Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations
Published: 2015-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Amid concerns that risky mortgage products and poor underwriting standards contributed to the recent housing crisis, Congress included mortgage reform provisions (QM and QRM) in the Dodd-Frank Wall Street Reform and Consumer Protection Act. CFPB's regulations establishing standards for QM loans became effective in January 2014. More recently, six agencies jointly issued the final QRM rule that will become effective in December 2015. GAO was asked to review possible effects of these regulations. This report (1) discusses views on the expected effects of the QM and QRM regulations, and (2) examines the extent of agency planning for reviewing the regulations' effects, among its objectives. GAO's methodologies included identifying and reviewing academic, industry, and federal agency analyses on the expected effects of the regulations. GAO also reviewed federal guidance on retrospective reviews and interviewed agency officials to assess agency efforts to examine the effects of the QM and QRM regulations.
section_title: What GAO Found
paragraphs: Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.
The QM regulations, which address lenders' responsibilities to determine a borrower's ability to repay a loan, set forth standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.
Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements. The QRM regulations align the QRM definition with QM; thus, securities collateralized solely by QM loans are not subject to risk-retention requirements.
The analyses GAO reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases (for borrowers, lenders, and investors) would mostly stem from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market, largely because the majority of loans originated were expected to be QM loans. However, questions remain about the size and viability of the secondary market for non-QRM-backed securities.
Agencies have begun planning their reviews of the QM and QRM regulations (due January and commencing December 2019, respectively); however, these efforts have not included elements important for conducting effective retrospective reviews. Federal guidance encourages agencies to preplan their retrospective reviews and carefully consider how best to promote empirical testing of the effects of rules. To varying degrees, the relevant agencies have identified outcomes to examine, potential data sources, and analytical methods. But existing data lack important information relevant to the regulations (such as loan performance or borrower debt to income) and planned data enhancements may not be available before agencies start the reviews. The Bureau of Consumer Financial Protection (CFPB) has proposed expanding Home Mortgage Disclosure Act data reporting requirements, but the earliest that the enhanced data will be available is 2017. Similarly, the Department of Housing and Urban Development (HUD) identified how it intends to examine its QM regulations and some potential data sources but has yet to determine how it would measure the effects of these regulations, including metrics, baselines, and analytical methods. Agencies also have not specified how they will conduct their reviews, including determining which data and analytical methods to use. Finalizing plans to retrospectively review the mortgage regulations will position the agencies to better measure the effects of the QM and QRM regulations and identify any unintended consequences. Additionally, the agencies could better understand data limitations and methodological challenges and have sufficient time to develop methods to deal with these limitations and challenges.
section_title: What GAO Recommends
paragraphs: CFPB, HUD, and the six agencies responsible for the QRM regulations should complete plans to review the QM and QRM regulations, including identifying specific metrics, baselines, and analytical methods. CFPB, HUD, and one QRM agency—the Federal Deposit Insurance Corporation—concurred or agreed with the recommendations. The other QRM agencies did not explicitly agree with the recommendations, but outlined ongoing efforts to plan their reviews.

section_title: Letter
paragraphs: The foreclosure crisis was fueled in part by the proliferation in the early to  mid-2000s of risky mortgage products and loosened underwriting  standards that have come to be associated with unusually high loan  losses. One financial analytics firm estimated that the realized losses  associated with defaulted residential mortgages totaled about $920 billion  from 2006 through 2012.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. During this period, securitization practices included bundling high- risk mortgages into residential mortgage-backed securities. As demand  for the securities grew, lenders and securitizers (also known as sponsors)
These products included mortgages with  increasingly were compensated based on loan volume rather than loan  quality, contributing to a decline in underwriting standards.
Congress passed the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act) in 2010 to help prevent a recurrence of  such problems in the mortgage market, among other things. Section  1411 of the Dodd-Frank Act generally requires lenders to make a  reasonable and good faith determination of a consumer’s ability to repay  a residential mortgage loan. According to section 1412 of the Dodd-Frank  Act, a lender is presumed to have satisfied the ability-to-repay  requirement and receives certain protection from liability when it  originates a “qualified mortgage” (QM). To implement the ability-to-repay  and QM provisions of the Dodd-Frank Act, the Bureau of Consumer  Financial Protection (known as CFPB) issued a final rule amending  Regulation Z, which implements the Truth in Lending Act (TILA).  Regulation Z already had a prohibition against lenders making “higher- priced” mortgage loans without regard to a consumer’s ability to repay the  loan. The final rule—Ability-to-Repay and Qualified Mortgage Standards  (ATR/QM) under the Truth in Lending Act (Regulation Z), effective in  January 10, 2014—applies expanded ability-to-repay considerations to  most residential mortgage loans and defines QM. The Dodd-Frank Act  also required the Department of Housing and Urban Development (HUD),  Department of Veterans Affairs (VA), Department of Agriculture (USDA),  and USDA Rural Housing Service to issue rules to implement the QM  provisions. (For the purposes of this report, we define “QM regulations” as  the segments of the final rules that implement section 1412 of the Dodd- Frank Act.) The QM regulations are intended to help protect consumers  from risky types of mortgages while ensuring access to credit.
The Dodd-Frank Act also requires securitizers to retain a financial  exposure of no less than 5 percent of the credit risk of any asset that  they, through the issuance of asset-backed securities, transfer to a third  party (risk retention). The Dodd-Frank Act creates an exception to this  requirement if a mortgage-backed security is collateralized exclusively by  residential mortgages that 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 referred to as “qualified residential  mortgages” (QRM). The risk-retention provision is designed to protect  investors from losses and improve financial stability. To implement the  risk-retention requirements of the Dodd Frank Act, six agencies jointly  issued a final rule—Credit Risk Retention—in December 2014 that,  among other things, defines QRM as equivalent to QM. The rule will be  effective for residential mortgage-backed securities in December 2015  and other asset-backed securities in December 2016. (For the purposes  of this report, we use “QRM regulations” to refer to the provisions of the  risk-retention rule that define QRM.)
A key challenge in implementing the QM provisions of the Dodd-Frank  Act was balancing the goal of protecting borrowers with the goal of  maintaining broad access to mortgage credit. Similarly, a key challenge in  implementing the QRM provisions of the Dodd-Frank Act was balancing  the goal of protecting investors with preserving access to affordable  mortgage credit. Members of Congress and others have expressed  concerns that the regulations implementing these provisions could affect  the cost, availability, origination, and securitization of residential  mortgages.
This report (1) describes selected trends in the origination and  securitization of residential mortgages in 2000–2014; (2) discusses views  on the expected effects of the QM and QRM regulations on the residential  mortgage market; and (3) examines the extent to which federal agencies  have plans in place to monitor and assess the effects of the QM and  QRM regulations on the residential mortgage market.
To describe residential mortgage trends in 2000–2014, we selected key  mortgage market indicators, including mortgage originations, interest  rates, mortgage foreclosure and default rates, and mortgage-backed  security issuances. We used mortgage data from federal and mortgage  industry sources, including Inside Mortgage Finance, CoreLogic LLC,  Freddie Mac, Mortgage Bankers Association, and the National Bureau of  Economic Research. We reviewed information on the data sources,  interviewed knowledgeable officials about data accuracy, and reviewed  data quality information and corroborating information. We determined  these data to be sufficiently reliable for our purposes.
To examine the expected effects of the QM and QRM regulations on the  residential mortgage market, we identified and reviewed economic  analyses that examined the potential effects. We identified estimates of  the regulations’ effects and believe the analyses are generally reliable for  our purposes. To perform a consistent review of these studies, we used a  structured instrument that identified important characteristics for high- quality analyses. We reviewed Federal Register releases and comment  letters associated with the promulgation of the regulations. We  interviewed agency officials, stakeholders, and others on their views of  the potential effects of the regulations. Specifically, we interviewed  officials from CFPB, HUD, Department of the Treasury’s Office of  Financial Research, Federal Deposit Insurance Corporation (FDIC),  Federal Housing Finance Agency (FHFA), Board of Governors of the  Federal Reserve System (Federal Reserve), Financial Stability Oversight  Council, Office of the Comptroller of the Currency (OCC), and Securities  and Exchange Commission (SEC). We interviewed a range of groups  representing mortgage market participants, including mortgage lenders,  securitizers, investors, and consumers and representatives of credit rating  agencies. We chose these groups and individuals because they had a  range of views.
To examine the extent to which federal agencies have plans to monitor  and assess the effects of the QM and QRM regulations, we identified and  reviewed requirements and guidance for monitoring and assessing  regulations. Specifically, we reviewed provisions of the Dodd-Frank Act  that require CFPB to assess its significant rules and report on its  assessment, Executive Orders related to retrospective reviews, and  associated Office of Management and Budget (OMB) memorandums. We  focused on the retrospective review activities of CFPB and the six  agencies responsible for the QRM regulations—FDIC, FHFA, Federal  Reserve, HUD, OCC, and SEC. We reviewed Federal Register releases  and other agency documents pertaining to retrospective reviews. We  interviewed agency officials from the seven agencies listed earlier about  their plans to retrospectively review the QM and QRM regulations. See  appendix I for a detailed description of our scope and methodology.
We conducted this performance audit from November 2013 to June 2015  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.
subsections: section_title: Background
subsections: section_title: Residential Mortgage Categories and Securitization
paragraphs: Two types of residential mortgage loans are common: fixed-rate  mortgages, which have interest rates that do not change over the entire  term of the loans, and adjustable-rate mortgages (ARM), which have  interest rates that change periodically based on changes in a specified  index.
Residential mortgages also fall into several loosely defined categories:
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 the loans  have one or more higher-risk characteristics such as limited  documentation of income or assets or higher loan-to-value ratios;
Subprime mortgages are generally made to borrowers with blemished  credit and feature higher interest rates and fees than prime loans; and
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. HUD’s Federal  Housing Administration (FHA), VA, and the Rural Housing Service  operate major federal programs that insure or guarantee mortgages.
The nonprime market segment (Alt-A and subprime) features a number of  nontraditional products and characteristics:
Hybrid ARM—interest rate is fixed during an initial period, then  “resets” to an adjustable rate for the remaining term of the loan.
Payment-option ARM—borrower has multiple payment options each  month, including negative amortization (minimum payments lower  than needed to cover any of the principal or all the accrued interest,  which may increase the outstanding loan balance over time).
Interest-only—borrower can pay just the interest on the loan for a  specified period, usually the first 3-10 years, thereby deferring  principal payments.
Low and no documentation loans—require little or no verification of a  borrower’s income or assets.
