For many years, homeownership has been promoted as part of the American dream. Over the past 50 years, the homeownership rate has been in the range of 62% to 66%. Since 2008, however, the residential mortgage market has experienced historically high default and foreclosure rates, credit losses, liquidity problems, and tighter mortgage standards. In addition, Fannie Mae and Freddie Mac, two congressionally chartered government-sponsored enterprises (GSEs) formed to provide liquidity and access to the mortgage market, have been placed in conservatorship and have received various types of financial support from the U.S. Department of the Treasury and the Federal Reserve. In the first nine months of 2012, Fannie Mae and Freddie Mac together owned or securitized 77% of new mortgage-backed securities (MBS), and Ginnie Mae, which is part of the Department of Housing and Urban Development (HUD), guaranteed the other 23%. Some have questioned the solvency of the mortgage insurance program of the Federal Housing Administration (FHA). For some households, the financial risk implied by the experience of nationwide house price declines may make renting more attractive relative to owning a home. It is not clear that today's most popular type of mortgage, the 30-year fixed rate, will continue as the most popular. In coming years, the residential mortgage market is likely to change in response to legislation, regulatory actions, demographic changes, and continuing problems in the mortgage market. These changes may be of interest to Congress because of the impact on current and future homeowners, the real estate and home building industries, and the financial system. Changes to the mortgage market can be organized into three categories: legislative, regulatory, and demographic. In the 112 th Congress there were many bills introduced that would have changed the residential mortgage market. Fannie Mae and Freddie Mac could have been affected by more than 45 bills that were introduced. These bills would have required various changes to the GSEs, including winding them down, executive compensation, decreasing risk in their investment portfolios, reducing their issuance of new bonds, modifying affordable housing goals, prohibiting new products, restricting the payment of legal fees, requiring the sale of assets, and removing their exemption from certain state and local taxes. These changes would have reduced or eliminated the GSEs' role in supplying mortgage funds, but it is likely that other private sector lenders would have replaced at least some of the funding that Fannie Mae and Freddie Mac provided. Legislation was introduced to change the home mortgage market in the areas of refinancing, foreclosures, fraud prevention, and mortgage servicing. H.R. 940 , the United States Covered Bond Act of 2011, which would have encouraged issuing a competitive type of securitization, covered bonds, was introduced in the 112 th Congress by Representative Scott Garrett. A covered bond is a type of bond issued by a company that contracts to make scheduled interest payments. Specific mortgages are set aside as collateral for the bonds in the event that the issuer does not make the interest payments. Other bills (e.g., S. 1963 ) introduced in the 112 th Congress would have created a temporary government agency to replace the GSEs with a full faith and credit guarantee of timely payment of principal and interest to holders of mortgage-backed securities (MBSs). This new agency would have replaced Fannie Mae's and Freddie Mac's similar corporate guarantees and at least partially offset the reduction in the supply of mortgage funds. To increase tax revenues, the National Commission on Fiscal Responsibility and Reform (sometimes called Bowles-Simpson) proposed reducing the tax deduction for mortgage interest paid on principal and second residences. 6 In isolation, these proposals could reduce the demand for mortgages and homeownership, the price per square foot of homes, the overall price of homes, and the size of new homes. The maximum unpaid balance on mortgages purchased by Fannie Mae or Freddie Mac, or guaranteed by the FHA and Ginnie Mae (part of the HUD) with the full faith and credit of the U.S. government, has been changed by legislation six times since 2008. Higher limits increase the supply of low-risk mortgage funding, reducing the interest rate on mortgages affected, and tending to increase the prices of homes affected. Five bills introduced in the 112 th Congress ( H.R. 408 , S. 178 , H.R. 1182 , S. 693 , and H.R. 1859 ) would have changed to the loan limit. In February 2011, the Obama Administration issued a report 9 with three general proposals to reform the housing finance system, including FHA, Fannie Mae, and Freddie Mac. These proposals would reduce the government's support for the mortgage markets. Some who purchase MBSs because of the government's support would be likely to switch from the enterprises' MBSs to safer investments, and other classes of investors could be attracted to the higher risk associated with higher mortgage market returns. It is not clear what the net effect on mortgage markets might be. There are similar proposals to reform FHA's mortgage guarantee program. Government agencies are developing new regulations that will affect the mortgage market. