As of June 2008, there were approximately 58 million first-lien home mortgages outstanding in the United States. According to a Federal Reserve estimate, outstanding home mortgages represented over $10 trillion in mortgage debt. The primary mortgage market has several segments and offers a range of loan products: The prime market segment serves borrowers with strong credit histories and provides the most competitive interest rates and mortgage terms. The subprime market segment generally serves borrowers with blemished credit and features higher interest rates and fees than the prime market. The Alternative-A (Alt-A) market segment generally serves borrowers whose credit histories are close to prime, but the loans often have one or more higher-risk features, such as limited documentation of income or assets. The government-insured or -guaranteed market segment primarily serves borrowers who may have difficulty qualifying for prime mortgages but features interest rates competitive with prime loans in return for payment of insurance premiums or guarantee fees. Across all of these market segments, two types of loans are common: fixed-rate mortgages, which have interest rates that do not change over the life of the loans, and adjustable-rate mortgages (ARM), which have interest rates that change periodically based on changes in a specified index. Delinquency, default and foreclosure rates are common measures of loan performance. Delinquency is the failure of a borrower to meet one or more scheduled monthly payments. Default generally occurs when a borrower is 90 or more days delinquent. At this point, foreclosure proceedings against the borrower become a strong possibility. Foreclosure is a legal (and often lengthy) process with several possible outcomes, including that the borrower sells the property or the lender repossesses the home. Two measures of foreclosure are foreclosure starts (loans that enter the foreclosure process during a particular time period) and foreclosure inventory (loans that are in, but have not exited, the foreclosure process during a particular time period). One of the main sources of information on the status of mortgage loans is the Mortgage Bankers Association’s quarterly National Delinquency Survey. The survey provides national and state-level information on mortgage delinquencies, defaults, and foreclosures back to 1979 for first- lien purchase and refinance mortgages on one-to-four family residential units. The data are disaggregated by market segment and loan type— fixed-rate versus adjustable-rate—but do not contain information on other loan or borrower characteristics. In response to problems in the housing and financial markets, the Housing and Economic Recovery Act of 2008 was enacted to strengthen and modernize the regulation of the government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks— and expand their mission of promoting homeownership. The act established a new, independent regulator for the GSEs called the Federal Housing Finance Agency, which has broad new authority, generally equivalent to the authority of other federal financial regulators, to ensure the safe and sound operations of the GSEs. The new legislation also enhances the affordable housing component of the GSEs’ mission and expands the number of families Fannie Mae and Freddie Mac can serve by raising the loan limits in high-cost areas, where median house prices are higher than the regular conforming loan limit, to 150 percent of that limit. The act requires new affordable housing goals for Federal Home Loan Bank mortgage purchase programs, similar to those already in place for Fannie Mae and Freddie Mac. The act also established the HOPE for Homeowners program, which the Federal Housing Administration (FHA) will administer within the Department of Housing and Urban Development (HUD), to provide federally insured mortgages to distressed borrowers. The new mortgages are intended to refinance distressed loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure. In exchange, homeowners share any equity created by the discounted restructured loan as well as future appreciation with FHA, which is authorized to insure up to $300 billion in new loans under this program. Additionally, the borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs. The program became effective October 1, 2008, and will conclude on September 30, 2011. To participate in the HOPE for Homeowners program, borrowers must also meet specific eligibility criteria as follows: Their mortgage must have originated on or before January 1, 2008. They must have made a minimum of six full payments on their existing first mortgage and must not have intentionally missed mortgage payments. They must not own a second home. Their mortgage debt-to-income ratio for their existing mortgage must be greater than 31 percent. They must not knowingly or willfully have provided false information to obtain the existing mortgage and must not have been convicted of fraud in the last 10 years. The Emergency Economic Stabilization Act, passed by Congress and signed by the President on October 3, 2008, created TARP, which outlines a troubled asset purchase and insurance program, among other things. The total size of the program cannot exceed $700 billion at any given time. Authority to purchase or insure $250 billion was effective on the date of enactment, with an additional $100 billion in authority available upon submission of a certification by the President. A final $350 billion is available under the act but is subject to Congressional review. The legislation required that financial institutions that sell troubled assets to Treasury also provide a warrant giving Treasury the right to receive shares of stock (common or preferred) in the institution or a senior debt instrument from the institution. The terms and conditions of the warrant or debt instrument must be designed to (1) provide Treasury with reasonable participation in equity appreciation or with a reasonable interest rate premium, and (2) provide additional protection for the taxpayer against losses from the sale of assets by Treasury and the administrative expenses of TARP. To the extent that Treasury acquires troubled mortgage-related assets, the act also directs Treasury to encourage servicers of the underlying loans to take advantage of the HOPE for Homeowners Program. Treasury is also required to consent, where appropriate, to reasonable requests for loan modifications from homeowners whose loans are acquired by the government. The act also requires the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board to implement a plan to maximize assistance to homeowners, that may include reducing interest rates and principal on residential mortgages or mortgage-backed securities owned or managed by these institutions. The regulators have also taken steps to support the mortgage finance system. On November 25, 2008, the Federal Reserve announced that it would purchase up to $100 billion in direct obligations of the GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), and up to $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. It undertook the action to reduce the cost and increase the availability of credit for home purchases, thereby supporting housing markets and improving conditions in financial markets more generally. Also, on November 12, 2008, the four financial institution regulators issued a joint statement underscoring their expectation that all banking organizations fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers, and that banking organizations work with existing mortgage borrowers to avoid preventable foreclosures. The regulators further stated that banking organizations need to ensure that their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while implementing effective risk-mitigation measures. Finally, on November 11, 2008, the Federal Housing Finance Agency (FHFA) announced a streamlined loan modification program for home mortgages controlled by the GSEs. Most mortgages are bundled into securities called residential mortgage- backed securities that are bought and sold by investors. These securities may be issued by GSEs and private companies. Privately issued mortgage- backed securities, known as private label securities, are typically backed by mortgage loans that do not conform to GSE purchase requirements because they are too large or do not meet GSE underwriting criteria. Investment banks bundle most subprime and Alt-A loans into private label residential mortgage-backed securities. The originator/lender of a pool of securitized assets usually continues to service the securitized portfolio. Servicing includes customer service and payment processing for the borrowers in the securitized pool and collection actions in accordance with the pooling and servicing agreement. The decision to modify loans held in a mortgage-backed security typically resides with the servicer. According to some industry experts, the servicer may be limited by the pooling and servicing agreement with respect to performing any large- scale modification of the mortgages that the security is based upon. However, others have stated that the vast majority of servicing agreements do not preclude or routinely require investor approval for loan modifications. We have not assessed how many potentially troubled loans face restrictions on modification. National default and foreclosure rates rose sharply during the 3-year period from the second quarter of 2005 through the second quarter of 2008 to the highest level in 29 years (fig.1). More specifically, default rates more than doubled over the 3-year period, growing from 0.8 percent to 1.8 percent. Similarly, foreclosure start rates—representing the percentage of loans that entered the foreclosure process each quarter—grew almost three-fold, from 0.4 percent to 1 percent. Put another way, nearly half a million mortgages entered the foreclosure process in the second quarter of 2008, compared with about 150,000 in the second quarter of 2005. Finally, foreclosure inventory rates rose 175 percent over the 3-year period, increasing from 1.0 percent to 2.8 percent, with most of that growth occurring since the second quarter of 2007. As a result, almost 1.25 million loans were in the foreclosure inventory as of the second quarter of 2008. Default and foreclosure rates varied by market segment and product type, with subprime and adjustable-rate loans experiencing the largest increases during the 3-year period we examined.