High loan-to-value ratios—borrower would make a small down  payment, causing the ratio of the loan amount to the home value to be  relatively high. The higher the ratio when a loan is originated, the less  equity borrowers will have in their homes.
Prepayment penalties—borrower incurs a fee if he or she pays off the  loan balance before it is due.
Balloon payment loans—mortgages that do not fully amortize over the  term of the loan, leaving a balance due at the end of the balloon  period.
Mortgages can fall into any one of several payment status categories:
Current—borrower has met scheduled payments.
Delinquent—borrower has missed one or more scheduled monthly  payments.
Default—borrower is 90 or more days delinquent.
Foreclosure—borrower has been delinquent for more than 90 days  and the lender has elected to initiate a legal process against the  borrower that has several possible outcomes. Generally, the borrower  loses the property because it is sold to repay the outstanding debt or  is repossessed by the lender.
Prepaid—borrower has paid the entire loan balance before it is due.
Prepayment often occurs as a result of the borrower selling the home  or refinancing.
After the loan has been made, originating lenders can retain their loans in  portfolio or sell them to investors on the secondary market, either as  whole loans to other financial institutions or (directly or indirectly through  other financial institutions) as loan pools that are held in trusts and  administered by a trustee. The loan pools become asset-backed  securities that are issued and sold to investors and are referred to as  mortgage-backed securities. This process, often referred to as  securitization (see fig. 1), plays an important role in providing capital for  mortgage lending by generating funds that can be used to originate more  loans. Investors assume the interest rate, prepayment, and credit risk  associated with the loans backing these securities, unless they are  covered by mortgage insurance or guarantees on the securities.
The secondary market for residential mortgages consists of three major  categories of securitizations—enterprise (Fannie Mae and Freddie Mac),  Ginnie Mae, and private label. Fannie Mae and Freddie Mac are  congressionally chartered, for-profit, shareholder-owned companies  known as government-sponsored enterprises and have been under  federal conservatorship since 2008. They generally purchase conforming  loans, which are mortgage loans that meet certain criteria for size,  features, and underwriting standards. In addition, the enterprises require  that loans they purchase with loan-to-value ratios in excess of 80 percent  have a credit enhancement mechanism, such as private mortgage  insurance. Loans above this limit are known as jumbo loans. After  purchasing mortgages, the enterprises create mortgage-backed securities  and guarantee investors in these securities that they will receive timely  payments of principal and interest. Ginnie Mae (a government  corporation) guarantees securities that are issued by approved private  institutions and backed by federally insured mortgages (FHA, VA, and  USDA). Private institutions are also involved in the creation of private- label securities backed by mortgages that do not conform to the  enterprises’ purchase requirements (because the mortgages are too large  or do not meet specified underwriting criteria). Private securitizing  institutions include investment banks, retail banks, mortgage companies,  and real estate investment trusts.
Other participants to a private securitization transaction include, but are  not limited to, credit rating agencies that assess the creditworthiness of  the securities and deal with underwriters hired by securitizers to market  and sell the securities to investors. Each type of securitization retains a  mortgage servicer to collect mortgage payments from borrowers and  disburse interest and principal payments to mortgage trustees, who pass  them to investors. Servicers also manage delinquent loans that may lead  to loss mitigation (such as a loan modification or a repayment plan) with  the borrower or foreclosure.
section_title: Ability-to-Repay and Qualified Mortgage Standards Rule
paragraphs: The ATR/QM regulations set forth minimum requirements lenders must  consider in relation to making the required good faith determination of a  consumer’s reasonable ability to repay. To satisfy the ability-to-repay  requirements, lenders generally must consider eight underwriting factors:  (1) current or reasonably expected income or assets; (2) current  employment status; (3) the monthly payment on the covered transaction  (the monthly payment must be calculated based on any introductory rate  or fully indexed rate for the loan, whichever is higher, and substantially  equal, fully amortizing monthly payments); (4) the monthly payment on  any simultaneous loan; (5) the monthly payment for mortgage-related  obligations; (6) current debt obligations, alimony, and child support; (7)  the monthly debt-to-income ratio or residual income; and (8) credit  history. To satisfy the QM requirements, the loan must meet certain  restrictions on product features and points and fees as well as meet  certain underwriting requirements. The loan must not have risky features  such as negative amortization, interest-only payments, or balloon  payments (except in certain circumstances). The term of the loan should  not exceed 30 years. Point and fees should be less than or equal to 3  percent of the loan amount (higher percentages are allowed for loans of  less than $100,000). Finally, the loan also must meet certain underwriting  requirements. The creditor must take into account the monthly mortgage  payment utilizing a fully amortizing schedule using the maximum rate that  may apply during the first 5 years after the first payment. The creditor  must consider and verify income or assets and current debt obligations,  alimony, and child support.
The rule also sets out three main categories of QMs that are presumed to  comply with the ability-to-repay requirements: general, temporary, and  small creditor.
Under the general category, all loans to borrowers with a monthly  debt-to-income ratio of 43 percent or less that meet the restrictions on  product features, points and fees, and underwriting requirements  described above are QMs.
Under the temporary category, loans that meet the restrictions on  product features, and points and fees described above, and are  eligible for purchase, insurance, or guarantee by Fannie Mae, Freddie  Mac, FHA, USDA and its Rural Housing Service, or VA are QMs, but  are not subject to a specific debt-to-income ratio.
Under the small-creditor category, loans must meet some restrictions  on QMs such as product features and points and fees. Creditors must  evaluate consumers’ debt-to-income ratio or residual income, but the  loans are not subject to a specific debt-to-income ratio. Generally,  these loans must be held in portfolio by a small creditor for at least 3  years. However, there is another category for small creditors in rural  and underserved areas in which mortgages with balloon payments  originated by such creditors can be QM loans.
If a lender originates a mortgage that meets the QM requirements and  has an annual percentage rate (APR) within certain limits, the lender is  presumed to have satisfied the ability-to-repay requirements and receives  certain protections from liability. That is, these QMs have a safe harbor (a  conclusive presumption that the lender has satisfied the ability-to-repay  requirements) that immunizes the lender from claims related to the  borrower’s ability to repay. Lenders still can receive some protection from liability if they originate higher-priced QMs (those with APRs above  certain limits). That is, lenders are still presumed to have satisfied the  ability-to-repay requirements, but borrowers can rebut the presumption.  Borrowers can try to prove that based on information available to the  lender at loan origination, the borrower would not have enough income  left for living expenses after paying the mortgage and other debts.
Lenders also may make non-QM loans if they choose. However, these  lenders will not benefit from the safe-harbor or rebuttable presumption  liability protections afforded QM loans.
section_title: Risk-Retention Rule and Qualified Residential Mortgages
paragraphs: The Dodd-Frank Act generally requires securitizers of asset-backed  securities to retain not less than 5 percent of the credit risk of the assets  collateralizing the security. The act includes exemptions, including one for  securities collateralized exclusively by residential mortgages that are  “qualified residential mortgages.” The Dodd-Frank Act specifies that the  QRM definition cannot be broader than the QM definition (that is, the  QRM criteria can be more but not less restrictive than the QM criteria).  The act also requires agencies to specify  criteria for QRMs, taking into consideration underwriting and product  features that historical loan performance data indicate result in a lower  risk of default; 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 securitization collateralized by non-QRMs that  meet underwriting standards the agencies develop in regulations.
In the final risk-retention rule, issued in December 2014, the QRM  definition was aligned with the QM definition.that meet the QM requirements outlined previously are considered to be  QRM loans. Thus, securities collateralized solely by QM loans (and  therefore QRM loans) are not subject to risk-retention requirements.  Congress intended the risk-retention regulations to help address  problems in the securitization markets by requiring securitizers to retain  an economic interest in the credit risk of certain assets they securitized.  As a result, securitizers would have an incentive to monitor and ensure  the quality of the assets underlying a securitization transaction, which  also would help align their interests with the interests of investors.
More specifically, loans  In relation to risk retention, sponsors of securitizations will be required to  retain at least 5 percent of the credit risk associated with a securitization  that contains any non-QRM loans, unless an exemption applies. Under  certain circumstances, sponsors may allocate the retention obligation to  an originator, which agrees to retain that risk, if the originator has  contributed at least 20 percent of the balance of a loan pool collateralizing  mortgage-backed securities. The final rule requires this risk to be held by  originators in the same way the risk was held by the securitizer.
section_title: Role of Consumer Financial Protection Bureau
paragraphs: The Dodd-Frank Act transferred consumer protection oversight and other  authorities over certain consumer financial protection laws from multiple  federal regulators to CFPB. CFPB’s responsibilities include ensuring that consumers are provided with timely and understandable  information to make responsible decisions about financial  transactions; ensuring that consumers are protected from unfair, deceptive, or  abusive acts and practices, and from discrimination; and ensuring that markets for consumer financial products and services  operate transparently and efficiently to facilitate access and  innovation.
The Dodd-Frank Act also gave CFPB supervisory authority over certain  nondepository institutions, including certain kinds of mortgage market  participants. Such institutions generally lacked federal oversight before  the financial crisis of 2007–2009.
Finally, the Dodd-Frank Act requires CFPB to conduct an assessment of  each significant rule it adopts, such as the ATR/QM rule, and publish a  report of the assessment no later than 5 years after the effective date of  the rule.2019. The factors the assessments are to address include the rule’s  effectiveness in meeting the purposes and objectives of Title X of the  Dodd-Frank Act.
section_title: Retrospective Reviews of Regulations
paragraphs: Generally, Executive Orders and related implementation guidance from  OMB require executive agencies and encourage independent regulatory  agencies to develop and implement retrospective review plans. In  addition, OMB encourages agencies to preplan efforts to retrospectively  review their regulations and give careful consideration about how best to  promote empirical testing of the effects of rules both in advance and  retrospectively. OMB states that agencies may find it useful to engage  in retrospective analyses of the costs and benefits (quantitative and  qualitative) of regulations and suggests that independent regulatory  agencies identify metrics to evaluate regulations and ensure they have  high-quality data and robust models to conduct effective outcome-based  reviews. These directives and guidance also encourage agencies to  solicit public comments and make the results of these reviews available to  the public. Finally, agencies are encouraged to coordinate when  conducting their retrospective reviews and consider the combined effects  of their regulations.
section_title: Mortgage Market Trends Generally Consistent with Tighter Underwriting Standards in Recent Years
paragraphs: During 2000-2014, originations for residential mortgage loans rose  dramatically, then plummeted, and showed some signs of recovery in  recent years. Available data indicate that low levels of riskier loan types  have been originated since 2007. Additionally, measures of credit risk  associated with mortgages, such as borrower credit scores and debt-to- income ratios, were consistent with an overall tightening of loan  underwriting standards since 2008. The composition of the securities  market for residential mortgages also changed during this period; in  particular, the market share for private-label securities significantly  diminished after 2007.
subsections: section_title: Mortgage Market Indicators Suggest Some Recovery Has Begun
paragraphs: As shown in figure 2, mortgage origination volume peaked in 2003,  sharply declined in 2008, and then remained above 2008 levels (with  mixed increases and declines) through 2013 but declined in 2014—due to  declines in refinancing. In dollar terms, origination volume declined from  $3.7 trillion in 2003 to $1.2 trillion in 2014. The lower volume potentially  indicates lower credit availability, decreased demand, or both. A range of  factors contributed to mortgage market activity from 2000 through 2014.