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203 ) requires the Consumer Finance Protection Board (CFPB) to adopt regulations to implement "qualified residential mortgages" (QRMs) and financial regulators to implement "qualified mortgages" (QMs), which would affect risk retention, underwriting, pooling, and selling the mortgages as MBSs. The CFPB published the QM rule on January 30, 2013. The Consumer Financial Protection Bureau is developing procedures to review lenders' mortgage servicing procedures and to establish uniform rules concerning record keeping and minimum notice of interest rate increases. The Federal Housing Finance Agency (FHFA), the Federal Reserve (Fed), and Federal Deposit Insurance Corporation (FDIC) have proposed regulations affecting the capital (reserves) that insured depositories must hold against mortgages, and using covered bonds to finance mortgages. The Fed wrote to the House and Senate committees with jurisdiction over housing finance suggesting additional government interventions in the housing finance system to provide new support for the sector. Demographics and related factors are changing demand for housing and thus mortgage markets. Based on past relationships, the demographics of a maturing population suggest an increase in the homeownership rate, but other factors such as movement to assisted living facilities might offset this. Immigration increases the demand for housing, but the impact on homeownership rates could vary depending on the immigrants' income, planned length of stay in the United States, and their attitude toward home owning. Tighter mortgage qualification standards could reduce the homeownership rate compared with what it otherwise could be. The ability and desire to own a home may have declined for many who have lost their homes due to foreclosure or faced the threat of foreclosure, and this could change historical patterns of homeownership. Other households could also reassess the risks of foreclosure and may decide not to purchase a home. Additional, unpredictable factors affecting homeownership rates include the state of the economy, interest rates, inflation, and expectations for the future (including home price expectations). If these change, homeownership rates could change. In particular, rates for 30-year fixed-rate mortgages have been around 4% while inflation has been 1.5% to 3.0%, making real (inflation-adjusted) mortgage rates 1% to 2.5%. Although real mortgage rates have been low by historical standards, if the economy weakens, and house prices continue to decline, households may continue to defer home purchases. The net result on homeownership rates is unclear: they could rise or fall. A home is an infrequent consumer purchase that combines consumption, investment, and a variety of risks. Financing the purchase of a home with a mortgage adds a level of financial complexity and risk, but allows a purchaser to better match the flow of housing services with the flow of paying for the capital that provides the services. Homes are most frequently financed with 30-year fixed-rate mortgages that historically have typically been paid off in 7-10 years usually by refinancing the mortgage or by selling the home. The demand for owner-occupied homes and associated mortgages depends on a wide variety of factors: home prices, household credit history, cost of renting housing, mortgage interest rates, mortgage characteristics, household formation, household income, and age, to name some of the most important. Expected changes in house prices, income, household size, and government incentives are important. The supply of owner-occupied homes and mortgages depends on many factors: the price of existing housing; the cost of land, labor, and materials; interest rates; and the characteristics of alternative investments. Mortgages are characterized by their interest rate, their term (life), the allocation of payments to principal and interest, the frequency of payments, and adjustments, if any, to the interest rate. As a financial instrument, a mortgage is characterized by a flow of interest payments, repayment of principal, and various types of risk. There are many ways to categorize risk. This report concentrates on three types of risk: credit, prepayment, and interest rate. Credit risk is the risk that the borrower will not make the payments specified in the mortgage. In general terms, the credit risk of a mortgage to the borrower and to the lender depends on the probability of delinquency, the probability of going to foreclosure following delinquency, possible losses from foreclosure sales, and possible recovery from other assets of the borrower. Federal programs to encourage homeownership over renting have reduced the cost of homeownership by allowing homeowners tax deductions that renters cannot take. Also, government and private-sector programs offer insurance and loan guarantees that limit the loss to lenders in the event of foreclosure. Prepayment risk is the risk that borrowers will pay off the mortgage before the full term (e.g., 30 years).