIP codes with high proportions of black or African-American households,  the percentages of mortgage originations that met the criterion were  generally lower than those for all borrowers, ranging from 1 percentage  point less in 2004 and 2006 to 10 percentage points less in 2009 (see  table 5). In ZIP codes with high proportions of Hispanic or Latino  households, the proportions of mortgage originations that met the  criterion were also generally lower than the proportions for all borrowers,  ranging from about 3 percentage points less in 2006 and 2007 to 15  percentage points less in 2010. In low-income ZIP codes, the proportions  of mortgage originations that met the criterion were generally lower than  the proportions for all borrowers, ranging from 2 percentage points less in  2004 to nearly 5 percentage points less in 2010. In severe housing  bubble states, the proportions of mortgage originations that met the  criterion were generally lower than the proportions for all borrowers,  ranging from less than 1 percentage point lower in 2004 and 2005 to 5  percentage points lower in 2010. In all other states, the proportions of  mortgage originations that met the criterion in all years were similar to  those for all borrowers, except in 2010, when the proportion was 2  percentage points higher.
section_title: Appendix III: Comments from the National Credit Union Association
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Westley (Assistant  Director), Meghana Acharya, Serena Agoro-Menyang, William Bates,  Stephen Brown, Emily Chalmers, Matthew McDonald, John McGrail,  Timothy Mooney, Lisa Moore, Alise Nacson, and Jim Vitarello made key  contributions to this report.
section_title: Bibliography
subsections: section_title: Selected Bibliography of Research on Homeownership Counseling
paragraphs: AARP Public Policy Institute. Homeownership Education and Counseling.  PPI Issues Brief. Washington, D.C.: 2003. Available at  http://www.aarp.org/money/budgeting-saving/info-2003/homeownership_ education_counseling.html  Agarwal, Sumit, Gene Amromin, Itzhak Ben-David, Souphala  Chomsisengphet, and Douglas D. Evanoff. Do Financial Counseling  Mandates Improve Mortgage Choice and Performance? Evidence from a  Legislative Experiment. Federal Reserve Board of Chicago Working  Paper No. 2009-7, October 2009.  ———. “Learning to Cope: Voluntary Financial Education and Loan  Performance During a Housing Crisis.” American Economic Review, vol.  100, no. 2 (2010).
Carswell, Andrew. “Does Housing Counseling Change Consumer  Financial Behaviors? Evidence from Philadelphia.” Journal of Family and  Economic Issues, vol. 30, no. 4 (2009).
Collins, J. Michael. “Exploring the Design of Financial Counseling for  Mortgage Borrowers in Default.” Journal of Family and Economic Issues,  vol. 28, no. 2 (2007).
Collins, J. Michael., and Collin O’Rourke. Homeownership Education and  Counseling: Do We Know What Works? Policylab Consulting for  Research Institute for Housing America (Special Report) and Mortgage  Bankers Association. Washington, D.C.: April 2011.
Ding, Lei, Roberto G. Quercia, and Janneke Ratcliffe. “Post-Purchase  Counseling and Default Resolutions Among Low- and Moderate-Income  Borrowers.” Journal of Real Estate Research, vol. 30, no. 3 (2008).
Hartarska, Valentina, and Claudio Gonzalez-Vega. “Credit Counseling  and Mortgage Termination by Low-Income Households.” Journal of Real  Estate Finance and Economics, vol. 30, no. 3 (2005).  ———. “Evidence on the Effect of Credit Counseling on Mortgage Loan  Default by Low-Income Households.” Journal of Housing Economics, vol.  15, no. 1 (2006).
Herbert, Christopher E., Jennifer Turnham, and Christopher N. Rodger.  The State of the Housing Counseling Industry. Abt Associates for the U.S.  Department of Housing and Urban Development. Washington, D.C.:  September 2008.
Hirad, Abdighani, and Peter M. Zorn. A Little Knowledge is a Good Thing:  Empirical Evidence of the Effectiveness of Pre-Purchase Homeownership  Counseling. Joint Center for Housing Studies of Harvard University, Low  Income Homeownership Working Paper Series 01.4. Cambridge, Mass.:  August 2001.
Hornburg, Steven P. Strengthening the Case for Homeownership  Counseling: Moving Beyond “A Little Bit of Knowledge.” Joint Center for  Housing Studies of Harvard University Report W04-12. Cambridge Mass.:  August 2004.
Jones, Katie. “Housing Counseling: Background and Federal Role.”  Congressional Research Service Report to Congress R41351.  Washington, D.C.: July 2010.
Mallach, Alan. Homeownership Education and Counseling: Issues in  Research and Definition. Community Affairs Discussion Paper 00-01,  Federal Reserve Bank of Philadelphia, 2001.
Mayer, Neil S., Peter A. Tatian, Kenneth, Temkin, and Charles A.  Calhoun. National Foreclosure Mitigation Counseling Program Evaluation:  Preliminary Analysis of Program Efforts, September 2010 Update.  Prepared for NeighborWorks America. Washington, D.C.: Urban Institute,  2010.
McCarthy, G. and Roberto Quercia. Bridging the Gap between Supply  and Demand: The Evolution of the Homeownership Education and  Counseling Industry. Research Institute for Housing America Report No.  00-01. Washington, D.C.: May 2000.
Quercia, Roberto, and Spencer M. Cowan. “The Impacts of Community- based Foreclosure Prevention Programs.” Housing Studies, vol. 23, no. 3  (2008).
Quercia, Roberto, and Jonathan S. Spader. “Does Homeownership  Counseling Affect the Prepayment and Default Behavior of Affordable  Mortgage Borrowers?” Journal of Policy Analysis and Management, vol.  27, no. 2 (2008).
Quercia, Roberto and Susan M. Wachter. “Homeownership Counseling  Performance: How Can It Be Measured?” Housing Policy Debate, vol. 7,  no. 1 (1996).