Refinances. During the years of rapidly increasing mortgage origination  (2000–2003), decreasing interest rates and increasing home prices  provided opportunities for borrowers to refinance to lower monthly  payments or take equity out of their homes for consumption and  investment. As shown in figure 2, the volume of refinances increased to  $2.8 trillion in 2003, and then decreased and remained at roughly $1.5  trillion from 2004 through 2007. Refinances as a percentage of mortgage  originations peaked at 76 percent in 2003 and remained at roughly 70  percent from 2009 to 2013. Refinances declined to 44 percent in 2014.  Similarly, the number of subprime cash-out refinances increased  significantly from 2000 through 2005 (from about 246,000 in 2000 to  about 1.2 million in 2005) and then declined to about 195,000 in 2007.
As part of monetary policy, the Federal Reserve, through the Federal Open Market  Committee, sets the federal funds rate at a level it believes will foster financial and  monetary conditions consistent with achieving its monetary policy objectives, and it  adjusts that target in line with evolving economic developments. availability of credit for the purchase of houses.” The large-scale  purchase program was an integral component of the Federal Reserve’s  efforts to ease financial conditions and provide policy accommodation in  the crisis. Starting in September 2007 and on several occasions  afterward, the Federal Reserve reduced the federal funds rate with the  last reduction occurring in December 2008. Decreasing or increasing the  federal funds rate—the rate at which depository institutions lend to other  depository institutions overnight—can influence the cost and supply of  credit, including mortgages. Mortgage rates are generally a product of  the supply of and demand for mortgages. Other factors, such as the  prevalence of mortgage defaults, unemployment rates, and home prices  also can determine the supply and demand for mortgages and thus also  influence costs.
Default and foreclosure. Default and foreclosure rates peaked in 2010  but trended downward through 2013. From 2000 through 2006, mortgage  performance was relatively stable. The rate of default was below 1  percent, and the foreclosure inventory rate—the percentage of total  mortgage loans in foreclosure—was below 2 percent (see fig. 2). These  rates then rose to historic levels, the default rate reaching nearly 5  percent and the foreclosure inventory rate reaching 4.6 percent in the first  quarter of 2010. Through 2013, the rates declined, suggesting some  recovery in the housing and mortgage market. But at the end of 2013, the  foreclosure inventory rate remained at 2.9 percent, according to data from  the Mortgage Bankers Association. As we reported earlier, more  aggressive lending practices—that is, an easing of underwriting standards  and wider use of certain loan features associated with poorer loan  performance—contributed to the increases in default and foreclosure  rates that began in the third quarter of 2006.house prices left borrowers more likely to have negative equity (owing  more on a mortgage loan than the property is worth), which also  contributed to the increases in defaults. Higher default rates may result in  higher total losses for lenders on their loans.
section_title: Low Levels of Riskier Loan Types Have Been Originated since 2007
paragraphs: Originations of riskier loan types declined to low levels after 2007. For  example, the share of nonprime mortgages (Alt-A and subprime)  decreased from about 40 percent in 2006 to less than 5 percent in 2008  (see fig. 3). As noted in our 2009 report, the nonprime market segment  featured a number of nontraditional products and characteristics.of the features of these products, such as low or no documentation of  borrower income and assets, are prohibited or limited under the final  ATR/QM rule.
Since the decline in originations of riskier loan types, the market share of  other loan types and products increased. For example, conforming and  government-insured or guaranteed loans constituted the majority of loan  originations from 2008 through 2014 (see fig. 3). More specifically, such  loans accounted for about 80 percent or more of the market during this  period. Furthermore, the share of jumbo loans hit a low in 2009 (5.5  percent), and then generally increased through 2014 (20.1 percent).  Although larger than the conforming loan limit established by the  enterprises, jumbo mortgages are generally considered prime mortgages  and not Alt-A or subprime.
Although the data on ARMs with risky features are limited, those data  suggest that the availability of these features declined between 2005 and  2007. For example, originations of subprime ARMs and Alt-A option  ARMs increased rapidly from 2000 through 2005, but fell markedly in  subsequent years. About 262,000 subprime ARMs were originated in  2000, but this number grew seven-fold to about 1.8 million originations in  2005 (the peak of the market for subprime ARMs). By 2007, the number of these loans declined to about 214,000. Likewise, originations of Alt-A  ARMs increased substantially, from about 10,000 loans in 2000 to more  than 893,000 in 2005, but declined to about 249,000 by 2007. These  nontraditional loans generally had fixed interest rates for short initial  periods and then would convert to indexed rates higher than traditional  ARMs—which could result in payment shock (large increases in monthly  payments). Also, some lenders may have determined a borrower’s ability  to repay an ARM based on the initial monthly payment, rather than the  higher payments if rates were to increase. As we and others have found,  subprime hybrid and Alt-A option ARMs had significantly higher rates of  serious delinquency (in default or foreclosure) than other subprime and  Alt-A loans.
section_title: Since 2008, Measures of Credit Risk Associated with Mortgages Were Consistent with Tightening of Underwriting Standards
paragraphs: Since 2008, measures of the credit risk of purchase mortgages (such as  borrower credit scores and debt-to-income ratios) were consistent with  lenders tightening underwriting standards. Underwriting standards, such  as those of FHA and the enterprises, include assessments of these  measures. For example, the enterprises have a debt-to-income ceiling of  45 percent. A credit score is a numeric value that represents a borrower’s  potential credit risk, based on his or her credit history. Generally, a higher  score indicates greater credit quality and potentially lower likelihood of  default. Lenders continue to use credit scores as a primary means of  assessing whether to originate a loan to a borrower. As shown in figure 4, credit scores for purchase loans fluctuated but exhibited an upward  trend since 2004. For example, average scores for these borrowers rose  from 704 in January 2004 to 750 in December 2013.
As shown in figure 4, the average debt-to-income ratio for purchase loans  increased to a high of about 40 percent in early 2008 and subsequently  decreased to 34 percent in December 2013. Lenders use debt-to-income  ratio as a key indicator of a borrower’s capacity to repay a loan. The ratio  represents the percentage of a borrower’s income that goes toward all  recurring debt payments, including the mortgage payment. A higher ratio  is generally associated with a higher risk that the borrower will have cash  flow problems and may miss mortgage payments.income ratios is consistent with a tightening of credit availability for  borrowers with higher debt burdens. However, the data provider and  others have noted that the data are often missing debt-to-income  information and debt-to-income ratios are often calculated inconsistently.
A decline in debt-to- Nonetheless, research by CoreLogic suggests that lenders in recent  years originated loans with lower debt-to-income ratios.
Finally, average (mean) loan-to-value ratios for purchase loans increased  since 2006. For example, from January 2003 to August 2006, average  monthly loan-to-value ratios hovered around 80 percent. From September  2006 to November 2009, average monthly loan-to-value ratios increased  about 5 percentage points to 85.6 percent. Since then, the ratios declined  slightly, but remained higher than 2003–2006 levels. The continuing  prevalence of higher ratios may be due in part to the increasing share of  originations from FHA, which had an average loan-to-value ratio of about  96 percent for purchase loans originated from October 1999 to July  2014. of borrowers obtaining both first- and second-lien mortgages— ”piggyback” loans—that may not be reflected in the previous statistics.The higher the loan-to-value ratio when a loan is originated, the less  equity borrowers will have in their homes and the more likely they are to  default on mortgage obligations especially during times of financial stress.
section_title: Market Share for Private- Label Securities Significantly Diminished Since 2006
paragraphs: FHA provided the average loan-to-value ratio data.
2005 and 2006.less than 1 percent of the market.
section_title: Initial Effects of Mortgage Regulations Likely Limited for Most Borrowers
paragraphs: Overall, agencies, market participants, and observers estimated that the  QM and QRM regulations would not have a significant effect initially  because many loans made in recent years already met QM and QRM  criteria before these regulations were promulgated. Our review of  economic analyses showed that researchers estimate that the majority of  mortgages originated in recent years likely would have met the  requirements for QM and QRM loans. The recently finalized risk-retention rule aligns the definition of QRM with QM.
subsections: section_title: Qualified Mortgage Regulations Likely to Have Limited Effects in Current Market
subsections: section_title: Availability of and Willingness to Originate Mortgages
paragraphs: Estimates from the studies we examined pertaining to loans made in  recent years suggest that if lenders continued current practices, a   The studies  majority of loans would meet requirements for QM loans.used a variety of methodologies, including trend analysis with historical  data, comparisons with established baselines, and surveys of market  participants. Furthermore, in a July 2011 report, we found that the  majority of loans originated from 2001 through 2010 would have met most  of the individual QM criteria.
The Federal Reserve estimated that 14 percent of Fannie Mae and Freddie Mac  refinance mortgages in 2010 had debt-to-income ratios above 43 percent. In comparison,  the Federal Reserve estimated that 25 percent of Fannie Mae and Freddie Mac purchase  mortgages and 31 percent of Fannie Mae and Freddie Mac refinance mortgages in 2006  had debt-to-income ratios above 43 percent. Board of Governors of the Federal Reserve  System,Mortgage Market Conditions and Borrower Outcomes: Evidence from the 2012  Data and Matched HMDA-Credit Report Data, Federal Reserve Bulletin vol. 99, no. 4  (Washington, D.C.: November 2013). underserved areas can make mortgages with balloon payments and  those mortgages can qualify as QM loans.
Although the QM regulations were not expected to have a significant  effect on the overall mortgage market initially, some researchers and  participants estimated that they could adversely affect certain borrowers.  For example, a study we reviewed indicated that a narrow debt-to-income  threshold may disproportionately affect minorities and people living in  high-cost areas. Specifically, the higher cost of housing in certain areas  can increase these ratios. In addition, some market participants raised the  concern that lenders might be restricting lending to borrowers near the 43  percent debt-to-income or the 3 percent points and fees thresholds, out of  concern that calculation errors could result in a non-QM loan.
