Over the last few decades, the number of participants and the complexity of the market for home mortgage loans in the United States has increased. In the past, a borrower seeking credit for a home purchase would typically obtain financing from a local financial institution, such as a bank, a savings association, or a credit union. This institution would normally hold the loan as an interest-earning asset in its portfolio. All activities associated with servicing the loan including accepting payments, initiating collection actions for delinquent payments, and conducting foreclosure if necessary would have been performed by the originating institution. Over the last few decades, however, the market for mortgages has changed. Now, institutions that originate home loans generally do not hold such loans as assets on their balance sheets but instead sell them to others. Among the largest purchasers of home mortgage loans are Fannie Mae and Freddie Mac, but prior to the surge in mortgage foreclosures that began in late 2006 and continues today, private financial institutions also were active buyers from 2003 to 2006. Under a process known as securitization, the GSEs and private firms then typically package these loans into pools and issue securities known as mortgage-backed securities (MBS) that pay interest and principal to their investors, which included other financial institutions, pension funds, or other institutional investors. As shown in figure 1, as of June 30, 2010, banks and other depository institutions that originate and hold mortgages accounted for about 28 percent of all U.S. mortgage debt outstanding. Over 50 percent of the mortgage debt was owned or in MBS issued by one of the housing GSEs or covered by a Ginnie Mae guarantee. About 13 percent were in MBS issued by non-GSEs—known as private-label securities, with the remaining 5 percent being held by other entities, including life insurance companies. With the increased use of securitization for mortgages, multiple entities now perform specific roles regarding the loans, including the mortgage servicer, a trustee for the securitized pool, and the investors of the MBS that were issued based on the pooled loans. After a mortgage originator sells its loans to another investor or to an institution that will securitize them, another financial institution or other entity is usually appointed as the servicer to manage payment collections and other activities associated with these loans. Mortgage servicers, which can be large mortgage finance companies or commercial banks, earn a fee for acting as the servicing agent on behalf of the owner of a loan. In some cases, the servicer is the same institution that originated the loan and, in other cases, it may be a different institution. The duties of servicers for loans securitized into MBS are specified in a contract with investors called a pooling and servicing agreement (PSA) and are generally performed in accordance with certain industry-accepted servicing practices—such as those specified in the servicing guidelines issued by the GSEs. Servicing duties can involve sending borrowers monthly account statements, answering customer service inquiries, collecting monthly mortgage payments, maintaining escrow accounts for property taxes and hazard insurance, and forwarding proper payments to the mortgage owners. In exchange for providing these services, the servicer collects a servicing fee, usually based on a percentage of at least 0.25 percent, of the loans’ unpaid principal balance annually. In the event that a borrower becomes delinquent on loan payments, servicers also initiate and conduct foreclosures in order to obtain the proceeds from the sale of the property on behalf of the owners of the loans, but servicers typically do not receive a servicing fee on delinquent loans. When loans are sold, they are generally packaged together in pools and held in trusts pursuant to the terms and conditions set out in the underlying PSA. These pools of loans are the assets backing the securities that are issued and sold to investors in the secondary market. Another entity will act as trustee for the securitization trust. Trustees act as asset custodians on behalf of the trust, keeping records of the purchase and receipt of the MBS and holding the liens of the mortgages that secure the investment. Trustees are also the account custodians for the trust—pass- through entities that receive mortgage payments from servicers and disperse them among investors according to the terms of the PSA. Although trustees are the legal owners of record of the mortgage loans on behalf of the trust, they have neither an ownership stake nor a beneficial interest in the underlying loans of the securitization. However, any legal action a servicer takes on behalf of the trust, such as foreclosure, generally is brought in the name of the trustee. The beneficial owners of these loans are investors in MBS, typically large institutions such as pension funds, mutual funds, and insurance companies. Figure 2 shows how the mortgage payments of borrowers whose loans have been securitized flow to mortgage servicers and are passed to the trust for the securitized pool. The trustee then disburses the payments made to the trust to each of the investors in the security. The mortgage