Due to data limitations, the researchers were not able to identify the entire universe of  QM loans. all defaults during this period. However, the study also found a number  of performing loans that did not appear to meet the QM standard.  Specifically, 25 percent of nondefaulting mortgages made between 2005  and 2008 did not appear to meet the QM standards.
Some observers noted that because the QM standards do not include a  measure of creditworthiness (such as credit score) or a loan-to-value ratio  requirement, some QM loans may have characteristics associated with  higher default rates. As we reported in 2005 and 2010, loans with higher  credit scores, lower loan-to-value ratios, or both perform better than loans  with low credit scores, higher loan-to-value ratios, or both, all else being   Because non-QM loans present higher liability risks, lenders may  equal. impose stricter underwriting requirements for those loans, such as higher  credit scores, lower loan-to-value ratio thresholds, or both.
GAO, Mortgage Financing: Actions Needed to Help FHA Manage Risks from New  Mortgage Loan Products GAO-05-194 (Washington, D.C.: Feb. 11, 2005); and Nonprime  Mortgages: Analysis of Loan Performance, Factors Associated with Defaults, and Data  Sources, GAO-10-805 (Washington, D.C.: Aug. 24, 2010); and GAO-08-78R. regulations would have a measurable reduction in credit availability,  and two-thirds of respondents characterized the impact as  moderate. The survey found mixed expectations on whether  availability of all or only certain segments of mortgages would decline  in response to the QM regulations. For example, 41 percent expected  a reduction across all mortgages, and 40 percent of lenders expected  a reduction only in non-QM lending. Furthermore, a third of lenders  reported that they planned to restrict lending to QM segments only,  and 29 percent indicated that they primarily would originate QM loans  and only originate non-QM loans in targeted markets.
The Federal Reserve administered a survey of senior loan officers in  July 2014 in which loan officers reported that approval rates  decreased for some mortgage types in response to the ATR/QM  regulations. The survey found that the reductions in approval rates  were often smaller for larger banks. Among the surveyed banks, the  majority stated that approval rates did not decline for prime  conforming loans, but about a third reported a reduction. (Prime  conforming loans include loans eligible for purchase by the  enterprises—which include loans automatically designated as QM.)  Among all banks surveyed that made nontraditional mortgages, more  than half indicated that loan approval rates were lower for  nontraditional purchase mortgages—which are often non-QM due to  their product features—because of the ATR/QM regulations. Finally,  more than half of the respondents indicated that the QM regulations  had reduced application approval rates for prime jumbo home- purchase loans. However, in January 2015, another Federal Reserve  survey of senior loan officers found that several large banks had  eased lending standards for a number of categories of residential  mortgages over the preceding 3 months, about 12 to 13 percent of the  large banks surveyed indicated an easing of credit standards for QM  and non-QM jumbo loans.
An article posted by the Urban Institute in August 2014 examined the  effect the QM regulations might have on certain borrower and loan  characteristics—such as borrowers with debt-to-income ratios above  43 percent, interest-only loans, adjustable-rate mortgages, and loans  with small loan amounts—finding little variation in the proportion of  such loans before and after implementation of QM regulations.example, the share of loans with debt-to-income ratios above 43  percent remained relatively steady at approximately 17 percent for  Fannie Mae and Freddie Mac loans, 35 percent for Ginnie Mae loans,  and 10 percent for bank portfolio loans. However, from January  through July 2014, the share of loans with higher debt-to-income  ratios declined slightly for enterprise loans.
These statements and observations were made shortly after the QM  regulation became effective.
section_title: Securitization of Mortgages
paragraphs: Market participants with whom we spoke stated that the QM standards  were unlikely to have a significant effect on the securitization of  residential mortgages, largely because the majority of loans originated  were expected to be QM loans. Representatives of credit rating agencies  with whom we spoke indicated that they did not plan to require any  additional credit enhancements when rating securities backed solely by  QM safe-harbor loans.
Market observers, including two credit rating agencies also told us that  there had been a relatively small volume (number and size) of private- label securitizations recently, consistent with the overall securitization  trends we noted earlier. According to one of the larger credit rating  agencies, the market issued 27 residential mortgage-backed securities in  2014, most of which contained only QM loans. Another larger credit rating  agency told us that it rated 10 prime residential mortgage-backed  securities in 2014 that included QM loans. Although three of the ten  included non-QM loans, the proportion of non-QM loans was never  greater than 2 percent in any transaction. Neither rating agency believed  that a completely non-QM transaction was rated in 2014. Some observers  told us that many non-QM loans originated after the QM regulations  became effective had been held in portfolio, indicating they had not been  securitized. However, observers noted that some securities have included  non-QM loans and firms have discussed creating non-QM securities in  the future.
section_title: Litigation and Compliance Costs of QM Regulations
paragraphs: According to federal agency officials, the primary costs associated with  the QM regulations are increased litigation and compliance costs.  Generally, lenders, investors, and borrowers incur litigation costs when  borrowers file a legal claim challenging a lender’s efforts to assess the  borrower’s ability to repay. Lenders incur compliance costs to ensure that  they comply with QM regulations, such as by documenting their efforts to  assess borrowers’ ability to repay.
Estimates for potential litigation costs associated with the QM regulations  varied. Lenders’ costs may increase due to potential litigation costs. The  absence of safe harbor protection exposes higher-priced QM and non- QM loans to increased litigation risk. Both CFPB and credit rating  agencies estimated increased litigation costs associated with non-QM  loans. In contrast to CFPB, credit rating agencies also estimated  increased litigation costs associated with higher-priced QM loans.  However, CFPB stated that its estimated costs for nonqualified  mortgages “should reasonably serve as an upper bound for the costs of  qualified mortgages.” CFPB’s estimate assumed that 20 percent of  borrowers in foreclosure with non-QM loans would challenge a lenders’  compliance with the ability-to-repay regulations. In contrast, the estimates  of credit rating agencies about the probability of litigation ranged from 5 to  50 percent among borrowers in foreclosure with non-QM loans. Most  significantly, the credit rating agencies considered if the borrower was  located in a nonjudicial or judicial state. CFPB also assumed that 20  percent of the borrowers challenging the lender would prevail in litigation.  In contrast, the credit agencies’ estimates for borrower success ranged  from 10 to 75 percent. Credit rating agencies estimates differed from  CFPB’s because of the different assumptions and methodologies used in  their analyses.
Depending on the risk and costs to lenders associated with any additional  litigation, they might manage these costs by passing them to borrowers in  the form of higher loan costs or limiting the volume of loans originated  that likely would be subject to litigation risk. For example, CFPB  estimated that the potential for increased litigation costs would cause  interest rates for non-QM loans to increase by approximately 2.5 basis  points. However, CFPB did not generate a similar estimate for high- priced QM loans. Following CFPB’s rule, the credit rating agencies  published credit enhancement adjustments, which are used to offset  potential investor losses due to increased risk of litigation, for high-priced  QM and non-QM loans. Fitch estimated an adjustment of 65 basis points  for high-priced QM loans and 40 basis points for non-QM loans. In  contrast, Standard and Poor’s estimated an adjustment of 9 basis points  for high-priced QM loans and 30 basis points for non-QM loans.  Likewise, the addition of these credit enhancements ultimately may  increase the cost of funding these loans. The effect would be difficult to  estimate because it is largely dependent on future housing market  conditions, including the level of competition among lenders and among  securitizers. Although these estimates provide insights about the costs  associated with the QM regulations, agency officials and observers with  whom we spoke said that the estimates were limited by the unique legal  requirements for originators and investors under the Dodd-Frank Act that  we discussed earlier. The observers noted that they expected to revise  their estimates when litigation had taken place. Thus, the actual litigation  costs associated with QM may not be known for some time.
Market participants and industry observers did not believe that  compliance costs associated with the ATR/QM regulations would hinder  the functioning of the overall market, but they identified compliance costs  that were likely to be passed to consumers. For example, they noted that  complying with the documentation standards creates additional work and  adds processing time, both of which result in increased costs. Costs also  could rise if institutions needed to take additional steps to properly  disclose information in their financial statements about QM and non-QM  loans. But market participants also noted that compliance costs may vary  by institution and the degree to which an institution could realize certain  economies of scale. Some indicated that compliance costs were  significant for all originators, regardless of size, but added that these  costs were related to more than just QM regulations, and included  implementing Basel III standards.
section_title: Qualified Residential Mortgage Regulations Likely to Have Limited Effects in Current Secondary Market
subsections: section_title: Availability of Mortgages
paragraphs: According to agency officials and observers, the QRM regulations, which  were finalized in December 2014, were unlikely to have a significant  effect on the availability of residential mortgages under current market  conditions. A loan meeting QM standards automatically is QRM-eligible;  therefore, securities collateralized solely by QM loans will not require  securitizers to retain any of the risk. Securitizers generally must retain at  least 5 percent of the credit risk associated with any securitization  collateralized by any non-QRM loans. Securitizers may allocate the  retention obligation to an originator, if the originator has contributed at  least 20 percent of the balance of a loan pool collateralizing mortgage- backed securities. As discussed earlier, agency officials and market  observers anticipate that the majority of loans will conform to QM  standards and therefore believe that the QRM regulations will not have a  substantial effect on the availability of residential mortgages for most  borrowers.
section_title: Costs of Mortgages
paragraphs: Since the risk-retention rule equated QRM with QM, mortgage market  participants likely would incur few or low additional costs, if any, in  ensuring that loans met the definition of QRM. As discussed earlier, the  primary costs associated with the QM regulations are litigation and  compliance costs. These additional costs may be passed to borrowers.  To ensure compliance with the QRM regulations, lenders and securitizers  might need to take additional steps to properly disclose information in  their financial statements about QRM and non-QRM loans. According to  the regulators, aligning the QRM definition with QM would meet the  statutory goals and directives to limit credit risk and preserve access to  affordable credit, while at the same time facilitating compliance.  Specifically, the agencies in the final QRM regulations noted that the  markets for those residential mortgages exempted under the final rule  (that is, QRM mortgages) are expected to be large, and result in  significant liquidity, economies of scale, and little-to-no impact on  securitization of these mortgages. For non-QRM securities, the Federal  Reserve estimated in October 2014 that a risk-retention requirement of 5  percent would add 25 basis points at most to a borrower’s costs.  However, studies we reviewed and mortgage market participants with  whom we spoke did not believe these costs would disrupt mortgage  market function.
section_title: Securitization of Mortgages
paragraphs: The effect of the QRM regulations on the securitization of residential  mortgages is likely to be limited in the current market. By equating the  definition of QRM with QM, the majority of loans currently being originated  likely would be considered to be QRM-eligible and, therefore, not subject  to risk retention. However, changes to the role of the federal government  in relation to the structure of the market for residential mortgage-backed  securities could change the expected effects of the QRM regulations. The  final QRM regulations exempt certain securitizations from the risk- retention requirements, including securitizations that have the full  guarantee of the enterprises and securitizations guaranteed by Ginnie  Mae. Mae and Freddie Mac operate under federal conservatorship. This  consideration is separate from the QM temporary exemption for  enterprise loans discussed earlier.Finance, the enterprises had a dominant share of the residential  securitization market during 2013, with about 66 percent of mortgage  originations made through the enterprises. Ginnie Mae guaranteed about  22 percent of the residential securitization market in 2013.
79 Fed. Reg. 77749(§__.8) (Dec. 24, 2014) and 79 Fed. Reg.  77761 (§__.19(b)(1))  (Dec. 24, 2014). small compared with the volume and size of such securitizations from  2005 through 2007. According to the credit rating agencies with which we  spoke, the majority of the loans that make up these recent securities met  the QM definition and therefore would be considered to be QRM-eligible.  Observers estimated that non-QRM loans sold to the private-label  secondary market likely would be low-risk loans, such as interest-only  loans to high-wealth borrowers.
However, some have cautioned that the equation of QM and QRM might  restrict the secondary market for non-QRM loans and therefore limit the  origination of these loans. For example, the risk-retention rule states that  “the agencies recognize that aligning the QRM and QM definitions has  the potential to intensify any existing bifurcation in the mortgage market  that may occur between QM and non-QM loans, as securitizations  collateralized by non-QMs could have higher funding costs due to risk- retention requirements in addition to potential risk of legal liability under  the ability-to-repay rule.” The agencies acknowledged this risk but  decided that not aligning QRM and QM definitions likely would result in  even greater segmentation in the securitization market and higher costs  for consumers. Furthermore, the final risk-retention rule requires that  securitizations with blended pools of QRM and non-QRM loans be subject  to the risk-retention requirements. As noted in the preamble to the rule,  the QRM agencies (FDIC, Federal Reserve, FHFA, HUD, OCC, and  SEC) anticipated that “QM and non-QM loans are less likely to be  combined in a pool because of the different risk profiles and legal  liabilities associated with these loans.” Some industry observers pointed  out that the small volume of non-QRM loans, which will be subject to risk- retention requirements, may not be sufficient to result in a fully functioning  securitization market for such loans. Similarly, the preamble to the rule  states that “securitization typically is a more cost-effective source of  funding when the underlying pool includes a large number of loans.”  Although some private-label securities included both QM and non-QM  loans in the same securitization in 2014, one rating agency noted that it  had not rated any transactions that consisted entirely of non-QM loans  and did not believe that such a transaction had closed during 2014. At  least one sponsor plans to create a mortgage-backed security that is  wholly non-QRM, according to one rating agency. Although some lenders  have been making and holding non-QRM loans in their portfolios, the lack  of a robust market for non-QRM securities may limit some lenders’  willingness to underwrite non-QRM loans.
Some investors expressed the concern that the adopted QRM regulations  did not increase investor protections for higher-risk loans that were QM- eligible. Specifically, the QRM regulations permit security sponsors to  include QM-eligible loans with high-risk characteristics, such as high loan- to-value ratios and low credit scores, without imposing a risk-retention  requirement. The risk-retention rule does not incorporate requirements for  a loan-to-value ratio or a borrower’s credit history because of concerns  that the additional requirements might disproportionately affect low- and  moderate-income, minority, or first-time homebuyers. Furthermore, the  agencies believe the QRM requirements appropriately minimize  regulatory compliance burdens in the origination of residential mortgage  loans. According to an institutional investor advisor, investors would  prefer to rely on risk retention as a method for holding mortgage  originators and securitizers accountable. Outside of the risk- retention/QRM regulations, investors now have access to additional  information that they could use to require sponsors to retain some of the  credit risk of loans that make up the mortgage-backed security.  Previously, investors typically lacked detailed information about the pool  of loans that made up securities. However, SEC recently revised  regulations for registered offerings of asset-backed securities to require  that certain loan-level information for residential mortgage-backed  securities (among other asset classes) be made available at the time of  the offering and on an ongoing basis.
section_title: Efforts to Examine Effects of Both Regulations Faced Challenges
paragraphs: Due to the unavailability of certain important data elements, researchers  faced challenges when analyzing the short-term and long-term potential  effects of the QM and QRM regulations. Similarly, we previously reported  that this issue makes evaluating the potential effects of the QM and QRM  regulations difficult, as detailed in the following examples.
Debt-to-income ratios are key elements to identify QM and non-QM  loans. However, as we and others have found, this information is  often unreliable or missing. Datasets frequently do not contain debt- to-income information for subprime and Alt-A loans, and available  data often may be unreliable.
Information on the points and fees borrowers incur are also key  elements to identify QM and non-QM loans. However, this information  is not maintained in any available database, according to agency  officials and observers. Without this information, it is difficult to  determine if a loan complied with the QM requirement for a 3 percent  cap on points and fees.
For these reasons, conclusively identifying the universe of QM loans is  difficult. Instead, the studies must rely on other indicators of QM loans  such as the lack of certain prohibited features or markers for the loan  being fully documented.
Researchers also often faced challenges establishing a baseline for  assessing the effect of the QM regulations. As discussed earlier, the  housing market is highly cyclical, but the early 2000s saw a major  expansion in many segments of the market. As such, the choice of a  baseline can significantly affect a study’s findings. For example, choosing  an immediate precrisis baseline may make it appear that regulations were  having a larger effect than they would with a postcrisis baseline. Baseline  choices can result in different findings on the potential future effect of QM.
Mortgage market participants also told us that it would be difficult to  isolate the effect of the regulations on the availability of mortgages  because of other changes affecting the mortgage market. For example,  many mortgage originators are also subject to the new CFPB servicing  requirements. As a result, it is difficult to attribute any changes observed  in the mortgage market directly to the finalization of the QM and QRM  regulations.
The long-term implications of the QM and QRM regulations on the  mortgage market depend on several factors that are difficult to predict.  For example, lender willingness to make non-QM loans (particularly to  certain borrowers such as those with high debt-to-income ratios) and the  cost of these loans are unknown. In addition, the future role of the  enterprises in the residential mortgage market has yet to be determined  and the mortgage activities of federal agencies may change (many  proposals have been introduced to change the single-family housing  finance system). Moreover, the QM and QRM regulations may change  over time. For example, CFPB took action to expand the exemption for  small lenders after the rule had been finalized. Finally, the activities of  nongovernmental and private participants can change over time  In a 2014 report that assessed protection for mortgage securities  investors, we found that the ATR/QM regulations might set a floor to the  loosening of credit and help prevent a repeat of the deterioration of  lending standards that contributed to the 2007–2009 financial crisis. The  QM and QRM regulations provide incentives to originate QM and QRM  loans. For example, originating a QM loan provides litigation protection for  the lender and assignee if the loan is sold to an investor. Similarly,  securitization sponsors are not required to retain any portion of the credit  risk of QRM loans if the securitization exclusively comprises QRM loans.  Should underwriting standards begin to loosen and lenders become more  willing to offer loans that do not meet QM or QRM standards, these  incentives may deter some lenders from loosening standards beyond the  limits specified in the regulations. Although the regulations may help limit  high-risk mortgage lending in future market expansions, some activities  are not forbidden by statute (for example non-QM mortgage loans still can  have negative amortization and interest-only payments). Nonetheless,  lenders must assess the borrowers’ ability to repay for all loans, including  any non-QM loans lenders may originate and sponsors may securitize.
section_title: Planning for Reviews of Regulations Lacked Key Elements
paragraphs: CFPB and HUD have begun planning for their reviews of the QM  regulations. CFPB identified potential outcomes, data sources, and  analytical methods for examining its QM regulations, but had not finalized  its plans. HUD identified outcomes and potential data sources, but had  not identified specific metrics, baselines, and analytical methods for  examining its regulations. The agencies responsible for the QRM  regulations identified outcomes and potential data sources and analytical  methods, but had not yet identified specific metrics and baselines for  examining the QRM regulations.
subsections: section_title: CFPB Had Not Completed Plan That Specified Outcomes and Methodologies
paragraphs: In response to the Dodd-Frank requirement to review significant  rulemakings, CFPB has made efforts to identify data, but as of May 2015  had not finalized a plan that specified what outcomes and  methodologies—such as metrics, baselines, and analytical methods—it  will use to examine the effects of the QM regulations. CFPB discussed  some potential plans to review the QM regulations in the final ATR/QM  rule but has not since finalized a plan for its analysis.
The Dodd-Frank Act requires CFPB to assess “the effectiveness of the  rule or order in meeting the purposes and objectives of this title [Title X— Bureau of Consumer Financial Protection] and the specific goals stated  by the Bureau.” Furthermore, Executive Order 13563 states that the  regulatory system “must measure, and seek to improve, the actual results   of regulatory requirements.”completed plans for how it intends to examine the QM regulations. For  instance, a review addressing the purposes of the title might include  outcomes such as the effects of the regulations on the overall housing  market, cost or availability of credit to borrowers, regulatory burden on  industry participants, or protection of consumers from unsustainable  mortgage products. The choice of outcomes to be examined plays a key  role in the selection of appropriate or relevant data, baselines, and   But CFPB has not yet  analytical methods. For example, examining the cost and availability of  mortgage credit could require different data elements and analysis than  examining the effectiveness of the QM regulations in preventing defaults  and foreclosures.
To date, CFPB has identified several potential data sources it could use  to examine the QM regulations. For example, CFPB identified data  collected to meet the requirements of the Home Mortgage Disclosure Act  (HMDA). HMDA data currently include information about mortgage  applications, originations, and loans purchased on the secondary market.  However, HMDA currently does not contain information to determine if a  loan is QM or non-QM. The Dodd-Frank Act directs CFPB to expand  HMDA data reporting requirements. For example, it directs the collection  of points and fees information, interest rate spreads, and certain other  loan features. CFPB also has proposed to collect additional information  (such as borrowers’ debt-to-income ratios and whether the loan meets the  QM standard) that could be used to examine the QM regulations.  However, the data elements may not be finalized as proposed and may  not be available at the time CFPB conducts its analysis (the report on the  review must be published no later than Jan. 10, 2019). CFPB had not  finalized the HMDA proposal as of April 2015. Once the new HMDA  reporting requirements are finalized, CFPB officials said lenders will need  time to modify their systems to comply with the new reporting  requirements, collect the data, and report the data to CFPB.officials indicated that the earliest the new data might be collected would   CFPB  be in 2017. Moreover, HMDA data do not include and are not planned to  include information about the performance of loans—such as default,  delinquency, and foreclosure. According to agency officials, loan  performance information would be important to fully examine the effects  of the QM regulations.