market has four major segments that are defined, in part, by the credit quality of the borrowers and the types of mortgage institutions that serve them. Prime—Serves borrowers with strong credit histories and provides the most attractive interest rates and mortgage terms. This category includes borrowers who conform to the prime loan standards of either Fannie Mae or Freddie Mac and are borrowing an amount above the GSE federally mandated upper limit, known as “jumbo loans.” Nonprime—Encompasses two categories of loans: Alt-A—Generally serves borrowers whose credit histories are close to prime, but loans have one or more high-risk features such as limited documentation of income or assets or the option of making monthly payments that are lower than required for a fully amortizing loan. Subprime—Generally serves borrowers with blemished credit and features low down payments and higher interest rates and fees than the prime market. 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. The Federal Housing Administration and Department of Veterans Affairs operate the two main federal programs that insure or guarantee mortgages. Across all of these market segments, two types of loans are common: fixed-rate mortgages, which have interest rates that do not change over the life of the loan; and adjustable-rate mortgages (ARM), which have interest rates that can change periodically based on changes in a specified index. The nonprime market segment recently featured a number of nontraditional products. For example, the interest rate on Hybrid ARM loans is fixed during an initial period then “resets” to an adjustable rate for the remaining term of the loan. Another type of loan, payment-option ARM loans, allowed borrowers to choose from multiple payment options each month, which may include minimum payments lower than what would be needed to cover any of the principal or all of the accrued interest. This feature is known as “negative amortization” because the outstanding loan balance may increase over time as any interest not paid is added to the loan’s unpaid principal balance. If a borrower defaults on a mortgage loan secured by the home, the mortgage owner is entitled to pursue foreclosure to obtain title to the property in order to sell it to repay the loan. The mortgage owner or servicer generally initiates foreclosure once the loan becomes 90 days or more delinquent. Once the borrower is in default, the servicer must decide whether to pursue a home retention workout or other foreclosure alternative or to initiate foreclosure. State foreclosure laws establish certain procedures that mortgage servicers must follow in conducting foreclosures and establish minimum time periods for various aspects of the foreclosure process. These laws and their associated timelines may vary widely by state. As shown in figure 3, states generally follow one of two methods for their foreclosure process: judicial, with a judge presiding over the process in a court proceeding, or statutory, with the process proceeding outside the courtroom in accordance with state law. Because of the additional legal work, foreclosure generally takes longer and is more costly to complete in the states that primarily follow a judicial foreclosure process. Several federal agencies share responsibility for regulating the banking industry and securities markets in relation to the origination and servicing of mortgage loans. Chartering agencies oversee federally and state- chartered banks and their mortgage lending subsidiaries. At the federal level, OCC oversees federally chartered banks. OTS oversees savings associations (including mortgage operating subsidiaries). The Federal Reserve oversees insured state-chartered member banks, while FDIC oversees insured state-chartered banks that are not members of the Federal Reserve System. Both the Federal Reserve and FDIC share oversight with the state regulatory authority that chartered the bank. The Federal Reserve also has general authority over lenders that may be owned by federally regulated holding companies but are not federally insured depository institutions. Many federally regulated bank holding companies that have insured depository subsidiaries, such as national or state-chartered banks, also may have nonbank subsidiaries, such as mortgage finance companies. Under the Bank Holding Company Act of 1956, as amended, the Federal Reserve has jurisdiction over such bank holding companies and their nonbank subsidiaries that are not regulated by another functional regulator. Other regulators are also involved in U.S. mortgage markets. For example, Fannie Mae’s and Freddie Mac’s activities are overseen by the Federal Housing Finance Agency. Staff from the Securities and Exchange Commission also review the filings made by private issuers of MBS. Federal banking regulators have responsibility for ensuring the safety and soundness of the institutions they oversee and for promoting stability in the financial markets and enforcing compliance with applicable consumer protection laws. To achieve these goals, regulators establish capital requirements for banks, conduct on-site examinations and off-site monitoring to assess their financial condition, and monitor their compliance with applicable banking laws, regulations, and agency guidance.