CFPB also entered into a partnership with FHFA to build the National  Mortgage Database (NMDB), which will contain loan-level information  about the mortgage, borrower, and property for a nationwide sample of 5  percent of borrowers from credit bureau files. information from a credit bureau (such as borrowers’ credit scores and  payment history on the mortgage) will be supplemented with data from  other sources, such as HMDA and property valuation models, to create a  comprehensive profile for each mortgage in the database. FHFA officials  said NMDB is planned to include borrower’s debt-to-income ratios, points  and fees, interest rate of the loan, and information on loan performance.  Although the data used to create NMDB includes personally identifiable  information, the database will not contain personally identifiable  information, according to CFPB officials. The database is not yet  available. FHFA officials anticipated merging the data sources in 2015  and conducting analyses using the database at the end of 2015 or 2016.  FHFA officials have noted some concerns about the reliability of some of  the data, such as inconsistent definitions used for the debt-to-income ratio  at loan origination. Furthermore, many loan records do not contain any  information for some data elements, such as debt-to-income ratio.  Ultimately, FHFA officials hope to obtain debt-to-income information from  HMDA, which they anticipate will be a reliable data source. But, as noted  earlier, the expanded HMDA data will not be collected until at least 2017.
According to CFPB and FHFA officials, the agencies have worked together to develop  the specifications of the database, such as identifying data elements. CFPB has provided  financial support to create the database and FHFA has developed the infrastructure and  hardware for NMDB. contain data similar to HMDA (such as origination data) and the  forthcoming NMDB (such as loan performance information). CFPB  suggested that it could use these datasets to conduct analysis similar to  the one it conducted when developing the ATR/QM rule. For example,  CFPB used data from the two private vendors to estimate the percentage  of loans that would have qualified as QMs from 1997 through 2003 and in  2011. However, according to CFPB officials, CoreLogic and BlackBox  LLC data do not contain any information on points and fees or reliably  contain borrowers’ debt-to-income ratios. CFPB officials said they could  estimate the points and fees by deriving them from the stated interest rate  and APR of the loan, but cautioned that determining what charges were  included in the APR calculation was complex. Any analyses utilizing this  approach would need to consider and potentially correct for any bias in  the missing data.
CFPB officials said they have been collecting qualitative information from  various sources to monitor the initial effects of the QM regulations on the  residential mortgage market. For example, CFPB officials said they have  been tracking industry news, reviewing reports from media outlets, and  reviewing reports published by institutions and market participants (such  as credit rating agencies and some lenders) and the Federal Reserve. In  addition, CFPB officials said they have held informal conversations with  lenders at industry events and conferences to obtain their views on the  effects of the QM regulations. CFPB officials said this information alone  would not be enough to examine the QM regulations, but would inform  their approach for examining the regulations.
OMB encourages agencies to preplan efforts to retrospectively review  their regulations to improve the effectiveness of the reviews. OMB  suggests that agencies identify metrics to evaluate regulations, identify  baselines for their planned analyses, and ensure they have robust models  to conduct their analyses. Furthermore, when promulgating regulations,  OMB encourages agencies to give careful consideration about how to  promote empirical testing of the effects of the rules during retrospective  reviews. We found in a July 2007 report that agencies would be better  prepared to undertake reviews if they identified what data and measures  would be needed to assess the effectiveness of a rule before they started  a review and, indeed, before they promulgated the rule.
CFPB officials told us that they had not yet finalized a plan for their  retrospective review because they had been focusing first on developing  and finalizing the mandated regulations. Congress required CFPB to  issue the QM regulations within 18 months of the “designated date” for  the transfer of consumer financial protection functions under section 1061  of the Dodd-Frank Act to CFPB from other agencies.  CFPB officials told  us that a plan to assess the QM regulations is critical. But, as of May  2015, CFPB officials were working to finalize a review plan and officials  could not tell us what outcomes they would measure and what data and  methodologies they would use to examine the effectiveness of these  regulations. Without a plan to assess the QM regulations, CFPB may be  limited in its ability to effectively examine the regulations by the mandated  deadline. Such a plan will be particularly important because of the  uncertainty about the availability and timing of needed data, which may  necessitate consideration of alternative analytic strategies and data  sources.
section_title: HUD Had Not Specified Methodologies to Conduct Analysis
paragraphs: P.L. 111-203. Sec. 1400(c). See Pub. L. No. 111-203, §1062 for the requirement that  the Secretary of the Treasury designate a date for the transfer of responsibility, among  others, for promulgating regulations under various federal consumer financial laws to  CFPB. See 75 Fed. Reg. 57252 (Sept. 20, 2010) for Treasury’s designation of July 21,  2011, as the transfer date. wide plan for retrospective review of regulatory actions.Lenders can use  a borrower’s residual income as one measure of ability to make a  mortgage payment.
HUD does not maintain key data that it would need to conduct the  reviews—such as information on points and fees and interest rate  spreads (criteria for determining if a loan is safe harbor or rebuttable  presumption) and data needed to calculate residual income. To mitigate  the data gaps, HUD officials said they have considered using HMDA and  NMDB data. But as we discussed previously, the availability dates of the  expanded HMDA and NMDB data—such as information on points and  fees—are not known. As of May 2015, the agency also had not identified  how it would measure the effects of these regulations, including metrics,  baselines, and analytical methods.
HUD officials stated that they have not finalized plans for their review of  the QM regulations because of the uncertainty about the availability of  data resources, such as NMDB. They noted that once the NMDB  database was released, they would be able to determine whether it could  be used as a resource to monitor and examine QM lending. But, without a  plan to identify how to obtain necessary data and identify metrics,  baselines and analytical methods, HUD may be limited in its ability to  effectively review its regulations and achieve the intended outcomes of its  reviews.
section_title: Agencies Have Not Yet Specified Methodologies and Collaborative Strategies for QRM Reviews
paragraphs: Agency efforts to assess the QRM regulations included identifying  outcomes and potential data sources and methodologies, but have not  yet identified specific metrics, baselines, or analytical methods. The six  agencies responsible for the QRM regulations—FDIC, FHFA, Federal  Reserve, HUD, OCC, and SEC—have committed to commence a review  of the QRM definition no later than 4 years after the effective date of the  final rule (Dec. 24, 2015, for the QRM-related provisions), and every 5  years thereafter. In the risk-retention final rule, the agencies recognized  that mortgage and securitization market conditions and practices change  over time, and therefore stated it would be beneficial to review the QRM  definition. More specifically, the agencies would consider the structures of  securitizations, roles of the various transaction parties, relationships  between enterprise and private-label markets, and trends in mortgage  products in various markets and structures. They also stated that they  would review how the QRM definition affected residential mortgage  underwriting and securitization under evolving market conditions. The  agencies noted the timing would help ensure the initial review of the QRM  definition benefitted from CFPB’s review of the ability-to-repay rules,  including the QM definition, and would help the agencies in determining  whether the QRM definition should continue to fully align with the QM  definition in all aspects.
Agency officials said their efforts have included identifying potential data  sources for the review of the QRM regulations. For example, they noted  that they likely would use mortgage data sources similar to those utilized  when developing the QRM regulations, such as loan-level data from the  enterprises and information on private-label mortgage-backed securities  from a private data vendor. However, agency officials acknowledged that  the data available from these sources are missing key information, such  as points and fees and borrower’s debt-to-income ratios, needed to  determine if a loan is QM or non-QM, and consequently QRM eligible. In  addition, agency officials identified HMDA and NMDB as possible data  sources. However, the databases currently do not collect information on  points and fees and debt-to-income ratios, which may limit their  usefulness for examining the QRM regulations. Finally, the agencies have  considered using data collected through the Fannie Mae Mortgage  Lender Sentiment Survey and the Mortgage Bankers Association’s  Mortgage Credit Availability Index to help examine the QRM definition. Although agency officials have identified several data sources, they have  not established which data elements to select or how they would be used  to assess the QRM regulations.
The Mortgage Lender Sentiment Survey is a quarterly online survey among senior  executives of Fannie Mae’s leading institution partners. The survey covers industry topics  such as credit standards, consumer mortgage demand, and mortgage execution. The  monthly Mortgage Credit Availability Index is calculated using a borrower’s credit score,  loan type, and loan-to-value ratio, among other factors. The index is a summary measure  that indicates the availability of credit at a point in time.
Agency officials said their efforts also have included identifying potential  methodologies to assess the QRM regulations. For example, they plan to  use information collected through their ongoing efforts to monitor broad  trends and developments in the residential mortgage market, such as  mortgage applications, originations, products, and securitizations as well  as loan performance. They also have considered examining loan volumes  for QRM and non-QRM loans, as well as QM safe harbor and rebuttable  presumption loans. Furthermore, they may conduct a trend analysis by  comparing market data before and after the risk-retention rules were  effective. Finally, they said that they may look at early payment  delinquencies and defaults of newly originated mortgages, as well as  different kinds of QM loans, such as those covered under the QM  temporary exemption for enterprise loans.
Although the agencies identified several retrospective review  components—such as outcomes to examine and potential data sources  and methodologies—they have not developed a plan that identifies  specific metrics and baselines or committed to specific analytical  methods. Agency officials stated that they have not developed more  specific plans because their ongoing efforts to monitor broad mortgage  market trends were sufficient. Additionally, agency officials expected  additional information on the housing and mortgage market to be  available for their review of the QRM regulations. They explained that the  information would be important in determining whether the QRM definition  was appropriate under prevailing market conditions. However, the timing,  accuracy, and completeness of the data that may be available in time for  the agencies to conduct their retrospective reviews (commencing no later  than Dec. 24, 2019) are unclear. As we discussed previously, agencies  can be better prepared to undertake their reviews and may be able to  overcome or mitigate data challenges by identifying specific data sources,  metrics, baselines, and analytical methods well before conducting the  review, ideally before promulgating the rule.
Moreover, although agency officials acknowledged that the review of the  QRM regulations necessitates interagency collaboration and plan to  collaborate, the agencies have not yet identified specific mechanisms to  promote effective collaboration. According to agency officials, the QRM  agencies and CFPB held interagency meetings as agreed to during the  promulgation of the QM and QRM regulations. The agencies plan to hold  interagency meetings to conduct the reviews of the QRM regulations.
OMB guidance encourages agencies with overlapping jurisdiction or  expertise to determine how the agencies will coordinate to conduct  retrospective reviews. In prior reports, we identified key practices to  effective agency collaboration, including (1) agreeing on agency roles and  responsibilities, (2) defining and articulating a common outcome, (3)  establishing mutually reinforcing or joint strategies, and (3) identifying and  addressing needs by leveraging resources. Without establishing a  framework for collaboration, such as specifying the roles each will play  and responsibilities, the agencies involved in the QRM reviews may be  limited in their ability to measure the effects of the regulations within the  established time frames for their review.
section_title: Conclusions
paragraphs: In promulgating the QM and QRM regulations, the federal agencies  attempted to balance the goals of protecting borrowers and investors from  the abuses that contributed to the recent housing crisis with the goal of  maintaining access to affordable credit. While the QM and QRM  regulations likely will have limited initial effects in the current mortgage  market, the long-term implications of the regulations on the mortgage  market depend on several factors that are difficult to predict. As such, it  will be important for the agencies to conduct retrospective reviews of  these regulations. However, federal agencies’ efforts to prepare for  examining the QM and QRM regulations have not yet incorporated some  important elements of effective reviews as described below.
Although CFPB, HUD, and the QRM agencies identified potential data  sources (such as HMDA and NMDB), these data sources do not  maintain information needed to reliably identify QM and QRM loans.  CFPB and FHFA have been taking steps to expand these data  sources. However, it is not clear if the expanded data will be available  for the initial reviews.
HUD has not identified specific metrics, baselines, or analytical  methods to conduct its analyses.
Although the QRM agencies identified potential analytical methods to  conduct their analyses, they have not identified specific metrics and  baselines.
The six agencies conducting the review of the QRM regulations have  not specified mechanisms to promote effective collaboration, such as  agreements on agency roles and responsibilities.
Finalizing plans to retrospectively review the mortgage regulations and  incorporating these key elements will better position the agencies to  measure the effects of the regulations and identify any unintended  consequences. The agencies also could better understand data  limitations and methodological challenges and have sufficient time to  develop methods to deal with these limitations and challenges.  Furthermore, the QRM agencies could identify opportunities to effectively  collaborate and assign duties and responsibilities to help ensure effective  use of available resources.
section_title: Recommendations for Executive Action
paragraphs: We are making the following three recommendations.
To enhance the effectiveness of its preparations for conducting a  retrospective review of its QM regulations, CFPB should complete its  plan. The plan should identify what outcomes CFPB will examine to  measure the effects of the regulations and the specific metrics, baselines,  and analytical methods to be used. Furthermore, to account for and help  mitigate the limitations of existing data and the uncertain availability of  enhanced datasets, CFPB should include in its plan alternate metrics,  baselines, and analytical methods that could be used if data were to  remain unavailable.
To enhance the effectiveness of its preparations for conducting a  retrospective review of its QM regulations, HUD should develop a plan  that identifies the metrics, baselines, and analytical methods to be used.  Furthermore, to account for and help mitigate the limitations of existing  data and the uncertain availability of enhanced datasets, HUD should  include in its plan alternate metrics, baselines, and analytical methods  that could be used data were to remain unavailable.
To enhance the effectiveness of their preparations for conducting a  retrospective review of the QRM regulations, the agencies responsible for  the QRM regulations—FDIC, FHFA, Federal Reserve, HUD, OCC, and  SEC—should develop a plan that identifies the metrics, baselines, and  analytical methods to be used and specify the roles and responsibilities of  each agency in the review process. Furthermore, to account for and help  mitigate limitations of existing data and the uncertain availability of  enhanced datasets, the six agencies should include in their plan alternate  metrics, baselines, and analytical methods that could be used if data were  to remain unavailable.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from CFPB, FDIC,  Federal Reserve, FHFA, HUD, OCC, and SEC. We received written  comment letters from each of the seven agencies, which are presented in  appendixes III through IX. We also received technical comments from the  agencies (except OCC) that we incorporated as appropriate.
In response to our QM-related recommendations, CFPB concurred and  HUD agreed with the draft report recommendations in their comment  letters. CFPB stated that it was on track to finish its retrospective review  on time. In addition, CFPB provided additional details about the general  approach, data, metrics, and analytical methods that were likely to be  used in its review. To better recognize these planning steps, we  expanded our description of CFPB’s planning efforts, and modified the  recommendation to emphasize that CFPB should complete its plan.
In response to our QRM-related recommendations, two of the six  agencies (HUD and FDIC) stated that they agreed with the  recommendations in their comment letters. The other four agencies (the  Federal Reserve, FHFA, OCC, and SEC) did not explicitly agree with our  recommendations but outlined activities or efforts related to planning for  the retrospective review of the QRM definition. For example, the agencies  discussed their ongoing data analysis of mortgage market trends and  efforts to identify sources for data not currently available, such as debt-to- income ratios and points and fees. Furthermore, SEC identified several  potential metrics it could use to examine the QRM definition. For  example, SEC expects to examine delinquencies by debt-to-income  ratios, among other things. The Federal Reserve noted that it was fulfilling  much of our recommendation as part of its regular business operations.  However, the agencies did not provide specific time frames for finalizing  their approach for the retrospective reviews or how they plan to address  uncertainty about the availability of key data needed for the review, such  as debt-to-income ratios. For example, the Federal Reserve and SEC  stated that their precise analytical approach to reviewing the definition of  QRM will depend on data availability and mortgage market conditions.  Additionally, all the agencies indicated that they planned to work  collaboratively in conducting their retrospective reviews. FHFA and OCC  stated they planned to begin preparing for the review after the QRM  definition was effective (December 2015). Finally, two letters identified  some mechanisms that could promote effective collaboration. For  example, FDIC and SEC noted that the agencies intended to divide  responsibilities according to agency expertise and resources.
But the agencies could and should be doing more to finalize their plans to  retrospectively review the mortgage regulations. As we discussed in the  draft report, agencies can be better prepared to undertake their reviews  and may be able to overcome or mitigate data challenges by identifying  specific data sources, metrics, baselines, and analytical methods well  before conducting the review, ideally before promulgating the rule. It will  be particularly important to have plans that address these elements  because of the uncertainty about when and if needed data will be  available, which may necessitate consideration of alternative analytic  strategies and data sources Incorporating these key elements also will  better position the agencies to measure the effects of the regulations and  identify any unintended consequences.
The comment letters of the agencies involved in the QRM reviews also  outlined a general approach to collaboration. However, without  establishing a specific framework for collaboration, such as specifying the  roles each agency will play and their responsibilities and defining and  articulating a common outcome, the agencies involved in the QRM  reviews may be limited in their ability to measure the effects of the  regulations within the established time frames for their review.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Chairs of  FDIC, the Federal Reserve, and SEC; Comptroller of the Currency;  Directors of CFPB and FHFA; and the Secretary of HUD; and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs are listed on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix X.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report (1) describes selected trends in the origination and  securitization of residential mortgages in 2000–2014; (2) discusses the  expected effects of the qualified mortgage (QM) and qualified residential  mortgage (QRM) regulations on the residential mortgage market; and (3)  examines the extent to which federal agencies have plans in place to  monitor and assess the effects of the QM and QRM regulations on the  residential mortgage market.
subsections: section_title: Trends in the Origination and Securitization of Residential Mortgages
paragraphs: To describe trends of residential mortgages from 2000 through 2014, we  reviewed a range of mortgage market data generated by federal  agencies, mortgage market participants, and observers and identified  indicators that may be useful to gauge the effects of QM and QRM  regulations. We selected indicators associated with the origination and  securitization of residential mortgages (including the volume of  originations by certain characteristics, interest rates, foreclosure and  default rates, and volume of mortgage-backed security issuances) that  are described below:
To describe the volume of mortgage originations by certain  characteristics, we relied on summary data published by Inside  Mortgage Finance and data provided by CoreLogic LLC. For  example, we examined Inside Mortgage Finance data describing the  volume of originations by loan type—including conventional  conforming, Alt-A, subprime, jumbo, and government-insured; type of  interest rate (fixed- and adjustable-rate); and loan purpose (purchase  and refinance). The Inside Mortgage Finance summary data do not  include loans guaranteed by the Department of Agriculture. We did  not independently confirm the accuracy of the Inside Mortgage  Finance data. To determine the reliability of the data, we reviewed  publicly available information on the data source and queried a  knowledgeable official about the accuracy of the data. In addition, we  examined CoreLogic LLC data describing the volume of loan  originations by borrowers’ credit score, debt-to-income ratio, and loan- to-value ratio. The CoreLogic summary data include conventional  loans as well as loans insured or guaranteed by the Federal Housing  Administration and other federal programs. These data are restricted  to first-lien mortgages for the purchase of properties. CoreLogic  officials estimated 99 percent of the loans were for single-family  residential properties (1-4 units). These data provide wide coverage of  the national mortgage market—that is, approximately 85 percent of  mortgages, according to CoreLogic officials. Due to the proprietary  nature of CoreLogic’s estimates of its market coverage, we could not  directly assess the reliability of this estimate. We have used  CoreLogic data in prior reports in which we concluded the data were  sufficiently reliable for our purposes. Nevertheless, because of  limitations in the coverage and completeness of the data, our analysis  may not be representative of the mortgage market as a whole. To  determine the reliability of the CoreLogic data, we reviewed  information on the data source and queried a knowledgeable official  about the process CoreLogic used to collect its data and generate the  summary data. Although the CoreLogic data have certain limitations— for example, certain data fields are not fully reported—we concluded  that the data we used were sufficiently reliable for our purposes.
To describe mortgage interest rates, we relied on published data in  Freddie Mac’s Primary Mortgage Market Survey. To determine the  reliability of these data, we reviewed publicly available information on  the data source. We determined the data were sufficiently reliable for  our purpose, which was to provide information about how residential  mortgage interest rates had changed over the relevant time period.
To describe the volume of mortgages in default and foreclosure and  recession periods, we relied primarily on a prior GAO report that  identified and analyzed key national housing market indicators.used data collected for the prior report and reviewed our prior data  reliability assessment. Based on this review, we determined that the  data were reliable for our purposes. To update the data and analyses,  we relied on several data sources including the National Delinquency  Survey data issued by the Mortgage Bankers Association, and data  issued by the National Bureau of Economic Research. Generally, we  updated our assessments of the reliability of these data by reviewing  existing information about data quality and corroborating key  information. We determined that the data were sufficiently reliable for  our purposes.
To describe the volume of mortgage-backed security issuances, we  relied on summary data published by Inside Mortgage Finance. We  did not independently confirm the accuracy of the data we obtained.  However, we reviewed publicly available information on the data  source and queried a knowledgeable official about the accuracy of the  data. We determined these data were sufficiently reliable for our  purposes.
section_title: Expected Effects of the QM and QRM Regulations
paragraphs: To discuss the expected effects of the QM and QRM regulations on the  residential mortgage market, we identified and reviewed 24 economic  analyses examining the potential effects of these regulations. We  identified these analyses through means that included consultation with  subject-matter experts (internal and external to GAO), electronic searches  of scholarly databases, and reviews of studies conducted by agencies to  inform the rulemakings. Generally, the analyses examined the effects the  regulations may have on the cost, origination, availability, and  securitization of residential mortgages and were performed by federal  agencies, academics, industry observers, and industry participants. To  review the 24 analyses, we designed a data collection instrument to  ensure we collected consistent information from each. To develop the  data collection instrument we identified important characteristics for high- quality analyses from sources that included internal GAO guidance on  reviewing economic analyses and other federal requirements and best  practices for conducting economic reviews during the rulemaking  process. GAO staff separately subjected each analysis to a primary and  secondary review and independently verified that the collected  information was accurate. The staff also used the data collection  instrument to identify methodologies and any methodological concerns  that may have precluded us from using the economic analyses. We did  not exclude any of the economic analyses from our review. The team  reviewed the information collected to identify trends across the analyses  and identify estimated effects of the regulations. We believe the economic  analyses are generally reliable for reporting the range of estimates of the  effects of the regulations. We noted instances in which the analyses may  have had methodological challenges or data were either missing or  unreliable. We discussed any specific concerns about methodology or  scope in this report. In addition to the 24 analyses, we reviewed three  studies on the initial effects of the QM regulations that were conducted  after the rule became effective. (See app. II for a list of the 27 studies we  reviewed.) We did not apply our data collection instrument to these  studies, but reviewed the findings and the methodologies of these  studies. We believe the three studies were sufficiently reliable for the  purposes of describing immediate effects of the QM regulations.
We also reviewed additional sources that contained information about  potential effects of the QM and QRM regulations on the residential  mortgage market. For example, we reviewed Federal Register releases  and comment letters associated with the promulgation of the QM and  QRM regulations. We also interviewed agency officials, stakeholders, and  others to obtain their viewpoints about potential effects of these  regulations. For example, we interviewed officials from the Consumer  Financial Protection Bureau (CFPB), Department of Housing and Urban  Development (HUD), Department of the Treasury’s Office of Financial  Research, Federal Deposit Insurance Corporation (FDIC), Federal  Housing Finance Agency (FHFA), Board of Governors of the Federal  Reserve System (Federal Reserve), Financial Stability Oversight Council,  Office of the Comptroller of the Currency (OCC), and Securities and  Exchange Commission (SEC). Stakeholders and others we interviewed  included credit rating agencies; groups representing mortgage lenders,  securitizers, and investors; groups representing consumer interests; and  academics. We chose these groups and individuals because they had a  range of views.
section_title: Agencies’ Plans to Monitor and Assess the Effects of the QM and QRM Provisions
paragraphs: To examine the extent to which agencies have plans in place to monitor  and assess the effects of the QM and QRM provisions on the residential  mortgage market, we identified and reviewed requirements and guidance  relating to agencies’ efforts to monitor and assess regulations (criteria).  Specifically, we reviewed provisions of the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act) that requires  CFPB to assess its significant rules and publish a report of its  assessment. We also identified and reviewed Executive Orders related  to agencies’ efforts to conduct retrospective reviews. Moreover, we  identified and reviewed Office of Management and Budget (OMB)  memorandums associated with these Executive Orders. Finally, we  reviewed prior GAO reports that examined agencies efforts to conduct  retrospective reviews of regulations.
To examine efforts and plans to monitor and assess the effects of the QM  and QRM regulations, we focused our review on the retrospective review  activities of CFPB, HUD, and the six agencies responsible for the QRM  regulations—FDIC, FHFA, Federal Reserve, HUD, OCC, and SEC. We  did not evaluate the efforts of the Departments of Agriculture and  Veterans Affairs to review their QM regulations because they had not  promulgated their own rules when we began our analysis and because  their programs represent a smaller portion of the residential mortgage  market. To understand federal agencies’ efforts and plans to monitor and  assess the effects of the QM and QRM regulations, we reviewed Federal  Register releases and other agency documents pertaining to  retrospective reviews. For example, we identified and reviewed agency  publications that contained plans to conduct retrospective reviews of the  QM and QRM regulations, such as CFPB’s 2013 and 2014 strategic  plans, as well as HUD’s final QM regulations, its 2014 and 2015  retrospective review plan, and its 2014-2018 strategic plan. During our  review, we also examined CFPB’s efforts to expand reporting  requirements for Home Mortgage Disclosure Act (HMDA) data and  examined the extent to which the expanded reporting might include data  useful to monitor and assess the QM and QRM regulations. For example,  we reviewed CFPB’s 2014 proposed rule to expand HMDA reporting.  Similarly, we reviewed FHFA’s efforts to develop a National Mortgage  Database and the extent to which it may include data to monitor and  assess the QM and QRM regulations. We also interviewed federal  agency officials (from CFPB, FDIC, FHFA, Federal Reserve, HUD, OCC,  and SEC) about their plans to conduct retrospective reviews of the QM  and QRM regulations.
We conducted this performance audit from November 2013 to June 2015  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: List of Studies Reviewed
paragraphs: American Bankers Association. 21st Annual ABA Real Estate Lending  Survey Report. Washington, D.C.: 2014.
Ashworth, Roger, Laurie Goodman, Brian Landy, and Lidan Yang. “The  Coming Crisis in Credit Availability.” Amherst Mortgage Insight. May 30,  2012.
Bai, Bing. Board of Governors of the Federal Reserve System. July 2014  Senior Loan Officer Opinion Survey on Bank Lending Practices.  Washington, D.C.: August 4, 2014.
Board of Governors of the Federal Reserve System. Changes in U.S.  Family Finances from 2007 to 2010: Evidence from the Survey of  Consumer Finances. Washington, D.C.: June 2012.Board of Governors of  the Federal Reserve System. Report to the Congress on Risk Retention.  Washington, D.C.: October 2010.
Bureau of Consumer Finance Protection. Ability-to-Repay and Qualified  Mortgage Standards under the Truth in Lending Act. Washington, D.C.:  January 2013.
Coalition for Sensible Housing Policy. Updated QRM Proposal Strikes  Balance: Preserves Access While Safeguarding Consumers and the  Markets. Washington, D.C.: October 24, 2013.
DBRS. Assessing U.S. RMBS Pools under the Ability-to-Repay Rules.  New York, N.Y.: May 2014.
Department of Housing and Urban Development. Economic Analysis  Statement: Qualified Mortgage Definition for Insured or Guaranteed  Single Family Mortgages. Washington, D.C.: November 2013.
Department of Housing and Urban Development. Economic Analysis  Statement: Qualified Mortgage Definition for Insured or Guaranteed  Single Family Mortgages. Washington, D.C.: (undated).
Federal Housing Finance Agency. “Qualified Residential Mortgages.”  Mortgage Market Note, 11-02. Washington, D.C.: April 11, 2011.
Fitch Ratings. U.S. RMBS Qualified and Nonqualified Mortgage Criteria.  New York, N.Y.: March 2014.
Goldman Sachs. “Assessing the Impact of QM.” The Mortgage Analyst.  New York, N.Y.: October 10, 2013.
Moody’s Analytics. Moody’s Approach to Assessing Incremental Risk  Posed by the Ability-to-Repay Rules in U.S. RMBS. New York, N.Y.:  March 25, 2014.
Moody’s Analytics. Cost of Housing Finance Reform. New York, N.Y.:  November 2013.
Mortgage Bankers Association. MBA Comment on Reopened Comment  Period for QM Rule. Washington, D.C.: July 9, 2012.
Office of Financial Research. 2013 Annual Report. Washington, D.C.:  December 2013.
Quercia, Roberto G., Lei Ding, and Carolina Reid. Balancing Risk and  Access: Underwriting Standards and Qualified Residential Mortgages.  Chapel Hill, N.C.: Center for Community Capital at the University of North  Carolina, and Center for Responsible Lending, January 2012.
Reid, Carolina, and Roberto G. Quercia. Risk, Access, and the QRM  Reproposal. Chapel, Hill, N.C.: Center for Community Capital at the  University of North Carolina, September 2013.
Schwartz, Faith A., Margarita S. Brose, and Stuart I. Quinn. QRM and  Risk Retention Standards: Foundations for a Sound Housing Market.  Irvine, Calif.: Corelogic, December 2013.
Schwartz, Faith A. and Margarita S. Brose. ATR/QM Standards:  Foundations for a Sound Housing Market. New York, N.Y.: CoreLogic,  February 12, 2013.
Seidman, Ellen, Jun Zhu, and Laurie Goodman. “QRM, Alternative QRM:  Loan Default Rates.” Urban Wire: Housing and Housing Finance.  Washington, D.C.: Urban Institute, October 17, 2013.
Seidman, Ellen, Jun Zhu, and Laurie Goodman. “QRM vs. Alternative  QRM: Quantifying the Comparison.” Urban Wire: Housing and Housing  Finance. Washington, D.C.: Urban Institute, October 7, 2013.
Standard and Poor’s. Methodology and Assumptions for Adjusting RMBS  Loss Severity Calculations for Loans Covered under Ability-to-Repay and  Qualified Mortgage Standards. New York, N.Y.: January 23, 2014.
The Center for Responsible Lending, Consumer Federation of America,  and The Leadership Council on Civil and Human Rights. Request for  Comment on Qualified Mortgage. Durham, N.C.: July 9, 2012.
White, Joshua, and Scott Bauguess. Qualified Residential Mortgage:  Background Data Analysis on Credit Risk Retention. Washington, D.C.:  Securities and Exchange Commission (Division of Economic and Risk  Analysis), August 2013.
section_title: Appendix III: Comments from the Consumer Financial Protection Bureau
section_title: Appendix IV: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix V: Comments from the Federal Housing Finance Agency
section_title: Appendix V: Comments from the Federal Reserve System
section_title: Appendix VII: Comments from the U.S. Department of Housing and Urban Development
section_title: Appendix VIII: Comments from the Office of the Comptroller of the Currency
section_title: Appendix IX: Comments from the Securities and Exchange Commission
section_title: Appendix X: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Harry Medina (Assistant  Director), Anne A. Akin (Analyst-in-Charge), Emily Chalmers, Tisha D.  Derricotte, Donald P. Hirasuna, Robert D. Lowthian, John McGrail,  Barbara Roesmann, Jena Sinkfield, Andrew Stavisky, and Jim Vitarello  made major contributions to this report. Timothy Bober and Janet Eackloff  also contributed to this report.